Page 15 - Risk Management Bulletin April -June 2021

RMAI BULLETIN APRIL TO JUNE 2021

NON-FINANCIAL

RISK: A MULTI-

HEADED

MONSTER

Introduction In early stages of implementation of an NFR
framework, NFR was perceived as an evolving list of
The business of banking today is synonymous with
active risk management than it was ever before. The uncontrollable variables, such as Operational Risk,
success and failure of a banking institution heavily Compliance Risk, Conduct Risk, IT Risk, Cyber Risk,
depends on the strength of the risk management Model Risk and Third–party Risk. We can understand
system in the current environment. NFRs as those risks that are not core or directly
associated to the primary business and revenue
generating activities, but can nevertheless have
Banks and other financial institutions have made huge
investments to strengthen and upgrade their risk negative strategic, business, economic and/or
management tools and they have come a long way reputational implications.
since the global financial crisis. This includes The Nature of NFR
compliance with stringent regulatory requirements.
Risk is the effect of uncertainties on objectives - always
Most institutions now have well-developed risk
management frameworks to manage market, credit, linked to a loss which is uncertain. Any loss which is
and liquidity risk, that is the financial risks. However, certain is not a risk anymore; it is simply a cost.
there is a growing recognition of the need to manage Financial risk is always the consequence of specific
financial choices e.g. purchasing an asset or granting
Non-Financial Risk (NFR).
a loan. Despite the uncertainty, the financial risks
About the author posed by these transactions can generally be
measured, in the sense that losses tend to be limited
Usha Yadav and associated with known events, which are likely to
AGM (Faculty) occur with a certain probability.
SBI CRM
Gurugram, Haryana The rationale of banks’ business models is to take on

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