Vol 5 Issue 9 Oct 015 ISSN No : 30-750 ORIGINAL ARTICLE International Multidisciplinary Research Journal Indian Streams Research Journal Executive Editor Ashok Yakkaldevi Editor-in-Chief H.N.Jagtap
Welcome to ISRJ RNI MAHMUL/011/3595 ISSN No.30-750 Indian Streams Research Journal is a multidisciplinary research journal, published monthly in English, Hindi & Marathi Language. All research papers submitted to the journal will be double - blind peer reviewed referred by members of the editorial board.readers will include investigator in universities, research institutes government and industry with research interest in the general subjects. International Advisory Board Flávio de São Pedro Filho Federal University of Rondonia, Brazil Kamani Perera Regional Center For Strategic Studies, Sri Lanka Janaki Sinnasamy Librarian, University of Malaya Romona Mihaila Spiru Haret University, Romania Delia Serbescu Spiru Haret University, Bucharest, Romania Anurag Misra DBS College, Kanpur Titus PopPhD, Partium Christian University, Oradea,Romania Mohammad Hailat Dept. of Mathematical Sciences, University of South Carolina Aiken Abdullah Sabbagh Engineering Studies, Sydney Ecaterina Patrascu Spiru Haret University, Bucharest Loredana Bosca Spiru Haret University, Romania Fabricio Moraes de Almeida Federal University of Rondonia, Brazil George - Calin SERITAN Faculty of Philosophy and Socio-Political Sciences Al. I. Cuza University, Iasi Editorial Board Hasan Baktir English Language and Literature Department, Kayseri Ghayoor Abbas Chotana Dept of Chemistry, Lahore University of Management Sciences[PK] Anna Maria Constantinovici AL. I. Cuza University, Romania Ilie Pintea, Spiru Haret University, Romania Xiaohua Yang PhD, USA...More Pratap Vyamktrao Naikwade Iresh Swami ASP College Devrukh,Ratnagiri,MS India Ex - VC. Solapur University, Solapur R. R. Patil Head Geology Department Solapur University,Solapur Rama Bhosale Prin. and Jt. Director Higher Education, Panvel Salve R. N. Department of Sociology, Shivaji University,Kolhapur N.S. Dhaygude Ex. Prin. Dayanand College, Solapur Narendra Kadu Jt. Director Higher Education, Pune K. M. Bhandarkar Praful Patel College of Education, Gondia Sonal Singh Vikram University, Ujjain Rajendra Shendge Director, B.C.U.D. Solapur University, Solapur R. R. Yalikar Director Managment Institute, Solapur Umesh Rajderkar Head Humanities & Social Science YCMOU,Nashik S. R. Pandya Head Education Dept. Mumbai University, Mumbai Govind P. Shinde Bharati Vidyapeeth School of Distance Education Center, Navi Mumbai Chakane Sanjay Dnyaneshwar Arts, Science & Commerce College, Indapur, Pune Awadhesh Kumar Shirotriya Secretary,Play India Play,Meerut(U.P.) G. P. Patankar Alka Darshan Shrivastava S. D. M. Degree College, Honavar, Karnataka Shaskiya Snatkottar Mahavidyalaya, Dhar Maj. S. Bakhtiar Choudhary Director,Hyderabad AP India. S.Parvathi Devi Ph.D.-University of Allahabad Sonal Singh, Vikram University, Ujjain Rahul Shriram Sudke Devi Ahilya Vishwavidyalaya, Indore S.KANNAN Annamalai University,TN Satish Kumar Kalhotra Maulana Azad National Urdu University Address:-Ashok Yakkaldevi 5/3, Raviwar Peth, Solapur - 13 005 Maharashtra, India Cell : 9595 359 35, Ph No: 01737010 Email: ayisrj@yahoo.in Website: www.isrj.org
Indian Streams Research Journal ISSN 30-750 Impact Factor : 3.150(UIF) Volume - 5 Issue - 9 Oct - 015 RISK MANAGEMENT TECHNIQUES OPERATED BY THE COMMERCIAL BANKS V. Lakshmi Associate Professor, Tirupur Kumaran College for Women, Tirupur. Co - Author Details : Rachel Nancy Philip Principal, Tirupur Kumaran College for Women, Tirupur. ABSTRACT Risk is the fundamental element that drives financial behavior. Without risk, the financial system would be vastly simplified. However, risk is omnipresent in the real world. Financial Institutions, therefore, should manage the risk efficiently to survive in this highly uncertain world. The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. KEYWORDS :Tourist, Shani Shingnapur, Satisfaction Level, Questionnaire, Interviews Facilities. 1.1 INTRODUCTION: Risk might be defined as uncertainties arising out of adverse impact against the expected outcome on the basis of planned objective. The standalone profitability of a business entity is not very meaningful unless it is accounted for along with risk. Banks are no exception. Banks are basically financial intermediaries which are confronted with several types of risk. After economic liberalization, banks were open to discriminate pricing policies and offered differential products which carry different types of risks not dealt with by the banks previously. We understand that a transition of risk profile of the banks has taken place and thus, the importance of risk management and risk analysis has increased. Again, for the implementation of BASEL II, a robust integrated risk management system should be required in place for each bank. Risk is the fundamental element that drives financial behaviour. Without risk, the financial system would be vastly simplified. However, risk is omnipresent in the real world. Financial Institutions, therefore, should manage the risk efficiently to survive in this highly uncertain world. The 1
future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. (Rekha 010). The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. Foremost among them is the windof economic liberalization that is blowing across the globe. India is no exception to this swing towards market driven economy. Competition from within and outside the country has intensified. This has resulted in multiplicity of risks both in number and volume resulting in volatile markets. A precursor to successful management of credit risk is a clear understanding about risks involved in lending, quantifications of risks within each item of the portfolio and reaching a conclusion as to the likely composite credit risk profile of a bank. The fundamental business of lending has brought trouble to individual banks and entire banking system. It is, therefore, imperative that the banks are adequate systems for credit assessment of individual projects and evaluating risk associated therewith as well as the industry as a whole. Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures. It is, therefore, time that banks managements equip them fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. There has been very little effort to develop a method where risks could be identified and measured. 1. SIGNIFICANCE OF THE STUDY: The fundamental business of lending has brought trouble to individual banks and entire banking system. It is, therefore, imperative that the banks are adequate systems for credit assessment of individual projects and evaluating risk associated therewith as well as the industry as a whole. Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures. It is, therefore, time that banks managements equip themselves fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. 1.3SAMPLING DESIGN A sample design is a definite plan for obtaining a sample from a given population. It refers to the technique or the procedure would adopt in selecting items for the sample. Sample design may as well lay down the number of items to be included in the sample (ie.,) population of the study, sampling unit, sampling frame (or) sampling sources, size of sample and sampling procedure.
POPULATION OF THE STUDY The population frame would be the employees working in various commercial banks in Coimbatore city in the state of Tamil Nadu, India. SAMPLING FRAME The sampling frames are source list a sub-set of the defined target population from which sample is realistically for research. The sampling frame for the present research study would be comprised of adult employees in Coimbatore. SAMPLING UNIT This is the most important step in sampling design before selecting a sample. Sampling unit may be a geographical one such as a state, district, village, etc. The sample subjects for the present research are the investors belonging to different age group who are above 5 years old, the purpose of selecting stratus is 1.To ensure that the sample had similar representation (homogeneous) in terms of respondent profile..since the prior studies conducted in India have made the research by including many employees of various kinds of commercial banks. SAMPLING TECHNIQUE The researcher has adopted stratified random sampling technique for the present study. This method is used in exploratory research where the researcher is interested in getting a selected approximation of the truth as the name implies the sample is selected by making Coimbatore district divided into strata and the sample is selected through convenience. This non-probability method is often used during preliminary research effort to get a gross estimate of the results, without incurring the cost or time required to select a random sample. SAMPLE DESIGN FOR DIAGNOSTIC STUDY The universe of the present study is the Scheduled commercial banks of India. The Indian Banking sector has been divided into five groups and a representative sample of 30% has been selected from each group based on its profitability I) Nationalized bank Group: Punjab National Bank (PNB),Canara Bank (CB), Bank of India (BOI),Bank of Baroda (BOB), Indian Overseas Bank (IOB ),Oriental Bank of Commerce (OBC). ii) SBI & its Associates bank Group: State Bank of India (SBI),State Bank of Indore (SBID). iii) Old private sector bank Group: Federal Bank Ltd (FB), Jammu and Kashmir Bank Ltd (J&KB), Karnataka Bank ltd (KB), South Indian Bank (SIB) Tamil Nadu Mercantile Bank Ltd., (TMB). iv) New private sector bank Group: ICICI Bank ltd (ICICI) b. HDFC Bank Ltd (HDFC). v) Foreign banks: Standard Chartered Bank (SCB),Citibank NA (CIB),HSBC Ltd (HSBC),ABN Ambro Bank NV (ABNB),Deutsche Bank AG (DB),Bank of America (BOA),JP Morgan Chase Bank (JPMCB),Barclays Bank PLC (BB) SAMPLING SIZE This refers to the number of items to be selected from the universe to constitute a sample. Sample size has direct bearing on how accurate the findings are relative to the true values in the 3
population. Therefore determining an appropriate sample size for this research was considered to be a paramount importance. An optimum sample size fulfills the requirements of efficiency, representativeness, reliability and flexibility. DATA COLLECTION PROCEDURE The data used for the present study is primary in nature. The primary was collected through the field survey during the period January 01 to April 01. Surveys are an efficient ways of getting information s from a large sample of employees by asking questions and recording responses. Several types of methods of data collections were considered, considering the complexity of the survey, time and funding budget the survey method was finally adopted and the sample size was determined as 150. 1. OBJECTIVES OF THE STUDY Risk management practices adopted by the commercial banks in Coimbatore city. 1.5 REVIEW OF LITERATURE AI-Zubi et al (00) examined empirically the Jordanian banks capital and risk behavior as a reaction to pressure during the period 1990-003. The study used various econometric models such as the Generalized Least Square (GLS), the Fixed Effect Model (FEM), and the Random Effect Model (REM). The study reported that there was a strong positive correlation between the regulatory pressure and banks capital and their risk levels. The study concluded that the Jordanian banks are close to the minimum regulatory capital requirements and they tend to increase both their ration of capital-to-risk weighted assets and levels of risk. Ali and Daly (010) investigated the interaction between the cyclical implications of loan defaults (credit risk) in an economy and the capital stock of a bank. The approach used a macroeconomic credit model that through a comparative analysis of two countries, namely Australia (a relatively immune economy from the recent crisis). The result indicated that the same set of macroeconomic variables display different default rates for the two counties. Additionally the study finds that compared to Australia, the US economy is much more susceptible to adverse macroeconomic shocks. Aman and Zaman (010) studied the credit risk performance of private and state owned banks in Pakistan and found that the private sector banks were performing better with regards to the credit risk compared to the state owned banks. The study by analyzing data for a fifteen year period from 1990 to 005 reported that the private sector banks were efficient in managing their credit risk and suggested that the public sector banks need to improve their efficiency of credit risk management. The present analysis is focused towards risk management practices adopted by the commercial banks in Coimbatore city. There are many risk management techniques available such as Credit ratings Gap analysis Scenario analysis Duration analysis Maturity mismatching Earning at Risk Value at Risk Simulation techniques
Stress testing Risk adjusted return Internal based rating Credit scoring Credit committees The employees of the bank were asked to give their opinion whether the risk management technique is used in their bank or not. A continued analysis has been carried out the level of acceptance of the various risk elimination strategies, and the specific problem encountered in the implementation of the risk management techniques and the banks concern over the various risk operated was also analyzed. Table 1 Risk management techniques operated by the commercial Banks S.N o R isk manageme nt techniques Nationalized banks SB I & associates Old private sector banks New private sector banks Foreign banks A NA A NA A N A A NA A NA 1 Credit rat ings Gap analys is 3 S cenario analys is Duration analys is 5 M aturity mismatchin g E arning at R isk 7 Value at R isk S imulation techniques 9 S tress testing 10 R isk adjusted ret urn 10 13 57. 15 50 13 53. 1. 1 5. 115 1 51. 175 70 19 51. 130 5 107. 15 50 11. 1 51. 10 1. 135 5 1. 75 30 11. 105 10 17 50. 15 3. 7 3. 151 0. 11. 13 55. 10 0. 13 53. 15 5 90 3 13 9. 9 3. 13 5. 99 39. 19 51. 11. 1 59. 11. 3. 9 3. 17 70. 10. 9 39. 103 1. 1. 13 55. 1 57. 111. 1 5. 15 1. 7 9. 1 57. 15 0. 17 5. 1 51. 11. 10. 139 55. 130 5 15 1. 1 9. 110 17 50. 10 15 5 1. 13 55. 13 9. 10 9 3. 1 50. 10 5 13 9. 90 3 105 1 51. 11. 17 50. 1 9. 151 0. 15 5 139 55. 11. 17 50. 19 59. 13 5. 139 55. 157. 1 50. 99 39. 105 111. 19 51. 13 9. 101 0. 11 7. 111. 93 37. Table 1 explains the risk management techniques adopted by the different sector banks, the table highlights that with regard to the credit management technique, a percent of the nationalized banks have adopted this technique and a 5 per cent of the banks have not adopted, with regard to the SBI and its associates a percent of the banks have adopted the technique and a remaining 5percent of the bank has not adopted the technique, With regard to the old private sector bank and a 3. per cent of them have adopted the technique, a 5 per cent of the banks have adopted the technique and a per cent of them have not adopted. With regard to the foreign banks a 9. per cent of the banks have adopted the technique and a remaining 50. percent of the banks have not adopted. The technique of gap analysis was adopted by a 57. per cent of the nationalized banks, a percent of the SBI banks a 3. percent of the old private sector banks, 1. percent of the new private 5
sector banks and a 0. percent of the foreign banks have adopted the technique. The scenario analysis was adopted by 50 percent of the nationalized banks, a 50. percent of the SBI and its associates, 70. percent of the old private sector banks, 9. percent of the new private sector banks, and a 5 percent of the foreign banks have adopted. The duration analysis was adopted by a 53. per cent of the nationalized banks, a 3. percent of the SBI banks a. percent of the old private sector banks, percent of the new private sector banks and a 55. percent of the foreign banks have adopted the technique. The maturity miss match analysis was adopted by. percent of the nationalized banks, a 3. percent of the SBI and its associates, 39. percent of the old private sector banks, 5. percent of the new private sector banks, and a 50. percent of the foreign banks have adopted. The technique of value at risk analysis was adopted by a per cent of the nationalized banks, a. percent of the SBI banks a 55. percent of the old private sector banks,. percent of the new private sector banks and a 5.percent of the foreign banks have adopted the technique. The simulation technique analysis was adopted by 51. percent of the nationalized banks, a 55. percent of the SBI and its associates, 55. percent of the old private sector banks,. percent of the new private sector banks, and a 5. percent of the foreign banks have adopted. The technique of gap analysis was adopted by a 57. per cent of the nationalized banks, a percent of the SBI banks a 3. percent of the old private sector banks, 1. percent of the new private sector banks and a 0. percent of the foreign banks have adopted the technique. The risk adjusted return technique was adopted by 51. percent of the nationalized banks, 53. percent by the SBI and its associates,. percent of old private sector banks, 9. percent of the new private sector banks, and a. percent of the foreign banks have adopted the technique. Table Specific problem ventured by the banks based on risk management techniques S.No Risk management techniques Frequency Mean rank Rank 1 lack of market information 101.1 VII Capital inadequacy 1 13. III 3 Poor loan recovery 19 15.5 II Improper credit identification and rating 13 13.0 V 5 Short term guideline from bank 1 13.1 IV weak liquidity management 10 11. VI 7 Poor loan monitoring 110. VIII Lack of qualified and experienced personnel 10 1. I Total 150 100.0 The various problem implementing the risk management practices were analyzed and the various risk associated were listed above and the first rank was secured by the factor Lack of qualified and experienced personnel with a mean rank of 1., the II nd rank was bagged by the factor of Poor loan recovery with a mean value of 13., third rank was secured by the factor capital adequacy, the fourth rank was secured by the short term guideline from the bank with a mean value of 13.0 the fifth rank was secured by the factor of short term guideline from bank with a mean rank 13.1, the sixth rank was bagged by the factor weak liquidity management, the VIIth rank was secured by the factorpoor loan monitoring and lack of market information with a mean values of.1 and. respectively. Conclusion:
Risk is an opportunity as well as a threat and has different meanings for different users. The banking industry is exposed to different risks such as credit risk, liquidity risk, market risks and operational risk which can adversely affect tits profitability and financial health. Risk management thus has emerged as a new and challenging area in banking. Basel II has intended to improve the safety and soundness of the financial system by placing increased emphasis on banks own internal control and risk management practices. The ask of implementing and integrating the Basel II is challenging to Indian banks, after the independence and the LPG the Indian banks have been pushing itself to the changing and challenging demand of the world. But he reforms are made after the challenges are remarkable and the banks are still and yet to face various challenges in the coming years too. In the secondary analysis it is confirmed that the risk is more in the public sector banks than the private sector banks. Most of the public sector banks have indicated reduction/fall in the capital adequacy ratio and increased nonperforming assets. In contradictory the private sector banks like ICICI, Axis bank, HDFC bank, Yes Bank have high capital adequacy ratio. The very moot objective of capital requirement by banks is to absorb shocks. Hence based on the risk management policy the banks need to decide the quantum and quality of the capital. The regulatory norms on capital adequacy are the minimum norm from the regulators perspective, taking the banking system as a whole. But by taking the risk only the business grows, greater the risk, higher the profit and hence the business banks must strike a tradeoff between the two. The essential function of risk management is to identify, measure and most important is to monitor the activities pertaining to the risk. REFERENCES: 1.Al-Zubi, K. Et al. (00), Capital Adequacy, Risk profiles and bank Behaviour: Empirical evidence from Jordan, Jordan Journal of Business Administration, Vol. pp. 9-105..Ali, A. And Daly,K. (010), Macroeconomic Determinants of Credit Risk: recent Evidence from a Cross Country Study, International review of financial analysis, Vol. 19, pp. 15-171. 3.Aman, Q. And Zaman, K. (010), Credit Risk Performance of Private, State Owned and Foreign Banks on the economy of Pakistan (Econometric Approach), International Research Journal of Finance and Economics, Vol. 57. Pp. 7-5.. Report on Trend and Progress of Banking in India 01-13. 5.AnandSinha: Address on "Perspectives in Risk Governance" on August 3, 01 at the Risk& Governance Summit organised by the Indian School of Business, Hyderabad and Deloitte at Mumbai..AnandSinha: Address on Reflections on Regulatory Challenges and Dilemmas on August, 011 at FICCI-IBA Conference on "Global Banking: Paradigm Shift" at Mumbai. 7.Hennie van Greuning, Sonja BrajovicBratanovic: Analysing Banking Risk: A framework for assessing corporate governance and financial risk management..ey Survey on Remaking Financial Services - Risk management five years after the crisis. 9.A.T. Kearney's "Seven Tenets of Risk Management". 10.Senior Supervisors Group (00), "Observations on Risk Management Practices during the Recent Market Turbulence". 11.The World Bank and International Finance Corporation (010), "Bank Governance: Lessons from the Financial Crisis", Note Number 13. 7
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