Types of Risks and its Management in Banking

here in thus presentation, we discussed about the what is risks and four major types of risk in Banking and its control measures.

1. Types Of Risks and Its Management In Banking & Rural Finance

2. What is Risk Management? Identification of Risks Assessment of Risks Prioritization of Risks minimize monitor control Probability of unfortunate events maximize Realization of opportunities Resources

3. Types of Risk in Banking & Rural Finance

4. Credit Risk   Credit risk  is the risk of default on a debt that may arise from a borrower failing to make required payments Methods to measure Expected Loss Method Altman Z score

5. Credit Risk - Expected Loss Method Probability of Default ( PD ) is the likelihood that a loan will not be repaid and will fall into default . The credit history of the borrower and the nature of the investment must be taken into consideration when calculating PD Loss Given Default (LGD) the credit loss incurred if an obligor of the bank defaults . LGD = 1- RR Exposure at Default (EAD) is equal to outstanding loan amount (OS) plus the percentage of unused loan commitment (COM) drawn-down by the borrower EAD = OS + (COM – OS) * (UGD)

6. Altman Z score = 1.2*X1 + 1.4*X2 + 3.3*X3 + 0.6*X4 + 0.99*X5 Where : X1 is Working capital / Total Assets X2 is Retained Earning / Total Assets X3 is EBITDA/ Total Assets X4 is market Value of Equity / Total Liabilities X5 is Net Sales / Total Assets

7. Liquidity Risk Liquidity risk  occurs when an individual investor, business or financial institution cannot meet short-term debt obligations Method to measure :- Liquidity Coverage Ratio Net Stable Funding Ratio

8. Liquidity Coverage ratio Types Of Assets Examples Max Cap Level 1 Cash, central Bank Reserve 100% Level 2A Corporate Bonds 40% Level 2B Mortgage, Stocks 15% Jan 1, 2015 Jan 1, 2016 Jan 1, 2017 Jan 1, 2018 Jan 1, 2019 60% 70% 80% 100% 90%

9. Interest Rate Risk The Potential loss from unexpected changes in Interest rate which can significantly alter the bank profitability and market value of equity

10. Market Risk Market risk  is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets in which he is involved Method to measure ; - Value at Risk

11. For Example :- If VAR(95) = 3% 5% chance to lose max 3% of its market value Market Risk Management Value at Risk ( VaR ) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame Var (95%) -2.898550725 12.4 Var (99%) -4.398826979 2.48 Var (99.5%) -4.593874834 1.24 Value at Risk

12. Bank – MFI Securitization Process Securitization  is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security . MFI lend money at 20% interest rate Bank buy MFI customer loans portfolio at 10% interest rate Difference between MFI and Bank interest Rate in known as Interest Spread MFI get additional source of fund to expand their loan portfolio

13. Securitization Process Subscription Monthly Payout Collection SPV Obligors (MF Loans) Service / Collection agent (MFs/NBFCS) Originators (MFS/NBFCs) Investor in PTC Credit Enhancement Provider (MFs/NBFCs) Subordinated Principal / Over Collateral

14. Techniques to Mitigate Risk in Securitization Waterfall Mechanism: Excess Interest Spread Credit Enhancement Over Collateralization:

15. Thanks