Page 41 - Banking Finance August 2024

ARTICLE

Credit Risk: Credit risk refers to the probability of financial Compliance Risk: Compliance risk in bank refers to the risk
loss arises due to borrowers not repaying their loans as per of regulatory sanctions, financial loss or damage to
agreed terms and conditions accepted by them during reputation which may arise from bank's failures to comply
sanction. Interruption in repayment of loan be it principal with laws, regulations and industry standard to the sector.
or interest, decreases the cash flow and increases the cost Anti-Money laundering violations, Customer KYC and Due
of collection for the bank. Major credit risks that come in diligence failures, Consumer protection violation and Data
banking businesses are Credit default risk, Concentration privacy and cyber security breaches are the major examples
risk, Country risk, Settlement risk, Bankruptcy risk etc. of compliance risk.

Market Risk: Market risk refers to the risk of losses arises Strategies adopted by Banks for Risk
due to adverse price movements of an investment. It is
generally arising due to changes in interest rate, exchange Mitigation:
rates, Geopolitical events or recession. Major Market risk Risk mitigation in bank is a dynamic function which is very
which bank generally faces are Interest rate risk, Equity risk, important and crucial. No bank can run without accepting
Commodity risk and Currency risk etc. risk and its proper mitigation. Every business decision in
banking carries risk, but it does not mean that we have to
Legal Risk: Legal risk is a risk of financial or reputational loss avoid risk in our decision making rather we have to mitigate
that can result from lack of awareness or misunderstanding risk in the best possible way that make profit for the bank.
of the way law and regulation apply to the banking It is common saying where risk is more profit is more so in
businesses. It has close relationship with banking Products the case of bank where we take more risk charge more
and services and its processes. The major legal risks are spread on loan. Bank is adopting the following strategies to
Disputes between bank and customers, Corporate Legal mitigate the risk in the best possible way:
claims, Law suit against management etc.
Formation of operational risk mitigation committee: Bank
Technology Risk: Technology risk in bank refers to the is forming operational risk mitigation committee to look after
probability and potential of disruption in banking business the various activities associated to operational risk. They
due to failure of technology or cyberattacks. The major make the clear policy and procedure guidelines for doing the
technology related risks are Cyberattacks, Hacking of various banking business. They go through the various
software, Data storage, Data breaches etc. regulatory requirement and make it sure that the bank comply
with all types of regulatory requirements with no exception.
Liquidity Risk: Liquidity risk refers to inability of a bank to
meet its cash and collateral obligations, be it real or Issuance of Credit Policy and Formation of credit Risk
perceived. Three types of liquidity risk which arises in committee: Credit is one of the core businesses of a bank
banking due to poor risk management are Central bank and the quality of credit determines the future of bank. To
liquidity requirement risk, Market liquidity requirement risk mitigate the credit risk, the bank is issuing Credit policy and
and funding liquidity requirement risk.
reviewing the policy every year to make the necessary
changes as per the available strength and weaknesses in the
micro and macro economies. Credit committee reviews the
development in key industrial sectors, major credit portfolios
of the bank and approve the proposal as per the exposure
limit fixed by the bank in different sectors. Apart from these
Credit risk-based pricing, Risk rating, Portfolio management,
Diversification of loan, forming Loan review mechanism etc.
are the other techniques to deal with the credit risk in bank.

Fixing of prudential exposures cap for Money Market
operation: Market risk is a very dynamic and fast changing
risk which changes on every minute. Market risk is closely

BANKING FINANCE | AUGUST | 2024 | 37