In the new liberalized economy in India, Banks and regulators in recent years have been making sustained efforts to understand and measure the increasing risks they are exposed to.  With the Indian economy becoming global, the Banks are realising the importance of different types of risks.     Some of the risk are credit risks, market risks, operational risks, reputational risks and legal risks, using quantitative techniques in risk modeling.  RBI issued the first set of guidelines to Banks  on Risk Management on October 20, 1999. 

A risk can be defined as an unplanned event with financial consequences resulting in loss or reduced earnings. Therefore, a risky proposition is one with potential profit or a looming loss. Risk stems from uncertainty or unpredictability of the future. In commercial and business risk generates profit or loss depending upon the way in which it is managed. Risk can be defined as the volatility of the potential outcome.  Risk is the possibility of something adverse happening.   Risk management is the process of assessing risk, taking steps to reduce risk to an acceptable level and maintaining that level of risk.

 Thus, we can say that after the risks have been identified, risk management attempts to lessen their effects.   This is done  by applying a range of management techniques.  For example, the risk may be lessened by  taking out insurance or using derivatives  or re-plan the whole project.

• Risk Identification i.e the naming and defining of each type of risk associated with a transaction or type of product or service;
• Risk Measurement i.e. the estimation of the size ,probability and timing of potential loss under various scenarios;
• Risk Control-i.e. the framing of policies and guidelines that define the risk limits not only at the individual level but also for particular transaction

     (2)  Interest Rate Risk-This risk arises due to fluctuations in the interest rates.   It can result in reduction in the revenues of the bank due to fluctuations in the interest rates which are dynamic and which change differently for assets and liabilities.   With the deregulated era interest rates are market determined and banks have to fall in line with the market trends even though it may stifle their Net Interest margins

           (3) Liquidity Risk-Liquidity is the ability to meet commitments as and when they are due and ability to undertake new transactions when they are profitable. Liquidity risk may emanate in any of the following situations-

            (a) net outflow of funds arising out of withdrawals/non renewal of deposits

            (b) non recovery of cash receipts from recovery of loans

            (c) conversion of contingent liabilities into fund based commitment and

            (d) increased availment of sanctioned limits

        (4) Foreign Exchange Risk  -  Risk may arise on account of maintenance of positions in forex operations and it involves currency rate risk, transaction risks (profits/loss on transfer of earned profits due to time lag) and transportation risk (risks arising out of exchange restrictions)

 (5)   Regulatory Risks-   It is defined as the risk associated with the impact on profitability and financial position of a bank due to changes in the regulatory conditions, for example the introduction of asset classification norms have adversely affected the banks of NPAs and balance sheet bottom lines. 

 (6)  Technology Risk -  This risk is associated with computers and the communication technology which is being increasingly introduced in the banks.  This entails the risk of obsolescence and  the risk of losing business to better technologically

(7)   Market Risk-This is the risk of losses in off and on balance sheet positions arising from movements in market prices.

 (8)  Strategic Risk-This is the risk arising out of certain strategic decisions taken by the banks for sustaining themselves in the present day scenario  for example decision to open a subsidiary may run the risk of losses if the subsidiary does not do good business.

       (i)  Risk Identification-i.e the naming and defining of each type of risk associated with a transaction or type of product or service

       (ii)  Risk Measurement-i.e. the estimation of the size ,probability and timing of potential loss under various scenarios