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
Credit or Default Risk
Liquidity Risk
Interest Rate Risk
Market Risk
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
Interest Rate Risk
Management
Repricing
Risk
Yield Curve
Risk
Basic Risk
Embedded
Option Risk
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