22 Pages Posted: 25 Jan 2006
"Banks are in the business of managing risk, not avoiding it . . . ."
Risk is the fundamental element that drives financial behavior. Without risk, the financial system would be vastly simplified. However, risk is omnipresent in the real world. Financial Institutions, therefore, should manage the risk efficiently to survive in this highly uncertain world. The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution.
Credit risk is the oldest and biggest risk that a bank, by virtue of its very nature of business, inherits. This has, however, acquired a greater significance in the recent past for various reasons. Foremost among them is the wind of economic liberalization that is blowing across the globe. India is no exception to this swing towards market-driven economy. Better credit portfolio diversification enhances the prospects of the reduced concentration credit risk as empirically evidenced by direct relationship between concentration credit risk profile and NPAs of public sector banks.
". . . a bank's success lies in its ability to assume and aggregate risk within tolerable and manageable limits."
Keywords: Banks, Risk Management, Credit risk, NPA, India, Concentration risk, Risk based supervision
Suggested Citation: Suggested Citation
Arunkumar, Rekha and Kotreshwar, G., Risk Management in Commercial Banks (A Case Study of Public and Private Sector Banks). Indian Institute of Capital Markets 9th Capital Markets Conference Paper. Available at SSRN: https://ssrn.com/abstract=877812 or http://dx.doi.org/10.2139/ssrn.877812