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The Concept of Risk Management

A high risk industry is not essentially one which must be avoided by the investors. Invariably the high risk Industries provide the important opportunities for the high or rapid returns on the investment. But it is obvious that investment has to be carefully researched the first, and the risks of scheme carefully weighed. Thereafter, scheme must be watched with the constant attention. A technique for constantly monitoring and the evaluating an investment, and its risks, is called the "risk management".

The "common sense" school of the management recognizes that for every process there is a group of the potential risks which can be recognized individually and specified priority. In many cases they can be avoided by the careful concentration; for example, fire is well known to be a major cause of death and the injury, and chances of escaping and the saving property are greatly enhanced if early warning of fire is given. It is therefore rational to have smoke detectors in farm buildings. Process of managing risk is based on individual analyses of the three fundamental activities, which are taken in the sequence, and subsequent synthesis of results into a programmed of the management action. These three activities are:

1) Discovering the source or Identification of risk, from which a possible risk may occur,

2) Measuring the risk, or evaluating the crash on an individual or an organization in event of a probable risk happening, and

3) Managing and controlling the risk, or selecting most efficient methods to deal with a probable risk.

Thus these three mechanisms have, in turn, many sub-components. These all must be reviewed and analyzed when a risk management work out is undertaken. Guiding farmer in making a review and the analysis, and formulating the risk management strategy, are the subjects of following sections.

Different Types of Risks:

(1)Credit Risk - This is a risk of non recovery of the loan or risk of reduction in value of the asset. The credit risk also includes pre-payment risk resulting in the loss of opportunity to bank to earn higher interest income. The Credit Risk also arises due surplus experience to a single borrower, geographical or an industry area. The element of country risk is also present which is a risk of the losses being incurred due to the adverse foreign exchange reserve the situation or adverse the  economic or political situations in another country.

(2)Interest Rate Risk- This type of risk arises due to the fluctuations in interest rates. It can result in the reduction in revenues of bank due to the fluctuations in interest rates which are dynamic and which change differently for the assets and the liabilities. With deregulated era interest rates are market determined and the banks have to fall in the line with market trends even though it may suffocate their Net Interest boundaries.

(3)Liquidity Risk- The Liquidity is a ability to meet the commitments as and when they are due and the ability to undertake new transactions when they are gainful. The liquidity risk may originate in any of following situations-

(a)Net outflow of the funds arising out of the withdrawals/non renewal of the deposits.

(b)Non recovery of cash receipts from the recovery of loans.

(c)Translation of the contingent liabilities into the fund based commitment and

(d)Increased a ailment of the sanctioned restrictions.

(4)Foreign Exchange Risk  -  The risk may arise on the account of maintenance of positions in force operations and it involves the transaction risks (profits/loss on transfer of earned profits due to time lag), currency rate risk and the transportation risk (the risks arising out of the exchange restrictions).

(5)Regulatory Risks-   It is defined as risk associated with crash on the profitability and the financial position of a bank due to the  changes in regulatory conditions, for example introduction of the asset classification norms have the adversely affected the banks of NPAs and the balance sheet base lines.

(6)Technology Risk - This risk is connected with the computers and communication technology which is being increasingly introduced in banks. This entails risk of obsolescence and risk of losing the business to improve technologically.

(7)Market Risk-This is the risk of victims in off and on the balance sheet positions arising from the movements in the market prices.

(8)Strategic Risk-This type of risk arising out of the certain tactical decisions taken by banks for the sustaining themselves in present day scenario  for example the decision to open a auxiliary may run risk of losses if subsidiary does not do superior business.

The necessary components of the any risk management system are -

*Risk Identification- It refers the naming and defining of each type of the risk connected with a transaction or the type of service or product.

*Risk Control- It refers the framing of guidelines and policies that define risk limits not only at individual level but also for the particular transactions.

*Risk Measurement- It refers the estimation of probability, size and the timing of potential loss under the range of scenarios.

Why Is Risk Management Important?

The efficient risk management strategies allow you to distinguish your project's weaknesses, strengths, threats and opportunities. By planning for unexpected events, you can be prepared to respond if they happen. To make sure your project's achievement, define how you will grip the potential risks so you can mitigate, identify or avoid the problems when you need to do. A successful project managers distinguish that the risk management is significant, because achieving a project's goals depends on the preparation, planning, results and the evaluation that contribute to the achieving tactical goals.


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