The unanticipated part of the return, that portion resulting from surprises is the true risk of any investment. If we always receive what we expect, than the investment is perfectly predictable and, by definition, risk-free. In other words, the risk of owning an asset comes from surprises-unanticipated events. RISK is a concept that denotes the precise probability of specific eventualities. It is simply the future uncertainty and not only the incidents of predictable outcomes but also the unpredictable favorable outcomes. All the firms or companies whether it is in real or providing service are facing some sort of risk at present competitive business world to run its business. Banks are one of them in these regard and it is facing possibility of risk in terms of money and their achieved reputation. Bank is a financial institution that primarily deals with borrowing and lending money from the people by the people Continue reading
Bank Management Concepts
The Importance of Liquidity for Commercial Banks
Banks are considered to be as safe deposit for customers associated with them for both short and long term basis. It has increased liability over banks to make sure that they are able to fulfill all the demands of the customers. Also several acts passed in many countries has reduced the dependency that commercial banks used to possess over Central Banks to make sure that their needs are sufficed in case some emergency arrives. Thus to maintain certain level of stake in the company, it is mandatory for commercial banks to retain appropriate liquidity ratios such that any ambiguous situation could be avoided. If any disturbance is encountered in these ratios, there is a problem of funding that comes into picture and hampers bank’s credibility among its stakeholders. Liquidity control is also necessary for proper structuring of the bank along with looking after all the complexities related to the size Continue reading
Term Loan Appraisal
The primary task of a lending institutions before granting a term loan is to assure itself that the anticipated rise in the income of the borrowing unit would materialize, thus providing the necessary funds for repaying the loans according to the terms of amortization. The liquidity of term loans depends not so much on the short-run sale ability of the goods and commodities as on the increased term loan income of borrowing units resulting from a higher level of utilization of existing installed capacity. For assessing the risks involved in term lending, the normal criteria used for judging the soundness of short-term loans are often unreliable and inadequate. The methods of analysis and the standard to be adopted for appraisal of term loans are more similar to investment decisions than to short-term lending. Appraisal of term-loans requires a dynamic approach involving, inter alia, a projection of future trends of Continue reading
Impact of Banking Regulations on Financial Intermediation
Banks have all along played the role of financial intermediaries by channelizing funds primarily from the household sector to producing sector and the efficiency and smoothness with which such intermediation is done by banks are one of the prime parameters that determine the economic efficiency and consequent industrial and material progress of a society. Financial intermediation has a cost and that cost is reflected in bank rates and overhead expenditures incurred by banks. Bank rates, however, are not determined in isolation or only from the perspective of profit maximization by the banking sector. These rates are impacted by many other economic and statutory issues pertaining to a particular economy and such issues may vary widely from economy to economy depending upon the administrative attitude towards matters of equanimity in various sectors of the economy, especially the banking sector itself. The general view among experts in this field is that if Continue reading
Credit Management Concepts: Know Your Client
A cardinal rule in banking is the concept of “Know your client”. This means exactly what is says. The banker will do all he can to find out as much as he can about the company and the client. In this no information is too small or too immaterial since they will fit into a larger picture and the fate of the facilities extended may depend upon it. It has to be always remembered that the project may appear sound, the documentation perfect and the financials impeccable. However, if the intent is to cheat, it could cause severe losses to the Bank. Banks are always aware that a dishonest man is also a very clever person. Additionally the dishonest person has the advantage in that the innocent banker believes him to be a good, honest soul. He knows he is not; he knows he intends to cheat the banker and Continue reading
Transaction Risk or Operations Risk in E-Banking
The most important category of risk management for e-banking services is transaction risk or operational risk. Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. The main causes for operational risk can be: Inadequate Information Systems Breaches in internal controls Fraud Processing Errors Unforeseen catastrophes The inadequate information system can result from general risks or from application oriented risks. The general risks can include physical access to the hardware, logical access to the information and communication technology systems, emergency management or from an insufficient backup recovery measures-mitigate the consequences of system failures. A high level of transaction risk may exist with Internet banking products, particularly if those lines of business are not adequately planned, implemented, and monitored. Banks that offer financial products and services through the Internet must be able to meet their customer’s expectations. Continue reading