Relevance of Risk management in the Indian banking industry

Question

Relevance of Risk management in the Indian banking industry

Answer

Risk management is a vital part of assisting banks to grow while limiting the possible negative consequences should something go wrong. Possible negative consequences can arise from internal factors such as internal fraud or/and IT failure, or external factors such as an economic collapse or a stock market crash (IFM, n.d.). The major risks relating the banking industry can be categorised as the following: liquidity, credit, interest, market, and operational risk. In short, risk management takes into consideration two key points: the probability of something bad happening and/or the probable cost of something happening (IFM, n.d.). The central function of a bank is to manage risk and to offer a return to the shareholders in line with their risk profile. However, the credit crisis and the subsequent global recession appear to show that the banking sector has failed to tend to its core business(IFM, n.d.). As can be seen, risk management is important to the banking industry because banks have to follow risk management principles in order to mitigate financial disruptions, which can often lead to a counter effect on the relevant stakeholders, including: shareholders, creditors, etc (IFM,n.d.). The growing global competition to Indian banks by foreign banks, as well as the increasing deregulation, introduction of innovative products and financial instruments have emphasised the necessity for Indian Banks to be equipped in terms of risk management. It must be noted that, risk management in Indian banks is a fairly new practice in comparison to western banks, however it has already shown to improve the efficiency in governing of these banks as these procedures can improve corporate governance.

References

IFM (n.d.) Risk Management in the Banking Industry. Available at: http://www.internationalfinancemagazine.com/article/Risk-Management-in-the-Banking-Industry.html (accessed 12/08/2016)