- 1. What does Risk stand for?
- Uncertainties transforming into adverse outcomes
- Adverse in relation to planned objective or expectations
2. Risk Management defined:
- RM involves framing ofpolicies,
- procedures,andpracticesinvolved in
- identification, analysis, assessment,
- control andavoidance, minimisation
- oreliminationof unacceptable risks.
3. Risk Management Strategies
4. Major source of uncertainty
Commodity Prices LabourCosts InterestRates Currency $ Taxes ConsumerPreferences Technology EconomicPolicies PoliticalConditions Weather 5. Business :A series of activities running over a time horizon
- Acquiring materials Selling Deposits
- Marketing Distribution of
6. H ow do uncertainties effect businesses?
- Sales volume or sale price.
- Input costs, raw materials etc.
- Processing costs, wages, storage,
7. Where do uncertainties manifest ultimately?
- Profit or earnings or a business
- Net worth or value of a firm
8. Earnings of a bank: Deposits Borrowings interest expenses Loans Investment Interest income earnings 9. Earnings value of a firm Earnings taxes dividends Reserves & Surplus Balance Sheet 10. Risk Management: Objectives
- Lower risk management costs
11. Stable Earnings:
12. Un-interrupted Operations
- Avoid external interventions.
13. Safety of capital funds
- Consider a hypothetical bank with following
Assume that bank suffersRupee 4.5 lakh in loan losses. Which means 4.74% of loanlosses equals about 45% ofequity wipe out. Cash5 Loans95 Total:100 Equity10 Deposits90 Total:100 Assets (in lakhs rupees) Liabilities (in lakhs rupees) 14. Net worth of a bank
- Assets - external liabilities = owners equity
- in the value of assets/liabilities
- In the value of owners equity
15. Why Risk Management?
- Navigating a ship in a stormy sea.
- Choppy sea needs to calmed.
16. Management of Financial Risks:
- Risk Monitoring & Control