Risk Management in Bank of Baroda

TABLE OF CONTENTS

Chapters Title Page No.

I. INTRODUCTION 04

II. OBJECTIVES OF THE STUDY 10

III. RESEARCH METHODOLOGY 11

IV. LIMITATIONS OF STUDY 13

V. BANKING INDUSTRY PROFILE 14

VI. FINANCIAL RISK MANAGEMENT 30

VII. RISK MANAGEMENT IN BANKS 31

VIII. RISK - BACKGROUND 33

IX. TYPES OF RISKS 36

X. CREDIT RISK 39

XI. MARKET RISK 47

XII. OPERATIONAL RISK 56

XIII. REGULATORY & ENVIRONMENTAL RISK 58

XIV. BASEL ACCORDS 59

XV. CAPITAL ADEQUACY (as per Basle II Accord) 64

XVI. RISK AGGREGATION & CAPITAL ALLOCATION 70

XVII. RISK BASED SUPERVISION (RBS) 71

XVIII. AN IDEALIZED BANK OF THE FUTURE 76

XIX. BANK OF BARODA - THE BANK 80

XX. RISK MANAGEMENT AT BANK OF BARODA 87

XXI. STUDY OF OPERATIONAL RISK AT BANK OF BARODA 100

XXII. BANK OF BARODA DISCLOSURES UNDER BASLE II 106

XXIII. CONCLUSION 124

XXIV. REFERENCES 127

Chapter I

INTRODUCTION

Today, The Indian Economy is in the process of becoming a world class economy. The Indian banking industry is making great advancement in terms of quality, quantity, expansion and diversification and is keeping up with the updated technology, ability, stability and thrust of a financial system, where the commercial banks play a very important role, emphasize the very special need of a strong and effective control system with extra concern for the risk involved in the business. Globalization, Liberalization and Privatization have opened up a new methods of financial transaction where risk level is very high. In banks and financial institutions risk is considered to be the most important factor of earnings. Therefore they have to balance the relationship between risk and return.

In reality we can say that management of financial institution is nothing but a management of risk. Managing financial risk systematically and professionally becomes an even more important task. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today's financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. It can be said that` risk takers will survive, effective risk managers will proper and risk averse are likely to perish. The risk arises due to uncertainties, which in turn arise due to changes taking place in prevailing economic, social and political environment and lack of non-availability of information concerning such changes. Risk is an exposure to a transaction with loss, which occurs with some probability and which can be expected, measured and minimized. In financial institutions risk result from variations and fluctuations in assets or liability or both in incomes from assets or payments and on liabilities or in outflows and inflows of cash.

The fast changing financial environment exposes the banks to various types of risk. The concept of risk and management are core of financial enterprise. The financial sector especially the banking industry in most emerging economies including India is passing through a process of change.

Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today's financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. The significant transformation of the banking industry in India is clearly evident from the changes that have occurred in the financial markets, institutions and products. While deregulation has opened up new vistas for banks to argument revenues, it has entailed greater competition and consequently greater risks. Cross- border flows and entry of new products, particularly derivative instruments, have impacted significantly on the domestic banking sector forcing banks to adjust the product mix, as also to effect rapid changes in their processes and operations in order to remain competitive to the globalized environment. These developments have facilitated greater choice for consumers, who have become more discerning and demanding compelling banks to offer a broader range of products through diverse distribution channels. The traditional face of banks as mere financial intermediaries has since altered and risk management has emerged as their defining attribute.

Currently, the most important factor shaping the world is globalization. The benefits of globalization have been well documented and are being increasingly recognized. Integration of domestic markets with international financial markets has been facilitated by tremendous advancement in information and communications technology. But, such an environment has also meant that a problem in one country can sometimes adversely impact one or more countries instantaneously, even if they are fundamentally strong.

There is a growing realisation that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend, interalia, on the soundness of the financial system. This has consequently meant the adoption of a strong and transparent, prudential, regulatory, supervisory, technological and institutional framework in the financial sector on par with international best practices. All this necessitates a transformation: a transformation in the mindset, a transformation in the business processes and finally, a transformation in knowledge management. This process is not a one shot affair; it needs to be appropriately phased in the least disruptive manner.

The banking and financial crises in recent years in emerging economies have demonstrated that, when things go wrong with the financial system, they can result in a severe economic downturn. Furthermore, banking crises often impose substantial costs on the exchequer, the incidence