Risk Management in Banks Reference essay

  • Length: 16 pages
  • Sources: 6
  • Subject: Economics
  • Type: essay
  • Paper: #44661321

Excerpt from essay :

Hence, we decided to take differnet bank groups and companies (previously highlighted in the pie-charts) and compared the net growth of these selected bank groups in the finanical years of 2006 and 2007. Note that these net profits were claculated with the number of increase or decrease in the overall loans investments in these bank groups.

An important thing to note here is that while bank credit is increasing in India, the overall impact that its has on the GDP and the economy is still not at the extent that some of the other countries experience. India's current bank credit holds to 80% of the GDP of the country, in fact the entire Asian block with Thailand and China does not record higher than 100% of the GDP. When comparing that to Hong Kong (with 180% of the GDP and rising), it becomes obvious that the bank creidt management needs to revised for superior perfrmance.

Risk Management for Indian Banks

"Risk management is relatively new and emerging practice as far as Indian banks are concerned and has been proved that it's a mirror of efficient corporate governance of a financial institution. Globalization and significant competition between foreign and domestic banks, survival and optimizing returns are very crucial for banks and financial institutions. However, selecting the efficient customer and providing innovative and value added financial products and services are another paramount factors. In a volatile and dynamic market place for achieving sustainable business growth and shareholder's value, it is essential to develop a link between risks and rewards of all products and services of the bank. Hence, the banks should have efficient risk management framework to mitigate all internal and external risks" (Nallamothu & Ahmed, 2010).

In order to better manage bank credit risk, it is important to understand the various ways and situations in which credit risk can emerge. Some of the more common aspects or situations that occur in the form of credit risk include the following (Cool Avenues Knowledge Management Team, 2010):

If the transaction was designed in a direct lending format, then there is a higher chance that the funds originally transferred would not be returned or repaid; this could lead to losses of credit investments

If and when the liabilities of the clients or customers are crystallized, especially in the instances of the liabilities in question being guarantees or letters of credit, the customer or client will not be willing to come forward and pay back the funds received; this could lead to losses of credit investments

When talking about the financial freezes in the treasury products, there is an expectation of a cease of repayments or the parties involved not being willing to pay back the funds based on the original terms of agreement or contracts; this could lead to losses of credit investments

Contracts will also face minimal changes if and when security industry exchange business dealings with other industries they are already in business with; this could end up being a loss in investments as there will be minimal to no addition in credits taken for the new contracts

If and when there is an international dealing made, apart from internet banking, with maximum focus being on the cross-border exposure, this situation can result in the restriction, termination and deficiency of currency transfers between the two countries involved; this again causes numerous credit and accounting issues for both parties involved but particularly for the banks that lend or loan the money;

The fact of the matter is that with the banks improving and escalating their transactions and markets to a global scale means that they have to actually implement a far diverse internal structure. This in turn means that they will need to employ far more efficient and intricate strategies to counter the various formats of unprecedented credit risks that they might face. Aside from the credit risks involved in global banking, there are quite a few other hurdles and risks that banks will have to prepare for, for instance the operational risks that come with being a commercial-based operative; the business risks faced by the commercial borrowers, the various topographical/political/cultural/religious/legislative risks associated with expanding into an unknown or foreign territory; even the reputation risks involved can turn out to be make or break for bank groups or companies involved in global banking. However, all of these can be preemptively countered by conducting thorough market researches before establishing global business settlements; credit risk management, however, is not that easy to prepare for (Cool Avenues Knowledge Management Team, 2010).

"Credit risk management enables banks to identify, assess, manage proactively, and optimize their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalization, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes" (Cool Avenues Knowledge Management Team, 2010).

What Indian banks need to understand, when taking on the global banking structure, is that credit risk management is based around the efficiency and quality of the strategies that they have employed. The quality of the strategies will help if adjusting and altering the changes needed based on the customer and shareholder returns on investments. Hence, the best example currently in global banking is the United States that, according to many banking industry analysts, has been able to record an average of 56% and higher in the financial years from 1989-1997 for the shareholder returns on credits or loans provided. They achieved this with a low loan loss strategy; the team at Cool Avenues Knowledge Management Team explains that the "low loan loss banks stage a quicker share price recovery than their peers, and in a credit downturn, the market rewards the banks with the best credit performance with a moderate price decline relative to their peers" (Cool Avenues Knowledge Management Team, 2010).

India's banking structure has undergone its reddy years in the past decades, and when talking about shareholder returns on credits and loans for them, it is important that the invetsments in these reddy years and understood with regards to the overall inflation rates of the country, its interets rates on credits and loans as well as the global exchange rate of the India Rupee (Cool Avenues Knowledge Management Team, 2010).

Using Credit Risk Management as Building Blocks of Business

Indian banks need to integrate their corporate objectives with their credit risk management structures in order to have strong and sustaining building blocks of business. In order to incorporate the corporate goals with risk management the following aspects have to be paid attention to:

1 - Strategy and Policy

Strategy and policy refers to the way in which the business is conducted on a regular basis. It will also include business aspects like the overall appetite and demand for credit and loans in the clientele as well as the overall structure and guidance needed for credit investments to enable the clients make an informed, analytical and clear decision on the format of credit risk and investment they want to make (Cool Avenues Knowledge Management Team, 2010).

"It is essential that each bank develops its own credit risk strategy or enunciates a plan that defines the objectives for the credit-granting function. This strategy should spell out clearly the organization's credit appetite and the acceptable level of risk - reward trade-off at both the macro and the micro levels" (Cool Avenues Knowledge Management Team, 2010).

Considering the above statement, it is necessary for the bank to develop their strategy around their own willingness to step forth and provide loan and credit investment opportunities designed around the economic, political, market and infrastructure framework of the country they are established in. The currency of the country and the maturity of the market also play a huge part in the development of the bank's strategy. Hence, this would include the through assessment of many volatile aspects like:

Segmentation and recognition of the target audience based on consumer behaviors and the competitive business sectors,

The preference of the specialization of the industry and competition in it,

The overall financial investments needed for the possibility of sustaining credit investments and reducing chances of debts or non-repayment (Cool Avenues Knowledge Management Team, 2010).

The overall policy approach of banks stepping in the global banking industry should be to completely realize the extent of organizational tasks required for not only incorporating risk management and measurement strategies but also include all the functional techniques, recording techniques, legislation and guidelines required internally and externally in relation to risk management. The overall policies require for loan investments must also expand outside the box of merely understanding and implementing sustainable credit activities. They should allow a constant source of networking to other banks as well as ensure that loan losses don't surface due to 'poor loan structuring and perfunctory risk assessments' (Cool Avenues Knowledge Management Team, 2010).

"An organization's risk…

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