RISK MANAGEMENT IN BANKING SECTOR

BY:AMAN LUTHRABBA(G) 6TH SEMROLL NO. : 045

OBJECTIVE OF THE STUDYTo study broad outline of management of

credit, market and operational risks associated with banking sector.

An overview of the risks in general.An insight of the various credit, market and

operational risks attached to the banking sector.

The methodology related to the management of operational risk .

Tools applied in for measurement and management of various types of risks.

RESEARCH METHODOLOGYScope of StudyThe report seeks to present a comprehensive picture of the

various risksinherent in the bank. The risks can be broadly classified into threecategories: Credit riskMarket riskOperational riskResearch Design It is descriptive in nature. Sampling Method & Technique Convenience sampling method. Data Collection Sources Secondary Sources-The secondary data I collected was

through the study of the information already existed in the company in form of printed files or digital files reserved in the company for further references.

Risk management by commercial banks -- Time to hammer out the chinksFinancial markets over the world have

undergone far-reaching changes in the last decade, spurred by deregulation and liberalization, as well as rapid developments in communication and Internet technologies. Banks in INDIA have, however, generally not paid enough attention to the potential risks and to evolve mechanisms and systems to control and manage them in line with the global standards and procedures.

Risk management by commercial banks -- Time to hammer out the chinksRisk management is a comprehensive

process adopted by an organization that seeks to minimize the adverse effects it is exposed to due to various factors -- economic, political or environmental, some of them inherent to the business, others unforeseen and unexpected.

WHATIS RISK?A risk is ANYTHING that may affect the

achievement of an organization’s objectives. It is the UNCERTAINTY that surrounds

future events and outcomes. It is the expression of the likelihood and

impact of an event with the potential to influence the achievement of an organization’s objectives.

DEFINITION OF RISK MANAGEMENT?Risk Management is the

process of identifying, measuring, monitoring and controlling risks.

Risk management provides a clear and structured approach to identifying risks. Having a clear understanding of all risks allows an organization to measure and prioritize them and take the appropriate actions to reduce losses.

CHALLENGE IN BANKING“Banking is an art of striking a balance between Risk and

Revenue.”

BANKING RISKTaking risks can almost be said to be the

business of bank management. A bank that is run on the principle of avoiding all risks or as many of them as possible, will be a stagnant institution ,and will not adequately serve the legitimate credit needs of its society. On the other hand a bank that takes excessive risks or credit is more likely ,takes them without recognizing their extent or their existence will surely run into difficulty.

RISKS FACED BY BANKSCREDIT RISKMARKET RISKINTEREST RISKLIQUIDITY RISKOPERATIONAL RISKCOUNTRY RISKMANAGEMENT RISK

CREDIT RISKThe risk that the obligor (borrower) will

not be able to repay the debt (loan) under the terms of the original agreement (loan agreement).

MOST CRITICAL RISK IN BANKING

REQUIRES MOST SUBJECTIVE JUDGEMENT

MUST BE MANAGED CAREFULLY

MARKET RISKChanges in market rates and prices will

impair an obligor’s ability to perform under the contract negotiated between the parties.

NEEDS MONITORING OF CHANGES IN PRICES OF COMMODITIES, REAL ESTATE, ETC.

INTEREST RATE RISKInterest rate risk is the exposure of an

institution's financial condition to adverse movements in interest rates, whether domestic or world-wide.

ANOTHER CRITICAL RISK

RE-PRICING/ MISMATCHES NEED TO BE ADDRESSED

LIQUIDITY RISKThe risk that a bank will be unable to

accommodate decreases in liabilities or to fund increases in assets.

Such risks arise when the re-pricing or maturities of assets do not match those of liabilities.

CRITICAL RISK

MATURITY MISMATCHES

BASED ON MARKET CONDITIONS & PERCEPTIONS

OPERATIONAL RISKThis risk arises from the lack of effective

internal controls and auditing procedures.It is particularly important as the bank

should have good internal controls. RISK OF A FAILURE IN THE BANK’S

PROCEDURES WHETHER FROM EXTERNAL CAUSES OR AS A RESULT OF ERROR OR FRAUD WITHIN THE INSTITUTION.

COUNTRY RISKRisk associated with the economic, social

and political environment of the borrower’s country.

Country risk is most apparent when lending to foreign governments/ their agencies and other customers.

BANK’S HAVING GLOBAL PRESENCE

MANAGEMENT RISKThe risk that owners / shareholders,

directors or senior management might be unfit for their respective roles or they are actually dishonest.

ALSO A CRITICAL RISK

“THE BEST WAY TO ROB A BANK IS TO OWN IT”

ANALYSIS & INTERPRETATION1. CAR can be viewed from two aspects:

Total advancement to total assetsTotal investment to total assets 

Capital Adequacy Ratio is defined as, CAR = Capital Risk Weighted AssetsCapital adequacy ratio is the ratio which

determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk, etc.

2007-2008 2008-2009 2009-1010 2010-2011 2011-20120

2

4

6

8

10

12

14

16

CAR

CAR

Interpretation: The CRAR has declined to 13.17 in 2011-2012 which was 14.73 in 2010-11. Thus, it is showing slight inefficient management of credit risk

2007-2008

2008-2009

2009-2010

20010-2011

20011-2012

0.55

0.56

0.57

0.58

0.59

0.6

0.61

0.62

0.63

2. TOTAL ADVANCES TO TOTAL ASSETS

TOTALADVANCES TO TOTAL ASSETS

Interpretation: The ratio is showing an increasing trend at 0.62 in 2010-11 which implies proper balancing of advances & assets.

3. Net Non Performing Assets to Total Assets

This ratio helps in identifying the quality of the asset of the bank. It can be calculated by dividing Net NPA by Total assets. Lesser the ratio shows the good quality of the asset.

2007-20080

2008-2009

2009-2010

2010-2011

20011-2012

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

NON PERFORMING ASSETS TO TOTAL ASSETS

NON PERFORMING ASSETS TO TOTAL ASSETS

Interpretation: The percentage of Net NPA to Total assets has decreased to 0.18% during 2011-2012. This indicates a sound asset quality.

4. Net Non Performing Assets to Total Advances

Net NPA shows the level of net NPA on net advances given by the bank. It can be calculated by dividing net NPA by net advances. Higher the ratio more will be the alarming situation for the bank and vice-versa.

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

0

0.2

0.4

0.6

0.8

1

1.2

NET NON PERFORMING ASSETS TO TOTAL ADVANCES

NET NON PER-FORMING ASSETS TO TOTAL AD-VANCES

Interpretation: The percentage is showing an decreasing trend from the period 2010-2011 to 2011-12, 0.29% due to good management.

5. EARNING PER NON PERFORMING ASSETSAn NPA is defined as a loan asset, which has ceased to

generate any income for a bank whether in the form of interest or principal repayment.

Earning per Non Performing Asset ( ENPA) can be calculated using the following formulae:

ENPA = (EBT/TA) / (NPA’s/ TA)

ENPA- Earning per Non Performing Assets

NPA – Non Performning Assets TA - Total Assets

EBT– Earnings before tax

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

012345678

EARNING PER NON PERFORMING ASSETS

EARNING PER NON PERFORMING AS-SETS

Interpretation: The ENPA during 2011-12 has come down to 7 from 7.2

CONCLUSIONWith branches all over India and a clientele across

the world, the bank is considered one of the most pro active banks in India with a competent tech savvy team of professional at the core of services.

In 20010-11 Punjab National Bank could present an outstanding performance which was beyond market expectations despite the challenging economic scenario where the bank operates.

Even though, the banking sector all over the world has been affected by the recession due to the global meltdown in economy, especially the US banking system, Punjab National Bank proved its competence not only in terms of increased profit but also in providing boundless customer service.

The effectiveness of risk management rests where the credit quality is maintained by the bank.

Basel III is likely to improve the risk management systems of banks as the banks aim for adequate capitalization to meet the underlying credit risks and strengthen the overall financial system of the country.

Formerly, people were not much bothered about the banking services but now they are comparing banks based on the services offered.

BIBLIOGRAPHYWEBSITES www.rbi.orgwww.investopedia.comwww.pnbindia.comwww.google.co.inBooks:

Galai, Mark, Crouny , Risk Management, second edition.Bhole L. M, Financial Institutions and Markets –

Structure, Growth and Innovations, fourth edition.Gleason T .James, Risk. The new Management

Imperative in Finance, fourth editionSaunders Anthony, Credit Risk Management, second

edition.Schleiferr Bell, Risk Management, third edition.

Any questions?

THANK YOU