Page 50 - BANKING FINANCE SEPTEMBER 2015

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one accrued benefit - men in the business have become about high risk? Does it always indicate high gain! No. It is
more risk conscious. Wild shots are not attempted in the degree of risk that is important before the project is
today's learned business world indeed.
What exactly is risk?
Very often it is interpreted in the vague sense - consider
risk to be an abstract notion that has a large impact in
their stock market gamble the possibility that the value of
the investment would decrease due to a variety of fac-
tors. Quantitative financial experts opine - variance is a
commonly used proxy for risk.
Risk is essentially the standard deviation of return on an
asset of portfolio. While examining a security, the more
volatile it is (for example, a technology company's stock
during times of fluctuating consumer spending) the more
risky it is considered to be.
The business world today has become more complicated -
so also the global financial markets-much more uncertain
than ever before. The global financial uncertainties were
not entirely unanticipated but, the intensity was not pre-
dicted nor was the duration expected.
The outlook is far more uncertain now for global situation
than before - the recession menace and the global finan-
cial turmoil emanating from the U.S. sub prime mortgage
crisis, oil prices skyrocketing, gold prices ruling at three
decades high - a few instances out of a good equilibrium/
peace disturbing number clearly show the need for guard-
ing against uncertainties weighing properly the ability to
absorb risk!
So, risk - derived from the Italian word 'risicare'- is where
the business is. It cannot be liquidated altogether simply
because tomorrow is another day and we do not know
what will happen tomorrow. Yesterday is a history - it can-
not be changed. Today is a gift. We plan budget, fix target
for tomorrow where the past experience plays a great
role - the gains are noted and the failures are guarded
against repetition.
Risk can be hedged, whereas uncertainties are to be in-
sured. In Webster dictionary risk means danger, in Chinese
dictionary risk means a danger and simultaneously an op-
portunity. No gain is associated with no risk; but what
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taken up/in operation. A stitch in time saves nine right!
In fact, the key to effective risk management, however, is
not necessarily to minimize all of the various types of risks.
For example, in the banking sector, lending operations
have the inherent risk of possible loan losses (credit risk),
but by taking risk, banks are able to charge a premium for
their risk taking activities and earn profits. Risk is, clearly,
a source of profits.
Of course, in managing various types of risk, it is essential
to divide them into two basic types, based on their inher-
ent characteristics viz. risks that should be taken and risks
that should be minimized. In implementing risk manage-
ment activities, departments in charge of various types of
risks must respond appropriately in time and at the same
time work constantly to upgrade capabilities.
It is essential for the institution as a whole to locate mea-
sure and manage risk volumes accurately and that too
from a centralized perspective practically and realistically.
Hence the crucial need is there for all the players - gov-
ernment controlled or privately controlled - to identify,
measure, price and exert all sorts of monitoring and con-
trol so as to ensure that the financial health of the organi-
zation does not suffer from incurable disease. And natu-
rally, early detection and degree assessment helps to set
right the entire going. We knew how to enter the market,
but little did we know the exact time to exit.
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