3 Risks Faced by all Banks Across the Globe
Although risk management is a newer practice in India when compared to other nations, it’s already shown to improve the efficiency of the banking sector in the country.
Banks, both public sector and private sector, have to plan for risk management to handle market fluctuations and remain sustainable.
The following are the three most important risks that banks in India and across the world face, and thus, are planned for:
Credit risk is the possibility that a borrower may fail to repay the amount credited to them. Common examples include- loans, trade financing, interbank transactions, etc. There are many ways this could happen- the person may not have sufficient income, or they could pass away, or they could simply refuse to repay willingly.
Currently, a large number of banks in India are overburdened with the non-performing assets worth as much as Rs. 600,000 crores. This is the reason why RBI intervened and set up the Insolvency and Bankruptcy Code (IBC) to help the lenders tackle the credit risk.
Market risk concerns the risk of losses due to the changes in interest rates, foreign exchange rates, equity prices, etc.
There can be four types of market risks:
- Equity risk: Losses due to changes in stock price
- Interest rate risk: Losses due to increased borrowing interest rate (such as Repo rate).
- Currency Risk: Losses due to fluctuations in international currency exchange rates
- Commodity risk: Losses due to changes in industrial and agricultural commodities like natural gas, coal, wheat etc.
Operational risk is the risk of loss resulting from the bank’s employees, failed internal processes, infrastructure, etc. Examples include computer/server errors, human errors (an employee updating a bank account with a wrong entry), malware/ransomware attack, etc.
While these are the most common the biggest risks recognized by banks all across the world, some banks also consider additional risks such as business risk, reputation risk, etc.