Risk Management
Risk management has taken centre stage in any discussion on management of banks in the recent past.
To be sure, risk taking is as old as banks. Banks are in the business of taking deposits, repayable virtually on demand and lending/ investing the funds in illiquid assets.
The action of converting liquid funds into illiquid assets, with maturity mismatches between the two, is a certain recipe for risk. Banks have known and managed this risk fairly well over centuries of their existence.
In the last few decades, however, newer varieties of risk have arisen, because, in the pursuit of high returns, banks have embraced higher risks.
The risks about which many bankers are not fully familiar are in the realm of off- balance sheet commitment, market risks, interest risks and those associated with derivatives.
It will not be an exaggeration to say that a vast majority of directors of banks in India are not aware of the dimension and magnitude of these risks.
Since the job of banks is primarily to safeguard the interests of depositors and the shareholders, these risks should be managed professionally.
Risk management has taken centre stage in any discussion on management of banks in the recent past.
To be sure, risk taking is as old as banks. Banks are in the business of taking deposits, repayable virtually on demand and lending/ investing the funds in illiquid assets.
The action of converting liquid funds into illiquid assets, with maturity mismatches between the two, is a certain recipe for risk. Banks have known and managed this risk fairly well over centuries of their existence.
In the last few decades, however, newer varieties of risk have arisen, because, in the pursuit of high returns, banks have embraced higher risks.
The risks about which many bankers are not fully familiar are in the realm of off- balance sheet commitment, market risks, interest risks and those associated with derivatives.
It will not be an exaggeration to say that a vast majority of directors of banks in India are not aware of the dimension and magnitude of these risks.
Since the job of banks is primarily to safeguard the interests of depositors and the shareholders, these risks should be managed professionally.