Page 26 - BF Cover February 2019

ARTICLE

establishing an effective and efficient risk management sustainable growth, regulatory compliance, and creating
framework: economic wealth for stakeholders.

Step 1: Identification - Risk management activity starts with The risk management process helps to manage risks effectively
identification of risk which involves discovering, recognizing and when they occur, as the issues have been anticipated, and
explaining the risks that might affect the organisation and its strategies to treat them have already been established. This
stakeholders. During this step, risk managers start preparing the makes for an efficient and effective teams and happy
risk register which includes the bouquet of all possible risks faced stakeholders. The end result - risk managers help minimize the
by the company impact of threats and seize the opportunities that occur.

Step 2: Analysis - After the risk register has been prepared to Board Members, Risk Committees and key personnel have to
identify all risks, the risk manager then estimates its likelihood identify key risk areas in order to develop policies and strategies
and consequences for each of the risks. During this step, the risk that are comprehensive, flexible and easily deployable
manager develops an understanding of the risk's nature and the throughout the organisation. Strong leadership and active
magnitude with which it can affect the organisation's goals and oversight can determine the success of a company's risk
objectives management programme.

Step 3: Ranking - Once the identification and assessment of risk Conclusion
is done, it is imperative for risk managers to sort them into an Risk management was always a part of corporate strategy,
order of ranking which would signify which risk is an utmost however, there has been a remarkable shift in companies'
priority of an organisation in order to decide the risks that are to outlook towards active risk management. Today, we notice that
be managed and those that are to be absorbed. This sorting the velocity of information has increased exponentially and
depends on various factors such as probability of occurrence, therefore the time for corporates, to react to any external event,
exposure level, impact on operations, velocity, acceptance, has reduced. Due to algorithmic trading and machine learning
shared or not, etc. models, the financial markets tend to react much faster than
the risk managers in any corporate. Thus emerges a need to
Step 4: Treatment - All risk management activities have an potentially foresee and predict, with a degree of certainty, the
important objective or goal, which is to mitigate the identified type and magnitude of risks faced by the business in order to
risk. Risk managers invest a lot of time in developing techniques react quickly.
to respond to these risks. Responsiveness can be prepared
considering the sorting done in the previous step. This helps risk Further, as organisations mature, their tolerances to any
managers to focus on the risks which are high on the priority list. fraudulent activity and hence, tolerance for reputation risk,
While planning responses, the aim should be to minimize the decreases. Earlier, companies relied on internal audit based on
chances of these risks materializing, reducing their unfavorable sampling methodology to give the management comfort on the
impact and developing a contingency plan operations of a particular department. However, corporates have
now started embracing technology in this space as well, and with
Step 5: Monitoring and Reviewing - This is the last step in the the help of data analytics tools, it has now become possible to
risk management framework which includes periodic monitoring, do a complete population testing instead of relying on a smaller
tracking and reviewing of risk registers. This helps risk managers sample. This again shows that the tolerance level to any risk
update risk registers with new risks, new ranking order and event has decreased and corporates are looking to invest in
removing/updating already existing risks. Periodicity of technologies and human resources which would enable them to
monitoring, tracking and reviewing should be defined by the identify, assess and manage the risks appropriately.
management and may be different for various types of risks.
The bigger question still being debated is, with the advancement
Risk is about uncertainty, and putting a framework around it can in technology and automated tools: Will bots pose competition
support in effectively mitigating it. All this helps in allowing the to humans? - a question to which we shall probably have the
organisation to achieve its ultimate goal and objective of answer in the near future!

26 | 2019 | FEBRUARY | BANKING FINANCE