SYNOPSIS REPORT

ON

THE STUDY OF RISK MANAGEMENT IN BANKING SECTOR

(Report submitted to Doon Business School in partial fulfilment of the requirement

for the award of Master of Business Administration)

Submitted by

Aadriti Upadhyay
0191MBA220

MASTER OF BUSINESS ADMINISTRATION

Under the guidance of

Prof. Davinder walia

DOON BUSINESS SCHOOL, DEHRADUN

(Affiliated to Uttarakhand Technical University and Approved by AICTE)

2019- 2021
TOPIC/DISSERTATION-
The study of Risk Management in banking sector.

INTRODUCTION OF RISK MANAGEMENT IN BANKS

As banks no longer operate in a secure and regulated environment, there is an urgent need to develop and
develop their perceptions of change in their economic environment and in other contexts that have a
significant impact on their business operations.

Risk management is a comprehensive process adopted by an organization that seeks to reduce

the negative effects that are exposed due to various factors such as economic, political or environmental
factors. Some of them are business-related, some are invisible and unexpected. The current trends /
situation in commercial banks need to be monitored and require a greater understanding of the bank's
management and board's risks involved in their operations.

Risk Management Components:

The process of risk management has three identifiable steps viz. Risk identification,
Risk measurement, and Risk control.

● Risk Identification

Risk identification means defining each of risks associated with a transaction or a

type of bank product or service. There are various types of risk which bank face such
as credit risk, liquidity risk, interest rate risk, operational risk, legal risk etc.

● Risk Measurement

The second step in risk management process is the risk measurement or risk
assessment. Risk assessment is the essemination of the size probability and timing of
a potential loss under various scenarios. This is the most difficult step in the risk
management process and the methods, degree of sophistication and costs vary
greatly. The potential loss is generally defined in terms of ‘Frequency’ and
‘Severity’.

● Risk Control

After identification and assessment of risk factors, the next step involved is risk
control. The major alternatives available in risk control are:
1) Avoid the exposure
2) Reduce the impact by reducing frequency of severity
3) Avoid concentration in risky areas
4) Transfer the risk to another party.

TYPES OF RISKS OCCURS IN BANKS

 Liquidity risk
 Credit risk
 Market risk
 Interest rate risk
 Foreign exchange risk
 Exposure risks
 Investment risks
 Operational risk
 Legal risk
 Reputational risk
 Strategic risk

REVIEW OF LITERATURE

 Risk can be defined primarily as the degree of uncertainty about future returns. Those
who participate in the financial markets will often face a variety of risks because
uncertainty comes in many forms. This is the main reason why uncertainty is used as a
source of risk classification.
 David H. Phyle (1997) described risk as a loss of company value due to changes in
dynamic business conditions. In my study, I will focus on debt risk.

 The Singapore Monetary Authority (2006) defined the risk of debt as "a risk arising from
uncertainty in the ability to meet its contractual obligations."

 Regarding the importance of this type of financial risk, Chemski and Reinhart, as noted
by Jackson and Perrraudin (1999) think it is the biggest risk factor in many bank accounts
and if not managed properly, can weaken individual banks or even cause many instances
of financial instability by affecting the entire banking system. In the same line, according
to M. M. Mc Donough (1999) "credit risk remains at risk for many banks".

 As this risk has the potential to eradicate enough bank capital to force it to collapse,
managing this type of risk has always been a major challenge to bank operations (Broll,
Pausch and Welzel, 2002).

 Various authors have developed different approaches to debt risk classification. It was
argued by Hennie (2003) that the main types of credit risk are consumer risk, corporate
 risk and high or national risk. Culp and Neves (1998), on the other hand, considers the
automatic risk and risk of resale to be the two main types of credit risk. Horcher (2005)
defines six types of credit risk, namely, risk of default, social risk, legal risk, country or
high risk and risk of harassment.

 According to Horcher (2005), the traditional risk of debt is related to the payment of
mortgages, especially borrowing or selling.

 In recent years, banking risk management has been closely monitored. Banks and bank
advisors have tried to market more complex risk management methods that can report
consumer risk (e.g. rate), and, perhaps most importantly, diversification risk risks for all
borrowers in a large portfolio. Managers are also beginning to consider using internal
banking models to generate adequate cash flow rates. 9

 Suresh N, Anil Kumar S, and Godda D.M (2009) conducted a study to establish a
framework for estimating and managing credit risk in fifteen independent banks in India.
The main purpose of this study was to evaluate Non Performing Assets (NPAs) as a
percentage of the total assets of private banks. It was concluded that the level of NPAs of
private banks was declining and by comparing critical rates, it was found that
homogeneity was not in banks due to their exposure to debt.
 Sinan Cebenoyan and Philip E. Strahan (2001) examined how effective management of
bank credit risk exposure through the mortgage market affects financial performance,
lending, profitability and risk.

 They estimate a series of split duplicates, form reductions related to monetary measures,
investments in risky loans, profits and volatile regulatory risks (designed to hold bank
access to the domestic market) in the bank's use of the mortgage market to promote risk
management.

 They concluded that banks involved in buying and selling loans were better able to take
advantage of good investment opportunities now, as they were able to increase their C&I
and housing loans and were better able to manage with less money and less money.

 In fact, they argue that increasing banking practices are expected to improve access to
bank lending but not reduce bank risk. Similar to Froot and Stein (1998), they found that
such risk management of debt through effective credit purchases and sales activity affects
banks' investment in risky loans.

OBJECTIVE OF THE STUDY

The following objectives have been prepared to conduct this study on risk management in banks.
1. Recognize the need to manage risk in the banking sector.

2. Knowing the different types of risks facing banks

3. Analyze the different types of risks involved in banks such as

● Credit risk

● Market risk, including interest rate risk

● Liquidity risk

● Operational risk

4. Impact of covid -19 on banking sector

5. Knowing new ways to measure risk in banking sector.

SCOPE OF STUDY

Risk is intrinsic to banking business as the major risks confronting banks are credit Risk, interest
rate risk, liquidity risk and operational risk.
Irrespective of the nature of the risk the best way for banks to protect themselves is to identify
risk, accurately measure, price it and maintain appropriate levels of reserves and capital. If
Indian banks are to compete globally then they have to institute sound and robust risk
management practices, which will improve efficiency of banks.

 The scope of this study involves analyzing and measuring major risks i.e credit risk,
Liquidity risk, interest rate risk and operational risk of banks (public and private
Sector).
 The present study evaluates key performance indicators of various banks in
Terms of credit deposit ratio, net interest margin, spread, overhead efficiency, and Gap
analysis and maturity ladder.
 While putting the risk management in place banks often
Find it difficult to collect reliable data.
 The challenge is mainly in the area of operational risk where there is dearth of reliable
historic data and not a great deal of clarity on the measurement of such risk.

SIGNIFICANCE OF STUDY

Good risk management is good banking. And good banking is essential for profitable
survival of institution. It brings stability in earnings and increases efficiency in
operations.

The present study proposes to:

● Value preservation
● Value creation
● Capital optimization

● Enhance capital allocation.

● Improvement of portfolio identification and action plans.
● An understanding of key business processes.
● Integration of risk management within corporate governance framework.
● Improved Information Security.
● Corporate Reputation.
● Instill confidence in the market place.
● Alleviate regulatory constraints and distortions thereof.

SOURCE OF DATA

Data for the present study is collected from two sources

 Primary Source:

The first hand information is collected with the responses and interviews with the financial
manager in relation to the product.

 Secondary Source:

The secondary data is colleted from the published sources like journals, Magazines and
various published books. 

LIMITATIONS OF STUDY

However, I have made every possible effort at my great extent level to show how
selected sample of banks analyse the major risks i.e credit, market and operational
risks. But the study at the disposal of a researcher on this level is limited. In addition
to other factor such as time that plays a very important role in every field of today’s
life has also an important bearing on research work. The main limitations of the
present study are as follows:
 ● The limitation of the study is only to the study of “Risk management in banks”.

● All data and information collected is true to some specific period of time.

● All the detials could be extracted as the companies will be having the rule of
“Confidentiality”.

● It was difficult to have group discussions with experts due to their busy
schedules.

BIBLOGRAPHY

● R.S.Raghavan, Risk management in banks.

● Taxmann,Treasury and Risk management in banks(2009-10)

● www.reservebankofindia.in

● GOOGLE.Scholar.com

● www.researchggate.com

● www.e-journals.com

● www.businessdictionary.com

● www.wikipedia.com

● www.investopedia.com