1) Credit Risk - This is the risk of non recovery of loan or the risk of reduction in the value of asset. The credit risk also includes the pre-payment risk resulting in loss of opportunity to the bank to earn higher interest interest income. Credit Risk also arises due excess exposure to a single borrower, industry or a geographical area. The element of country risk is also present which is the risk of losses being incurred due to adverse foreign exchange reserve situation or adverse political or economic situations in another country
(2) Interest Rate Risk-This risk arises due to fluctuations in the interest rates. It can result in reduction in the revenues of the bank due to fluctuations in the interestrates which are dynamic and which change differently for assets and liabilities. With the deregulated era interest rates are market determined and banks have to fall in line with the market trends even though it may stifle their Net Interest margins
(3) Liquidity Risk-Liquidity is the ability to meet commitments as and when they are due and ability to undertake new transactions when they are profitable. Liquidity risk may emanate in any of the following situations-
(a) net outflow of funds arising out of withdrawals/non renewal of deposits
(b) non recovery of cash receipts from recovery of loans
(c) conversion of contingent liabilities into fund based commitment and
(d) increased availment of sanctioned limits
(4) Foreign Exchange Risk - Risk may arise on account of maintenance of positions in forex operations and it involves currency rate risk, transaction risks (profits/loss on transfer of earned profits due to time lag) and transportation risk (risks arising out of exchange restrictions)
(5) Regulatory Risks- It is defined as the risk associated with the impact on profitability and financial position of a bank due to changes in the regulatory conditions, for example the introduction of asset classification norms have adversely affected the banks of NPAs and balance sheet bottom lines.
(6) Technology Risk - This risk is associated with computers and the communication technology which is being increasingly introduced in the banks. This entails the risk of obsolescence and the risk of losing business to better technologically
(7) Market Risk-This is the risk of losses in off and on balance sheet positions arising from movements in market prices.
(8) Strategic Risk-This is the risk arising out of certain strategic decisions taken by the banks for sustaining themselves in the present day scenario for example decision to open a subsidiary may run the risk of losses if the subsidiary does not do good business.
The essential components of any risk management system are –
(i) Risk Identification-i.e the naming and defining of each type of risk associated with a transaction or type of product or service
(ii) Risk Measurement-i.e. the estimation of the size ,probability and timing of potential loss under various scenarios
(iii) Risk Control-i.e. the framing of policies and guidelines that define the risk limits not only at the individual level but also for particular transactions
In risk management exercise the top management has to lay down clear cut policy guidelines in quantifiable and precise terms - for different layers line personnel business parameters, limits etc. It is very important for the management to plant at the macro level what the organisations is looking in for in any business proposition or venture and convert these expectations into micro level factors and requirements for field level functionaries only then they will be able to convert these expectations into reality. A very important assumption is made but normally omitted or over looked is provision of infra-structural support and conductive climate. Ultimately top management has a greater role to play in any risk management process
