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Risk Management

Introduction to Risk Management

This module attempts to describe various forms of risks, its awareness, its avoidance and pursuit wherever necessary, its classification and its impact on the bottom-line.

  • Risk identification
  • Risk assessment
  • Risk classification
  • Risk policies
  • Risk limits
  • Risk rating
risk-management-intro-icon
  • Risk estimation
  • Risk management tools
  • Risk management systems
  • Risk supervision
  • Risk based audit

These are some of the areas spelt out by BASLE Panel.

Risk quantification, Risk adjusted pricing and Risk adjusted rate of return and Risk related Capital norms are some of the outcome arising out of scientific approach to Risk Management.

An earnest attempt is made to cover these aspects in brief to enable bankers to recapitulate and supplement their own judgement for which there is no substitute.

Should banks take Risks?

Banking business is spun around profit motive. The profit/gain comes out as a reward for taking risks. Therefore risk taking is an integral part of banking business. Recently we have been hearing a lot about Risk -shy bankers wanting to play safe. This development is not a healthy sign and is going to affect the growth of the industry to a great extent. No risk-no reward. No reward no profit and no profit situations leaves every one in the game disappointed more particularly banks themselves, their personnel, their share holders, their clients, their society and all of this will mean sluggish national economy. There are many reasons attributed to the risk-shy attitude of some of the bank officials such as losses, accountability, fear of punishment, and vigilance pursuit. None of these are insurmountable. Healthy risk taking is the essence of banking business and should be actively pursued.

It is not the intention of this manual to scare the bankers from risk taking. On the contrary creating a healthy climate and environment setting is the goal of this endeavor. Keeping this in view a few pages have been devoted to aid and provoke risk-taking habit so that the full benefit of reaping the rewards of opportunity providing risks will accrue.

Taking Risks

Risk enough to succeed - this is the theme of many a successful bankers. When things get tough conventional wisdom tells us to PLAY IT SAFE, Pull in your horns. Consequently, rather than performing to our potential we concentrate on minimizing our losses. The result can be catastrophic.

Earnings: It is further stated that these areas should also be extended to cover not only the lending activities but also to all the other activities of the bank.

Risk categories: Risks are a possible set or sets of events that might occur and could cause material effects on the bank or its objectives or both. The negative effects are called risks and the positive effects are called opportunities.

Credit Risk Essentials

Anticipate

Identify

Segregate

  • Poor - Avoid poor selection
  • Acceptable - Pursue
  • Appraise viability
  • Fit into portfolio acceptability
  • Move through proper credit approval, sanction process
  • Subject to risk rating
  • Determine risk pricing.
  • Stipulate proper (Terms, covenants, documents, collaterals)
  • End use related disbursement.
  • Ensure against diversion
  • Supervise, and inspect to ensure continued viability
  • Subject to Loan review Mechanism
  • Look for presence of any risk
  • Determine the distance from risk and safety. Have a re-look into the rating minimizing our losses. The result can be catastrophic

Hero's and cowards feel exactly the same fear. Hero's just react to fear differently. When we find you are shying away from risks you may have just to tap into the adventurous spirit buried in us all. In order to facilitate the kind of tapping referred above some quotes are reproduced of which convenient ones can be recollected.

"Great achievements involve Great risk"

"Life is either a daring adventure or nothing at all"

"People are not afraid of changes. They fear the unknown"

"Every man dies but not every man lives"

"Only by great risks can great results be achieved"

"The person who goes farthest is generally the one who is willing to do and dare"

"If you do not live on the edge, you can not see the view"

"There is no safety, only varying degrees of risk”

"The policy of being too cautious is the greatest risk of all"

"To win without risk is to triumph without glory" "There is no security on the earth there is only opportunity" "Monotony is only the awful reward of the careful"

"To escape criticism do nothing, say nothing and be nothing"

"Do the thing you fear most and the death of fear is certain"

"Courage is resistance to fear, mastery of fear and not the absence of fear"

"The time to take counsel of your fears is before you make an important battle decisi That is the time to listen to every fear you can imagine. When you have collected all the facts and fears and made your decision turn off all your fears and go ahead"

(General George S. Patton)

"Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing"

(Mark Twain)

"Dangers of life are infinite, and among them is safety"

"There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves or lose our ventures"

(William Shakespeare in Julius Caesar)

What is Risk Taking

On becoming a Risk Taker

The essential theme of Risk Taking could be explained as in:

  • What is risk taking?
  • What are some blocks to risk taking?
  • Not being risk taker results in?
  • Some steps to becoming an effective risk taker

What is Risk Taking ?

Quotes on Risk Taking

To laugh is to risk appearing the fool

To weep is to risk appearing sentimental

To reach out for another is to risk involvement

To expose feelings is to risk exposing true self

"To place your ideas, your dreams before the crowd is to risk their loss To love is to risk not being loved in return"

To live is to risk dying

To hope is to risk despair

"To try is to risk failure"

Risk must be a token because the greatest hazard in life is to risk nothing

The person who risks nothing, does nothing, has nothing, and is nothing

He may avoid suffering and sorrow, but he simply cannot leam, feel, change, grow, love, and live

"Chained by his certitudes, he is a slave, he has forfeited freedom"

"Finally, a person who risks - is free"

Important Steps to Risk taking

  • Opening yourself to change; It is accepting the need for change and taking the behavioral steps that will result in that change
  • Honest appraisal of a situation in life requiring your action
  • Understanding the risks involved in taking such action
  • Weighing the pros and cons of taking the action
  • Making a choice
  • Performing the action with full consciousness of the risks, pros and cons and potential outcome rejection from others for the actions you have chosen to take
  • Pursuing the required actions despite the fear that it will affect others negatively, resulting in their efforts to make you feel guilty about taking such action
  • Deciding to make a personal sacrifice of time, energy, ability, and knowledge as an investment to better your circumstances
  • Hoping your circumstances will improve as a result of your personal sacrifice, but making it anyway
  • The effort to be honest with yourself about your part in interpersonal problems, admitting that you have certain personal barriers that prevent the resolution of the problem
  • Emitting to the other's) involved what the barriers are and seeking assistance to address those barriers and resolve the problems
  • Omitting to become objective in pursuing a rational approach to a problem
  • The willingness to identify irrational blocking beliefs, which hinder resolutions
  • Penning yourself to be identified as being too subjective, too emotional, too obstructing, and too hindering in the resolution of your problem.
  • The willingness to accept honest, objective feedback about the need for you to change your own behavior
  • The effort to be less subjective, less defensive, and more open in your search for truth, honesty, and sanity in resolving your problem
  • The willingness to take a healing, forgiving, and forgetting attitude in pursuing the resolution of a conflict
  • Penning yourself to be vulnerable, to being taken advantage of by the other in the conflict situation
  • Demonstrating your trust in the other person's willingness to accept an honest, open, and up-front approach to resolving the conflict
  • "Now"-oriented action
  • Direct confrontation of a problem. It is the absence of procrastination and denial in dealing with a problem
  • Responsible action taken to pursue the resolution of a problem

Road blocks to becoming a risk taker

  • Fear of rejection
  • Inability to let go of an old belief in a person or institution
  • A belief that life should always be fair
  • The problem or complaint going unresolved
  • Change being avoided
  • Maintenance of the status quo, even if it is negative
  • Others turning off to your complaints and pleas for help
  • No gains in life and stagnation
  • Over-dependence on others to take care of you
  • Unhappiness concerning your current status in life
  • Depression over your problems
  • Feelings of being stuck C immobilized
  • A chronic "yes, Y but" attitude
  • Lack of creativity in problem solving
  • The problems becoming exacerbated
  • Your rights and the rights of others being ignored
  • Experiencing "burnout" in facing your problems
  • Loss of support from others who have been assisting you in working on your problems
  • Loss of physical health
  • Loss of emotional health
  • Being isolated and ignored by others as you wallow in self-pity
  • Your blaming others for not helping to solve your problems
  • Your self-destructive, self-defeating behavior

Step 1: If you find that you are stuck in solving a problem, answer the following questions in your journal:

a. What is keeping me from solving this problem?

b. What is keeping me from taking any of the possible actions available to solve this problem?

c. How do I feel about choosing an action with an outcome for which I am uncertain?

d. What is it about which I am uncertain?

e. What is the worst possible thing that could happen if

I take the action needed?

I do not take the action needed?

f. What are the blocks and barriers in me, keeping me from taking the "uncertain" action about which i am unsure?

g. What are the possible consequences of ignoring this problem?

h. What are the possible consequences of not taking the risks necessary?

i. What do i need right now to take the risks necessary?

j. What do I need in order to live with myself in case the action I take results in an even more negative situation than I currently have?

Step 2: If you find that in answering the questions in Step 1 you are still unable to take a risk to solve your problem, use the "Productive Problem Solving" model, Section 3, of Tools for Relationships. In your journal, list the results of brainstorming:

a. Alternative, more appealing solutions to the ones you have already identified

b. Alternative consequences to not solving the problem

c. Reasons for not taking a risk over this issue

  • Need for approval
  • Need to avoid guilt
  • Need to always be right
  • Need to know all the "in's and out's" of a situation
  • Need for certainty
  • Lack of belief in yourself and others
  • Fear of being incompetent
  • Desire to avoid conflict
  • Unresolved anger
  • Poor role modeling in family of origin
  • Fear of failure
  • Unwillingness to face problems honestly
  • Lack of assertiveness in protection of your own rights
  • Inability to take the responsibility for your own life
  • Unwillingness to accept possible negative consequences
  • Preferring to be unhappy, mired in your problem
  • Playing it safe
  • A need for security
  • Fear of hurting others
  • Rationalizing the lack of need for direct action
  • Denial that a problem exists, and action needs to be taken
  • Projecting the need for action onto others
  • Intellectualizing about a problem to avoid action
  • Exempting yourself of responsibility to resolve a problem
  • Relying on others to resolve your problems
  • Alcohol or drug abuse "clouding" thinking
  • Over emotional response to a problem
  • Humoring yourself and others to ignore the problem
  • Over concern for everybody but yourself
  • Fear of pain (no pain, no gain)
  • Absence of desire to change
  • Irrational belief that it is impossible to change the situation
  • A disregard for the rights of yourself and others
  • Confusion about your role in handling the problem
  • Lack of ownership of the problem
  • Sentimentality for the needs of others
  • Enjoying the sympathy you receive from others for the problem you face

Do not say D ON T. At times when facing a new situation we rehearse our own defeat by spending too much time anticipating the worst. The Don'ts is a form of negative goal setting. They may be self-fulfilling because our mind responds to pictures. Research shows that an image in the mind fire nervous system the same way as actually doing same thing.

When a golfer tells himself "Don't hit the ball into the water" his mind sees the image of the ball going into the water-guess where the ball is likely to go?

When a doctor tells the patient that "while gulping the medicine think of anything except a monkey", it is sure that the patient will project the image of the monkey alone every time the medicine is to be taken

Consequently before going into any pressure packed situation focus only on what you want to have happen. Creative people feel that innovations do not need genius, just willingness to question the way things have always been done.

Learn from mistakes-no matter how much you prepare one thing is certain when you are trying something new you will make mistakes. No banker, writer, industrialist salesman athlete escapes failure if he continually challenges himself. In any walk of life disappointments will precede success. Failure is not a crime, but failure to learn from a failure is. If you are making mistakes that means you are taking risks and we won't grow unless we take risks. By embracing risks we will accomplish more than we ever thought we could. In the process we will transform our life into an exciting adventure that will constantly challenge, reward and rejuvenate us.

(Courtesy: Robert Kriegel, Louis Patler - Readers Digest "Do you risk enough to succeed?")