Risk Management in Banks: Reference to Indian Article Review

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Risk Management in Banks: Reference to Indian Banks Industry

"The Indian Financial System is tasting success of a decade of financial sector reforms. The economy is surging and has gathered the critical mass to convert it into a force to reckon with. The regulatory framework in India has sparked growth and key structural reforms have improved the asset quality and profitability of banks" (Agarwal & Sirohy, 2010).

The fact of the matter is this: the global market is fast integrating into a single stage for all markets though the spread if internet banking, a global banking system a highly likely possibility (Agarwal & Sirohy, 2010). In fact, internet banking is at the forefront of the global banking system, widening its expanse and possibly making it the ultimate step in the marketing structure for financial services not only in India (which is the focus of this research) but also in the world. There has been more and more global focus on and around haw global banks is going to expand even more due to globalization. The contribution of acts like the Financial Services Agreement (FSA) first drafted in 1997 has led to numerous financial sectors growing in their respective industries on a quid pro quo foundation. India and its financial sector is one that has taken this opportunity and used it to the fullest in recent years (Agarwal & Sirohy, 2010).Get full Download Microsoft Word File access
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Article Review on Risk Management in Banks: Reference to Indian Assignment

In this paper, we will focus on Risk Management issues and aspect in banks, with specific focus in the Indian Banking Industry. The paper will focus on different aspects of the banking industry with primary focus being on credit risk management with a two-fold approach i.e. firstly focusing on the theoretical aspects of Risk management approach and the analyzing the overall implementation of this approach in Indian banking sector. Hence, we will analyze the impact of the theoretical framework of the risk management procedures on the internal organizations of the banks as well as highlight the impacts that the growth has had on the economy overall. The paper will also use graphs and figures to illustrate growth of the Indian Banking Industry and support the theory presented.

"The Indian Economy is booming on the back of strong economic policies and a healthy regulatory regime. The effects of this are far-reaching and have the potential to ultimately achieve the high growth rates that the country is yearning for. The banking system lies at the nucleus of a country's development robust reforms are needed in India's case to fulfill that" (Agarwal & Sirohy, 2010).

The fact of the matter is that the credit risk management structure will work its best if and when freedom is given to the financial sector to structure and interact on the global front with global financial sectors. Researchers believe that with the banking industry going global and working on such a large scale will result in the structure and management of risks being implemented on a proactive level and the overall service package and quality of the credit services will enhance over time (Agarwal & Sirohy, 2010).

Credit Risk Management

Risk is an integral part of any and all businesses in the private or the public sector. Risk can surface in any form across any and all departments like customer services, marketing, human resources or recruitment, pricing, strategy, security, reputation, legitimacy, technology and/or any other form of regulation. "However, for banks and financial institutions, credit risk is the most important factor to be managed" (Cool Avenues Knowledge Management Team, 2010). When explaining what credit risk really is, it is important to note that credit risk is based completely on the breaking of the agreed terms of a contract by a borrower or counterparty. This could include not only going against the agreed terms but also the inability to fulfill whatever necessary tasks they were required to do according to the terms. "Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country" (Cool Avenues Knowledge Management Team, 2010).

Before we talk about the credit risk in Indian Banks, we must analyze the following figures (for the years 2008 and 2007 respectively) below to truly understand the major players in the Indian Banking Industry (Mukherjee, Nath and Pal, 2002).

Before analyzing the risk management techniques, it is important to understand the overall structure and framework of the Indian Banking Industry. The table (Table 2) below exhibits the types and formats of banks that exits in the Indian Financial Sector ranging from commercial to rural banks and focusing on the numeric frequencies (i.e. increase or decrease) over a period of six financial years.

It is interesting to note here how some of the banks lost their market share (for instance, the Canara Bank, the Punjab National Bank and the State Bank Group) within a space of twelve months only.

Fast forwarding to a couple of years, and analyzing the figure for the HDFC bank (below) in the years in 2009. The overall year proved to be extremely trying for the bank and its investments with nearly 80% of the total earned in gains, the consolidations of the stocks were more visible in the last two-two n a half months. Perhaps the stage where risk management techniques came into play for the HDFC was the dip right at the start of November followed by the higher percentage earned at the start of December. Of course, increasing credit investment and stocks is the aim of every bank so what they should be wary of when faced with a similar circumstance is to make sure that they avoid such irregularities through effective risk management. Maintaining steadier middle ground is really important here (Mukherjee, Nath and Pal, 2002).

The overall ratios and rates that the HDFC Bank is recording (see figure below) being based out of the New York City are very positive, especially in the current financial quarters. The banking sector shows a total of 32% increase in the total profits that HDFC experienced as part of the second leading private sector lender in the state. The bank experienced dynamic loan increases and growths and had the perfect risk management procedure to maintain the level of loan growth in the coming financial quarters. This is where the banks based in India can learn from the HDFC bank based in New York as the primary way that the banks in India can increase their overall loan traffic is through focusing their marketing and structural strategies in and around the retail loan domains and advances (Mukherjee, Nath and Pal, 2002).

India's financial structure is strongly supported by various other small sector organizations that improve the flow of credit investments and loans every year. One such organization is known as 'Bandhan' and is based out of Calcutta. Bandhan has quickly grown into one of the most extensive and profitable microfinance organizations in the world. In fact, Bandhan has beaten the norms for most microfinance organization because of its speedy growth while others in the same category seem to grow at a much slower rate. When looking for statistical proof, Bandhan's growth is very obvious with clients numbering to more than 750,000 clients, more than 400 franchises, nearly $120M earned in payments, employing more than 2000 personnel; not only that, they have an average growth of more than 30,000 clients in a month. When you do the math here, in half a decade's time, Bandhan has gone from being a completely new company to one that services over 3,750,000 people! The table below shows their growth in the aspects where credit investments and loans play the biggest part (Mukherjee, Nath and Pal, 2002).

In an important relative study, the researchers examined the connection between the overall standard of performance and the standard of strategy that is implemented in the Indian commercial banks in the current era. All of the results attained in the study were formulated using the financial records and releases of a selected sample of Indian Banks. The study explained how the ability of the bank to use its capital and resources in risk management helps to not only creates a higher percentage of loans but also improves the efficiency. This particular aspect is absolutely critical when dealing with risk management strategies because the higher the efficiency of the workforce, the easier would be implementation of risk management strategies. In the study, the researchers concluded that it was the public sectors banks that reported higher efficiency as opposed to the private or foreign Indian Banks which is why their style of business was consistently able to outperform them in the flexible and evolving financial sector of the country (Mukherjee, Nath and Pal, 2002). Below is a table that statistically proves their findings:

Hence, taking the lead from the study conducted by Mulherjee, Nath and Pal in 2002, in this study we aimed to understand and statistically highlight the profits made by the banks that directly resulted from their loans investments and risk management… [END OF PREVIEW] . . . READ MORE

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