Part - I

I am indeed pleased to be here to discuss an important topic like risk management. This is all the more so in an area like finance, where risk and its management has assumed greater significance.

I would first attempt to discuss the renewed interest on risk management in recent years due to changing risk perception in financial institutions followed by an overview of the types of risks and the strategies for risk management. Thereafter, I propose to deal with the role of the Board and organisational issues involved in risk management. This would be followed by the initiatives taken by the Reserve Bank in this regard. Finally, I would raise certain issues relating to management of risks. As banks account for a predominant share in the financial sector in India, I may refer to banks frequently in my talk today.

Risk has been present always in the banking business but the discussion on managing the same has gained prominence only lately. Bankers world-wide have come to realize that the growing deregulation of local markets and their gradual integration with global markets have deepened their anxieties.

With growing sophistication in banking operations, while lending and deposit-taking have continued to remain the mainstay of a majority of commercial banks, many have branched into derivatives trading, securities underwriting and corporate advisory businesses. Some banks have even expanded their traditional credit product lines to include asset securitisation and credit derivatives. Still others have greatly increased their transaction processing, custodial services or asset management businesses, in the pursuit of increased fee income. As a consequence, the issue of risk management has gained new recognition in recent times.

With improvements in information technology, more and more banks will possibly venture into the relatively new world of on-line electronic banking covering apart from traditional banking, providing of bill presentation and payment services. This would mean an increase in the diversity and complexity of risks. Banks would have to develop risk management systems that are rigorous and comprehensive, yet flexible enough to address newer risks they assume.

Out of the four risks confronting financial institutions viz., credit risk, interest rate risk, foreign exchange risk and liquidity risk, the credit risk remains the predominant risk for most banks, despite changes in banking over the last few years. You will recall that during the Asian financial crisis, non-performing loans in Indonesia, Malaysia, South Korea and Thailand soared to over 30 per cent of total assets of the financial system. The costs of dealing with the crisis have been enormous, involving massive transfer of resources. Even in normal times, credit risk attracts considerable amount of attention of credit planners and is extremely important.

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* This is the keynote address delivered by Shri. Jagdish Capoor, Deputy Governor, Reserve Bank of India, at One Day Seminar on Risk Management in Financial System at a Mumbai-based Management Institute.