To start with we first have to understand what is a risk, now this is a very important and very interesting thing,
Risk is all the uncertainty that you have, so the uncertainty in meeting your financial goals is what your risk essentially is, so any kind of investment if you are doing if you are not sure about the financial results that you are going to get your return on investment then you have some kind of a risk, And it’s very important to note that each and every single company must take on risk and it is the same thing for the banks, So a Bank cannot do its business without being exposed to risk, so the business of a bank is very much tight to risk, so we have to manage the risk we cannot reduce it to zero, but we can manage it,
To begins with the types of risk in banking let us take a look at the various types of risks that we are having in the banking mitra system but before we go into that just remember that so if you have high risk then correspondingly your reward also has to go up, so it has to be a high reward, so if you want to get a high reward if you want to get high returns on your investment then you have to take more risks and if you are taking a low risk then the returns will also be low, Now that is the basic concept of risk,
Let’s take a look at the types of risk in banking, first one is the credit risk so this is the type of risk when your borrower is feeling to repay the loan so the bank has given a loan but the borrower is unable to pay back whatever the loan he has taken,
There are two types of credit risk actually for the first time is the sovereign risk so the sovereign risk is also called the sovereign credit risk so it is the risk when a government is unwilling to meet the obligation, so a government is defaulting on its debt, This can happen if the government is going through an economic crisis when it is some kind of hyperinflation event that’s time frames when it happens and then you have the other type which is the counterparty risk it is also called the CCR which is the counterparty credit risk, now this is when a counterparty to a deal is unwilling to pay, a counterparty can be anybody two people whenever they have a contract the other person is called the counterparty, so if the counterparty is unable to pay you back then it is the counterparty risk,
The next type of risk is the operational risk and it is very very important perhaps one of the most important things that a bank has to manage in its day to day activities, so this is the type of risk where inadequate or failed internal processes can cause any kind of financial loss two a bank, so if the internal systems fail if your employees are not working properly if your systems are not properly designed, so, for example, we have heard about so many scams, so let’s take the example of PNB CSP( Punjab National Bank) scam it was pulled off by clerical staff and an officer, Only two people had pulled it off so it was a failed internal process that led rise to that billion dollars scam, so these kinds of things that very important that the bank needs to manage and RBI keeps a very close check on the banks for their operational risk management,
Here we go. These are the basic types of risk in the Indian banking sector that I have covered in this article. Thank you.