RISK MANAGEMENT – IMPORTANT FEATURES :

1. Risk management policies should be approved by the board. It should cover all the required guidelines and directives of the regulators and applicable legal frame work

2. There should be a good support from the Information Technology wing for creating an integrated system whereby an effective and efficient MIS would be an integral part of the risk management

3. There should be clear demarcation of functions and authority levels to ensure better internal control systems (ex: front office, mid office and back office of an integrated treasury)

4. An effective communication system coupled with the training programs

5. One of the risk mitigation measures is to setup appropriate limits for various aspects like counter party limit, country limit, currency limit, over night and intraday limits, stop loss limit, individual and group exposure limits etc.

6. Inbuilt checking and balancing systems, such as input and output controls, access control to the computer systems, and sensitive areas of the banks

7. Apart from review by the ALCO members, a periodical review and evaluation system should be in place

Risk Management is a methodology that helps managers make best use of their available resources. The process consists of important steps like:

Identification of risks:

Identify the types of risks that are associated with the banking business and operations. Define the types of risk, with special reference to the goals and objectives of the organization. Based on the past experience and future forecasts, risks can be identified and classified in to different levels like High, Medium and Low levels

The objective of risk identification is the early and continuous identification of events that, if they occur, will have negative impacts on the project’s ability to achieve performance or capability outcome goals. They may come from within the project or from external sources

Analyzing the risks:

Risks arise out of many factors like, PESTEL factors, Micro and Macroeconomic policies, ineffective internal control systems, speculation etc., Risks can be identified by means of using various analysis like financial, technical, trend and sensitivity analysis based on probability, trend , etc.,

Risk analysis can be defined in many different ways, and much of the definition depends on how risk analysis relates to other concepts. Risk analysis can be “broadly defined to include risk assessment, risk characterization, risk communication, risk management, and policy relating to risk, in the context of risks of concern to individuals, to public- and private-sector organizations, and to society at a local, regional, national, or global level

Evaluating the risks:

The risk may be evaluated by following the Regulators guidelines and directives and also based on past experiences as well. At the time of evaluation, proper weightages needs to be assigned for different types of risks as per banks’ risk management policies, such as, risk category, cost associated in managing such risks and also the impact of such risks. Once risk has been identified to the business, it is needed to assess the possible impact of those risks. It is essential to separate minor risks that may be acceptable from major risks that must be managed immediately.

To analyse risks, one need to work out the likelihood of it happening (frequency or probability) and the consequences it would have (the impact) of the risks one has identified. This is referred to as the level of risk, and can be calculated using the following formula:

level of risk = consequence x likelihood

Level of risk is often described as low, medium, high or very high. It should be analyzed in relation to what one is currently doing to control it. Keep in mind that control measures decrease the level of risk, but do not always eliminate it.

Monitor and review:

Monitoring and review process is an important segment in risk management. An effective monitoring system would assist bank management to identify or forecast risks to enable it to strengthen risk management with more controls to manage the risks which might arise from their business models and their exposure to various markets, across borders. In identifying, prioritizing and treating risks, organizations make assumptions and decisions based on situations that are subject to change, (e.g., the business environment, trading patterns or government policies).

Mitigation of risks:

One of the main objectives of the Risk Management is to ensure that risks are either avoided or minimized. While it is agreed that not all risks can be avoided, good risk management practices should create an effective system of mitigation of risks.

Risk mitigation planning is the process of developing options and actions to enhance opportunities and reduce threats to project objectives . Risk mitigation implementation is the process of executing risk mitigation actions. Risk mitigation progress monitoring includes tracking identified risks, identifying new risks, and evaluating risk process effectiveness throughout the project

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