Evolution and Importance for Effective Risk Management in Banks

During the last decade, we have witnessed a profound change in the size and structure of global financial markets. The consequential integration of financial markets has contributed to the creation of a more complex financial environment. The trends in the world economy, if taken in their totality, are producing a kind of shift in the economic paradigm according to which there is a reordering of institutions and relationships and which is having a dramatic effect on the lives of not only institutions but also individuals all over the world. The process of integration of financial markets in the Indian context has evoked a mixed response because some people seem to attributes to it all the ills of the economy. For others it is a phenomenon which has to be accepted, and still there are some that consider it as something which should be resisted. This paper includes the special problems faced by the process of integration of financial markets.


The financial markets are now inherently more risky then in the past. Banks in the process of financial intermediation are confronted with various kinds of financial and non-financial risks viz. credit, interest rate, foreign exchange rate, liquidity, equity price, commodity price, legal, regulatory, reputational, operational etc. The greatest challenge which the banks are currently confronting perhaps relates to the proper management of risks. Through this paper we will discuss the parameter which the risk management structure needs to compass before banks.


The RBI has recently issued detailed guidelines to banks to risk management. These guidelines emphasize that risks being highly interdependent, one area of risks has ramifications for other risk categories. Therefore the top management has to identify measure, monitor and control risks in a scientific manner. The banks should, therefore, know the risks they are facing, the risks which are important and need to be addressed and the context and priorities of risks in order to have a clearer understanding of them leading to healthier and effective management plans to mitigate the risks and review them on an ongoing basis.

Author:- Swati Jain and Rishi Kant Mittal