Risk Mitigation Practices in Banking: A Study of HDFC Bank

Risk Mitigation Practices in Banking: A Study of HDFC Bank

Hasnan Baber (Department of Management Studies, Central University of Kashmir, Srinagar, India)
Copyright: © 2016 |Pages: 15
DOI: 10.4018/IJRCM.2016070102
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Abstract

The prime activity of a bank is to lend money and earn profits in the form of interest but by doing so the money is exposed to the risk of default where the borrower is not able to pay the money back in specified period or becomes insolvent. The research study carried out at HDFC Bank under the topic “Risk Mitigation practices in banking- a study of HDFC bank” to fulfill the said motive turned out to be useful in understanding the various policies and practices used by the bank to manage the different types of risk that arise in banking. The study is grounded on the both primary as well as secondary data. The purpose of the study was to examine the different practices followed by the bank to such type of risks and how these practices has helped the bank to decrease the effect of the risk on the profitability and operations . The study also coves the recent trends in the Non-Performing Asset levels of the bank and how bank has been successful in decreasing the pace of NPAs to minimize the burden of securitization.
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Introduction

Financial institutions world-wide began to recognize operational risk in the 1990s. In that sense, the term operational risk is a recent phenomenon in the context of banking and financial institutions. Heightened regulatory interest in operational risk, particularly since the late 1990s, after a series of high profile incidents and losses (Barings, Allied Irish, Daiwa and others) finally culminated in an overt treatment of operational risk under the Basel Accord (2004). The Committee should plan stress situations to measure the impact of rare market conditions and monitor alteration between the actual instability of portfolio value and that predicted by the risk measures. There are various risks associated with borrowing and lending money. Credit risk or default risk comprises incapability or indisposition of a customer or counterparty to meet obligations in relation to lending, trading, evading, settlement and other financial transactions. The Credit Risk is generally made up of transaction risk or default risk and portfolio risk. The portfolio risk in turn includes intrinsic and application risk. The credit risk of a bank’s portfolio depends on both external and internal factors. Conventionally, credit risk management was the main task for banks. With liberal deregulation, market risk arising from opposing changes in market variables, such as interest rate, foreign exchange rate, equity price and commodity price has become relatively more significant. Even a small change in market variables causes considerable changes in income and financial value of banks. Market risk takes the form of:

  • 1.

    Liquidity Risk;

  • 2.

    Interest Rate Risk;

  • 3.

    Foreign Exchange Rate (Forex) Risk;

  • 4.

    Commodity Price Risk; and

  • 5.

    Equity Price Risk.

Managing operational risk is fetching an imperative piece of sound risk management practices in contemporary financial markets in the wake of remarkable upsurge in the capacity of communications, high degree of structural changes and complex support systems. The most significant type of operational risk contains failures in internal controls and corporate governance. Such breakdowns can lead to monetary loss through error, fraud, or failure to perform in a timely manner or cause the interest of the bank to be bargained.

Literature Review

Risk is inherent in every business the survival of the business depends on how well the environment is analyzed and risk is anticipated. Risk management in Indian banks is a relatively newer practice, but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the corporate governance of a financial institution. In times of volatility and fluctuations in the market, financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. Hence, an essential component of risk management framework would be to mitigate all the risks and rewards of the products and service offered by the bank. Thus the need for an efficient risk management framework is paramount in order to factor in internal and external risks.

There has been lost of research work regarding how banks manage different risks in the business and what are the impact of these risks on their day to day operations. Following are the some studies which were conducted in different time periods in India by different authors:

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