(PDF) Financial Risk Management of Banks in India -A Study of Indian Banks

Journal of Positive School Psychology http://journalppw.com

2022, Vol. 6, No. 3, 6234–6244

Financial Risk Management of Banks in India – A Study of Indian

Banks

Sara Safa Neama

Assistant Lecturer,

Department of Finance and Banking,

College of Administration and Economics,

SalahaddinUniveristy.

sara.neama@su.edu.krd

00964 7507419994

Abstract

The COVID-19 pandemic has had an immediate impact on economic activity, company and

individual income, and asset valuation etc. The International Monetary Fund (IMF) has declared the

global economy to be in a state of recession! According to the Bank of England, the situation is worse

than the financial crisis of 2008. The economic devastation is unprecedented in scope, with far-reaching

ramifications for the global economy. The economic impact, according to experts, will permanently

disrupt a number of industries, and the transition to a new normal will take several years. The banking

industry, in particular, is at the centre of the crisis, posing increased risks that will necessitate significant

adjustments in risk evaluation. This article is an attempt to find and view risks from the view point of

Reserve Bank of India through a series of Systematic Risk Surveys, which were conducted during the

period from April, 2018 to October, 2021. This paper is also shows the detailed explanation about

various risks such as “Global Risks, Macro-Economic Risks, Financial Market Risks, Institutional

Risks, and General Risks” considered in the survey.

Keywords: Risk Management, Indian Banks, Surveys, Global Risks, Covid-19.

1. Introduction

The banking and financial services

industries were shaken by the 2008 financial

crisis, prompting a flurry of measures aimed at

ensuring the banking system's resilience and

stability. On the other hand, the current

COVID-19 pandemic has shaken the industry in

a different way. Lockdowns, economic

downturns, job losses, and probable bankruptcy

are still being felt around the world as a result

of the pandemic's widespread impact. The

“COVID-19 pandemic” will put the

strengthened risk management and capital

adequacy mechanisms put in place after the

2008 financial crisis to the test, especially since

no scenario analysis could have predicted an

incident of this magnitude. The COVID-19

situation is expected to draw attention to

systemic flaws that must be addressed. This

white paper looks at the important risk

management areas that banks will need to pay

attention to in the short, medium, and long term.

It also explains how to address the impact by

changing risk management approaches,

processes, and systems.

The COVID-19 pandemic has had an

immediate impact on economic activity,

company and individual income, and asset

valuation etc. The International Monetary Fund

(IMF) has proclaimed the world to be in

recession! The situation, according to the Bank

of England, is worse than the financial crisis of

2008. The magnitude of the economic damage

is unparalleled, with far-reaching implications

for the global economy.

Experts believe that the economic

impact would permanently alter a number of

industries, and that the transition to a new

normal will take several years. The banking

industry, in particular, is at the heart of this

crisis, with heightened credit risk, and will

require considerable changes in risk

measurement, loss estimation, and stress testing

methods, systems, and models. The flowing are

the effects of Covid-19 pandemic.

• Depreciation in the Value of

Financial and Non-Financial Assets:

Individuals, corporations, economies,

and governments have all suffered as a

result of the lockdown, recession, and

loss in national income in terms of

6235 Journal of Positive School Psychology

revenue, incomes, earnings, tax

collection, fiscal deficits, spending,

capital flow, and demand for financial

and other assets. Except for gold, this

has resulted in varied degrees of

depreciation of financial and other

asset values and financial variables

across products and nations.

• Credit Losses are on The Rise: Loss

of income and increased

unemployment are the most serious

consequences of the lockdown.

Businesses with high operational and

financial leverage are being hit hard,

and many are filing for bankruptcy,

exacerbating demand, supply, and

employment situations, and lowering

collateral values.

• Regulatory Responses to the Effects:

Prudential and accounting standards

are becoming more flexible thanks to

the efforts of regulators, supervisors,

and standard-setters. To provide relief

to the firms, regulators and

governments have proposed a payment

moratorium, a reduction of reporting

responsibilities, and loan modification

schemes. To keep borrowers afloat,

regulatory authorities and governments

are accepting a higher level of risk at

banks, which is a less prudent measure.

2. Preamble

2.1. Existing Credit Risk Management

Framework's Limitations

Under the severe stress conditions

generated by the pandemic, the existing credit

risk framework is insufficient to measure and

manage credit risk.

Credit loss is typically calculated using

risk metrics such as Probability of Default (PD),

Loss Given Default (LGD), and Exposure at

Default (EAD). These risk metrics are used by

banks to calculate Expected Credit Losses

(ECLs) and Required Capital. Banks employ

the following measures

1. Forecast Modeling on Economic

Conditions;

2. Historical Data and Present State

Conditions.

It may be difficult to accurately

estimate economic conditions when the

economy is closed, resulting in a major portion

of portfolio losses shifting to the next stage. To

avoid a downward spiral in the face of

uncertainty, officials have announced payment

vacations during which borrowers' profiles will

not be raised to a higher Days Past Due Status

(DPDs).

2.2. Existing ALM and Market Risk

Management Framework have Limitations.

Depreciation in Asset Value is

exacerbated by a lack of Market Liquidity,

particularly in emerging market financial assets

and lower-quality assets. There is a flight to

excellence. As the value, trend, and relationship

of financial variables change, treasury, asset

liability management (ALM), liquidity, and

market risk models, processes, and systems

must be revisited.

2.3. Credit Risk Management Has a New

Normal

The inability to effectively evaluate

risk will be a key impact of the crisis, requiring

banks to make considerable modifications to

their credit risk management processes and

supporting technologies.

On the credit risk management front,

we expect the credit risk management team to

place a greater emphasis on:

• Re-calibration of credit scoring and

rating models to account for the impact

of the U, L, and V recovery curves

• Re-calibration of covenants linked to

accounting ratios and collateral

valuations

• Re-release of limits to end clients based

on revised collateral valuations, with

strong alignment to the new working

capital cycle

• Re-calibration of collection models to

account for payments covered by

moratorium Because the concept of

exclusion will change over time, it will

add to the complexity.

• Stress testing and ICAAP simulations

are being expanded to encompass

pandemic-level intensity scenarios.

• For a given period, regulatory reports

will be adjusted to reflect higher

capital, higher income, better liquidity,

and lower credit losses due to looser

requirements. Reports on the impact

are being prepared and actual measures

to improve upon policies

• A continuous forward-looking

assessment of the losses.

• On the technical front, we anticipate

the credit risk management team

making significant changes to the

following systems:

Sara Safa Neama 6236

• Core banking systems for identifying

and segregating Day Past Due loans;

• Credit scoring and rating models will

be re-calibrated with different recovery

scenarios; stress testing models and

ICAAP will be updated to include new

scenarios for severe stress events;

collateral valuation and allocation

models will be re-calibrated; and the

Early Warning Signal for financial

covenants will be modified.

2.4. A New Normal in Asset Liability

Management and Market Risk Management

• Due to deterioration in asset quality and

loss in collateral valuation, banks are

projected to experience large short-

term liquidity gaps due to depreciation

in financial asset prices and non-

payment of credit due. The central

bank, on the other hand, intends to

alleviate the liquidity shortage through

discounting and liquidity taps.

• As a result of the change in liquidity

sources, ALM and liquidity

behavioural models must be re-

calibrated, as the old models lack a

historical benchmark against which to

evaluate the current economic stress.

• Banks must identify and adjust market

yield curves, as central banks' intended

shifts in the curve on both the repo and

reverse repo sides will take time to be

reflected in the market.

• Recent market volatility has resulted in

a high number of Value-at-Risk (VAR)

back-testing violations across the

industry. Regulators may temporarily

allow the automatic use of a larger

VAR multiplier in exchange for a

reduction in risks-not-in-VAR capital

requirements to reduce the danger of

market risk becoming pro-cyclical.

• We foresee major improvements in

Liquidity Risk and Market Risk

Models, as well as Regulatory

Reporting, from the ALM and Market

Risk Management teams in terms of

technology and measurement.

2.5. Risk Management has Evolved into a

New Normal

Banks' risk management techniques

and technology are entering a new era, and

measurement metrics, processes, and

technologies will need to be reinvented. This

will necessitate a significant redesign of risk

technologies. This is also an opportunity to

combine numerous point solutions, add cloud

technologies, and update and improve model

implementation technology. In the end, this

opens up the possibility of automating and

industrializing a target-operating paradigm for

risk management.

3. Evaluating the Impact on Risk

Management

In the aftermath of the COVID-19

crisis, regulators established new liquidity lines

to maintain enough cash availability in the

financial system and to avoid banks from losing

their lending potential. Despite the relief

measures taken by regulators and governments,

we expect the financial system to undergo

significant changes as a result of the COVID-

19 issue. Risk management is especially critical

during times of crisis to maintain customer trust

and protect the financial system's viability.

Assessing the short-, medium-, and

long-term impact on various areas, as well as

establishing a strategic response centred on

improvements to risk management approaches,

procedures, and systems, is critical in our

opinion.

4. Operational Resilience

In the short to medium term, building

operational resilience is critical to enabling the

seamless delivery of critical banking services

during a crisis like the COVID-19 pandemic.

Banks should focus on improving operational

resilience, according to regulators in several

countries. We expect regulatory authorities

from all around the world to eventually impose

a similar rule. Building operational resilience

goes beyond what banks already have in place

for operational risk and business continuity. It

calls for the following:

• Identifying business services that, if

disrupted, could jeopardise consumer

and market integrity

• Establishing disruption tolerance limits

• Testing resilience through a variety of

extreme but plausible scenarios

• Developing capabilities and

communication plans to recover as

quickly as possible from the stress

scenario

5. Optimization of Costs and Efficiency

Given the current scenario, the focus

will be on lowering costs and enhancing

efficiency in the near to medium term. Specific

6237 Journal of Positive School Psychology

risk use cases that can be solved with robotic

process automation (RPA), machine learning

(ML), natural language processing (NLP), and

cognitive RPA to help risk officers work better

will be highlighted. Banks will be able to

establish operational resilience as a result of

such automation initiatives backed by

sophisticated technologies. Because of its

capacity to provide operational flexibility

through ease of scaling operations and lower

expenses associated with maintaining on-

premise hardware, cloud adoption will receive

a boost. However, before migrating a wide

range of risk management applications to the

cloud, banks must conduct a cost-benefit

analysis to determine actual financial savings.

6. Review of Literature

Sinha. P., Sharma. S., &Sondhi. K.

(2013)

1

Authors in their paper “Market

Valuation and Risk Assessment of Indian

Banks using Black -Scholes- Merton Model”

adopted a “Theoretical model” to study the

riskiness of banks considering its assets &

equity. Authors have concluded that the

inconsistency in assets is 3 to 5 times in the

private sector banks and this paper also

discussed the RBI Regulations relating to risk

management in banks.

Maji. S. G., De, U. K. (2015)

2

Authors

in their paper entitled “Regulatory Capital and

Risk of Indian Banks: A Simultaneous Equation

Approach” followed Central Tendency,

Regression Analysis and Z-Scores to examine

the relationship between Regulatory Capital

and Risk of Commercial Banks in India and

Impact of other variables on them. The study

found that strong inverse relationship between

Risk and Capital Adequacy Ratio. There is a

positive influence of probability on both capital

and risk.

1

Sinha. P., Sharma. S., and Sondhi. K. (2013),

“Market Valuation and Risk Assessment of Indian

Banks Using Black -Scholes -Merton Model”, St.

Louis: Federal Reserve Bank of St Louis.

2

Maji. S. G., De, U. K. (2015), “Regulatory Capital

and Risk of Indian Banks: A Simultaneous Equation

Approach”, Journal of Financial Economic Policy,

7(2), 140.

3

Bhagat. K. Gayval , V. H. Bajaj (2015),

“Measuring Efficiency of Indian Banks: A DEA -

Stochastic Frontier Analysis”, International Journal

of Innovative Research in Science, Engineering and

Technology, 4(12), pp. 12602-12608.

Bhagat K, Gayval I, V H Bajaj

3

Authors have chosen Data Envelopment

Analysis, Stochastic Frontier Analysis,

Multivariate Nonlinear Model and Alman Z-

Score Model in their paper “Measuring

Efficiency of Indian Banks: A DEA-Stochastic

Frontier Analysis” with the objective of

estimating efficiency of Indian Banks. The

results revealed that there is a moderate

consistency between parametric and

nonparametric frontier methods in efficiency

measuring.

Ashraf. A., Tariq Y.B. (2016)

4

This

paper entitled “Evaluating the Financial

Soundness of Banks: An Application of

Bankometer on Pakistani Listed Banks” states

that as per both models “Bankometer Model”

and “Z-Score Model”, Bank of Punjab’s

financial soundness needs to be improved.

Authors have argued that Non-Performing

Assets identified main determinant of bank risk

and indicates high inefficiency level in the

banks.

Yap. V. C., Ong H.B., Chan. K.T., and

Ang. Y.S. (2010)

5

This study shows that banks

risk exposure are affected by liquidity position,

domestic market, international market, business

operation and credit. This study was conducted

to identify the determinants of risks faced by

commercial banks in Malaysia in their paper

entitled “Factors Affecting Banks’ Risk

Exposure: Evidence from Malaysia”.

Miah. M.D., Sharmeen. K. (2015)

6

This study presents negative relation between

capital and efficiency. The article “Relationship

between Capital, Risk and Efficiency” found a

positive relationship between capital and risk

for Islamic Banks. It is also found that there is

a positive relation between risk and efficiency

for conventional banks.

4

Ashraf. A., & Tariq. Y. B. (2016), “Evaluating the

Financial Soundness of Banks: An Application of

Bankometer on Pakistani Listed Banks”, IUP

Journal of Financial Risk Management, 13(3), 47-

63.

5

Yap. V. C., Ong. H. B. Chan. K. T. and Ang. Y. S.

(2010), “Factors Affecting Banks’ Risk Exposure:

Evidence from Malaysia”, European Journal of

Economics, Finance and Administrative Science,

121-126

6

Miah. M. D., Sharmeen. K. (2015), “Relationship

between Capital, Risk and Efficiency”, International

Journal of Islamic and Middle Eastern Finance and

Management, 8(2), 203-221.

Sara Safa Neama 6238

Dhar. S. K. (2013)

7

Author studied on

correlation coefficient to analyse and classify

different forms of risks faced by the banking

industy in his paper entitled “Enterprise Risk

Management in Indian Banks”. This paper

provides the empirical evidence that describes

Risk Management is compliance driven in

Indian Banking Sector and not strategy driven.

7. Objectives

1) To know, identify, and understand

different types and status of risks in

Indian Banking Sector before, during

and after pandemic.

2) To study and present status of

identified risks from time to time

before, during and after pandemic.

3) To present appropriate suggestions for

the benefit of Risk Management

System.

8. Research Methodology

This paper is based on secondary data

available through Central Bank of India, i.e.,

Reserve Bank of India website. Various

Reports, Publications, Announcements, Scripts

have been considered for the study.

9. Research Analysis and Findings

In the broad category of risks to the

Indian Financial System, the following are the

different types of risks are identified and

categorized as per Systematic Risk Survey of

Reserve Bank of India.

a. Global Risks,

b. Macro-Economic Risks,

c. Financial Market Risks,

d. Institutional Risks, and

e. General Risks

Global Risks are further classified

according to Systematic Risk Survey (SRS) are

a. Global Growth

b. Sovereign Risk / Contagion

c. Funding Risk

d. (External Borrowings)

e. Commodity Price Risk (Including

Crude Oil Prices)

f. Other Global Risks

Macro-Economic Risks are further

classified according to Systematic Risk Survey

SRS) are

a. Domestic Growth

b. Domestic Inflation

c. Current Account Deficit

d. Capital Inflows / Outflows (Reversal of

FIIs, Slowdown In FDI)

e. Sovereign Rating Downgrade

f. Fiscal Deficit

g. Corporate Sector Risk

h. Pace of Infrastructure Development

i. Real Estate Prices

j. Household Savings

k. Political Uncertainty/ Governance

/Policy Implementation

l. Other Macroeconomic Risks

Financial Market Risks are further

classified according to Systematic Risk Survey

(SRS) are

a. Foreign Exchange Rate Risk

b. Equity Price Volatility

c. Interest Rate Risk

d. Liquidity Risk

e. Other Financial Market Risks

Institutional Risks are further classified

according to Systematic Risk Survey (SRS) are

a. Regulatory Risk

b. Asset Quality Deterioration

c. Additional Capital Requirements of

Banks

d. Access to Funding By Banks

e. Level of Credit Growth

f. Cyber Risk

g. Operational Risk

h. Other Institutional Risks

General Risks are further classified

according to Systematic Risk Survey (SRS) are

a. Terrorism

b. Climate Related Risks

c. Social Unrest (Increasing Inequality)

d. Other General Risks

Table 1

Ratings of Overall Global Risks from April, 2018 to October, 2021

Global Risks

April, 2018

Medium

October, 2018

Medium

April, 2019

Medium

October, 2019

Medium

April, 2020

High

7

Dhar, S. K. (2013), “Enterprise Risk Managements

in Indian Banks”.

6235 Journal of Positive School Psychology

October, 2020

Medium

April, 2021

Medium

October, 2021

Medium

Source: Systematic Risk Survey Reports, Reserve Bank of India.

As per the survey outcomes, Overall Global

Risks are perceived as a “Medium Risk”

category during April, 2018 to October, 2021,

but during the period April 2020, Overall

Global Risks are perceived as “High Risk”

category affecting the financial system in India.

Table 2

Ratings of Overall Macro-Economic Risks from April, 2018 to October, 2021

Macro – Economic Risks

April, 2018

Medium

October, 2018

Medium

April, 2019

Medium

October, 2019

Medium

April, 2020

High

October, 2020

Medium

April, 2021

Medium

October, 2021

Medium

Source: Systematic Risk Survey Reports, Reserve Bank of India.

As per the survey outcomes, Overall Macro-

Economic Risks are perceived as a “Medium

Risk” category during April, 2018 to October,

2021, but during the period April 2020, Overall

Macro-Economic Risks are perceived as “High

Risk” category affecting the financial system in

India.

Table 3

Ratings of Overall Financial Market Risks from April, 2018 to October, 2021

Financial Markets Risks

April, 2018

Medium

October, 2018

Medium

April, 2019

High

October, 2019

Medium

April, 2020

High

October, 2020

Medium

April, 2021

Medium

October, 2021

Medium

Source: Systematic Risk Survey Reports, Reserve Bank of India.

As per the survey outcomes, Overall Financial

Market Risks are perceived as a “Medium

Risk” category during April, 2018 to October,

2021, but during the period April 2019-April

2019 and April 2020-April 2020 Overall

Financial Market Risks are perceived as “High

Risk” category affecting the financial system in

India.

Table 4

Ratings of Overall Institutional Risks from April, 2018 to October, 2021

Institutional Risks

April, 2018

Medium

October, 2018

Medium

April, 2019

Medium

October, 2019

Medium

April, 2020

High

October, 2020

High

April, 2021

Medium

October, 2021

Medium

Sara Safa Neama 6234

Source: Systematic Risk Survey Reports, Reserve Bank of India.

As per the survey outcomes, Overall

Institutional Risks are perceived as a “Medium

Risk” category during April, 2018 to October,

2021, but during the period April 2020-April

2020 and October 2020-October 2020 Overall

Institutional Risks are perceived as “High Risk”

category affecting the financial system in India.

Table 5

Ratings of Overall General Risks from April, 2018 to October, 2021

General Risks

April, 2018

Low

October, 2018

Medium

April, 2019

Medium

October, 2019

Medium

April, 2020

Medium

October, 2020

Medium

April, 2021

Medium

October, 2021

Medium

Source: Systematic Risk Survey Reports, Reserve Bank of India.

As per the survey outcomes, Overall General

Risks are perceived as a “Medium Risk”

category during April, 2018 to October, 2021,

affecting the financial system in India.

Table 6

Ratings of Category Wise Global Risks from April, 2018 to October, 2021

Global Risks /

Period

Global

Growth

Sovereign

Risk /

Contagion

Funding Risk

(External

Borrowings)

Commodity

Price Risk

(Including

Crude Oil

Prices)

Other

Global

Risks

April, 2018

Low

Medium

High

Low

Oct, 2018

Medium

Low

Medium

High

Low

April, 2019

High

Medium

High

Low

October, 2019

High

Medium

Low

April, 2020

Very High

High

Medium

October, 2020

High

Medium

April, 2021

Medium

High

Low

October, 2021

Medium

High

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

From the above Table 6, and As per the survey

outcomes, Global Risks such as Global Growth,

Sovereign Risk / Contagion, Funding Risk

(External Borrowings), Commodity Price Risk

(Including Crude Oil Prices), and Other Global

Risks are perceived differently by the experts

including market participants participated in the

series of surveys conducted by RBI during

April, 2018 to October, 2021.

As per the survey outcomes, Global

Growth Risks are perceived as a “High Risk”

category during April, 2019, October, 2019 and

October, 2020. During October, 2018-October,

2018, and April 2021 to October, 2021 Global

Growth Risks were categorized as “Medium

Risk”. Here, notable point is that the period

April, 2020 was categorized as “Very High

Risk” and April, 2018 was categorized as “Low

Risk” affecting the financial system in India.

6235 Journal of Positive School Psychology

As per the survey outcomes,

Commodity Price Risks (Including Crude Oil

Prices) are perceived as a “High Risk” category

during April, 2020 to October, 2018. Here,

notable point is that the period April, 2020 was

categorized as “High Risk” and remaining

periods were categorized as “Medium Risk”

affecting the financial system in India.

As per the survey outcomes, Sovereign

Risk / Contagion Risks are perceived as a “Low

Risk” category during April, 2020 and

remaining periods were categorized as

“Medium Risk” affecting the financial system

in India.

As per the survey outcomes, Sovereign

Risk / Contagion Risks are perceived as a “Low

Risk” category during April, 2018 to April,

2019 and April, 2021 to October, 2021. and

remaining periods were categorized as

“Medium Risk” affecting the financial system

in India.

As per the survey outcomes, Other

Global Risks are perceived as a “Medium Risk”

category during April, 2020 to October, 2020,

and remaining periods were categorized as

“Low Risk” affecting the financial system in

India.

The overall change in the risk

perceptions towards Global Risks is described

below

Table 7

Change in the Risk Perceptions towards Global Risks

from April, 2018 to October, 2021

Global Risks /

Period

Global

Growth

Sovereign

Risk /

Contagion

Funding Risk

(External

Borrowings)

Commodity

Price Risk

(Including

Crude Oil

Prices)

Other

Global

Risks

April, 2018- Oct,

2018

Increased

Declined

Oct, 2018- April,

2019

Increased

Declined

Increased

April, 2019-

October, 2019

Increased

Declined

October, 2019-

April, 2020

Increased

April, 2020-

October, 2020

Declined

October, 2020-

April, 2021

Declined

Increased

April, 2021-

October, 2021

Increased

Declined

Increased

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

From the above Table 7, it is clear that during

pandemic of COVID-19 First Wave; almost all

categories of Global Risks are increased except

Commodity Price Risks (Including Crude Oil

Prices). The effect may be due less demand in

the market due to lock down and travel

restrictions in India. It is also noted that all other

mentioned global risks are decreased expect

Commodity Price Risks (Including Crude Oil

Prices). This effect may be due to removal of

lock down and travel restrictions.

Sara Safa Neama 6234

Table 8

Ratings of Category Wise Macro-Economic Risks from April, 2018 to October, 2021

Macro –

Economic Risks

/ Period

Domestic Growth

Domestic Inflation

Current Account Deficit

Capital Inflows / Outflows

(Reversal of FIIs,

Slowdown In FDI)

Sovereign Rating

Downgrade

Fiscal Deficit

Corporate Sector Risk

Pace of Infrastructure

Development

Real Estate Prices

Household Savings

Political Uncertainty/

Governance /Policy

Implementation

Other Macroeconomic

Risks

April, 2018

Medium

Low

Medium

Very

Low

October, 2018

Medium

High

Low

Medium

High

Medium

Very

Low

April, 2019

Medium

Low

Medium

High

Medium

Very

Low

October, 2019

High

Medium

High

Medium

High

Medium

Very

Low

April, 2020

Very

High

Medium

High

Very

High

Medium

Very

Low

October, 2020

High

Low

Medium

High

Medium

Very

Low

April, 2021

High

Medium

High

Medium

Low

October, 2021

Medium

High

Medium

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

6235 Journal of Positive School Psychology

Table 9

Change in the Risk Perceptions towards Macro-Economic Risks from April, 2018 to October, 2021

Macro –

Economic Risks

/ Period

Domestic Growth

Domestic Inflation

Current Account Deficit

Capital Inflows / Outflows

(Reversal of FIIs,

Slowdown In FDI)

Sovereign Rating

Downgrade

Fiscal Deficit

Corporate Sector Risk

Pace of Infrastructure

Development

Real Estate Prices

Household Savings

Political Uncertainty/

Governance /Policy

Implementation

Other Macroeconomic

Risks

April, 2018 -

October, 2018

Increase

d

Declined

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

October, 2018 -

April, 2019

Increase

d

Declined

Increase

d

Increase

d

No

Change

Increase

d

No

Change

Increase

d

Declined

April, 2019 -

October, 2019

Increase

d

Increase

d

Declined

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Declined

Increase

d

October, 2019 -

April, 2020

Increase

d

Increase

d

Declined

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Increase

d

Declined

April, 2020 -

October, 2020

Declined

Increase

d

Declined

October, 2020 -

April, 2021

Declined

Increase

d

Increase

d

Increase

d

Increase

d

Declined

Increase

d

Increase

d

Increase

d

April, 2021 -

October, 2021

Declined

Increase

d

Increase

d

Declined

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

Sara Safa Neama 6236

From the above Table 8 & 9, and As per the

survey outcomes, Macro-Economic Risks such

as Domestic Growth, Domestic Inflation,

Current Account Deficit, Capital Inflows /

Outflows (Reversal of FIIs, Slowdown In FDI),

Sovereign Rating Downgrade, Fiscal Deficit,

Corporate Sector Risk, Pace of Infrastructure

Development, Real Estate Prices, Household

Savings, and Political Uncertainty /

Governance /Policy Implementation Other

Macro-Economic Risks are perceived

differently by the experts including market

participants participated in the series of surveys

conducted by RBI during April, 2018 to

October, 2021.

As per the survey outcomes, Domestic

Growth Risks are perceived as a “High Risk”

category during April, 2019-April, 2021, but

the period April, 2020 is characterized as “Very

High Risk”. During remaining periods of the

study Domestic Growth Risks were categorized

as “Medium Risk”. Here, notable point is that

the period April, 2020 was categorized as “Very

High Risk” due to complete lock down of the

nation due to COVID-19 pandemic affecting

the financial system in India.

As per the survey outcomes, Domestic

Inflation Risks are perceived as a “High Risk”

category during October, 2020 to October,

2021. Remaining periods were categorized as

“Medium Risk” affecting the financial system

in India.

As per the survey outcomes, Sovereign

Risk / Contagion Risks are perceived as a “Low

Risk” category during April, 2020 and

remaining periods were categorized as

“Medium Risk” affecting the financial system

in India.

As per the survey outcomes, Current

Account Deficit Risks are perceived as a “High

Risk” category during October, 2018 to

October, 2018 and Remaining periods were

categorized as “Medium Risk”. But the period

October, 2020 is categorized as “Low Risk”

affecting the financial system in India.

As per the survey outcomes, Capital

Inflows / Outflows (Reversal of FII’s,

Slowdown in FDIs) Risks are perceived as a

“High Risk” category during October, 2018 -

October, 2018 and April, 2020. Remaining

periods were categorized as “Medium Risk”

affecting the financial system in India.

As per the survey outcomes, Sovereign

Rating Downgrade Risks are perceived as a

“High Risk” category during April, 2020. From

the period April, 2018-April, 2019 is

characterized as “Low Risk”. Remaining

periods were categorized as “Medium Risk”

affecting the financial system in India.

As per the survey outcomes, Fiscal

Deficit Risks are perceived as a “High Risk”

category during October, 2019-April, 2021, but

the period April, 2020-April 2020 is viewed as

“Very High Risk”. Remaining periods were

categorized as “Medium Risk” affecting the

financial system in India.

As per the survey outcomes, Corporate Sector

Risks are perceived as a “High Risk” category

during October, 2018-April, 2021. Remaining

periods were categorized as “Medium Risk”

affecting the financial system in India.

As per the survey outcomes, Pace of the

Infrastructure Development Risks are perceived

as a “High Risk” category during October,

2019-October, 2020. Remaining periods were

categorized as “Medium Risk” affecting the

financial system in India.

As per the survey outcomes, Real

Estate Prices Risks are perceived as a “High

Risk” category during April, 2020--April, 2020.

Remaining periods were categorized as

“Medium Risk” affecting the financial system

in India.

As per the survey outcomes, Household

Savings Risks are perceived as a “High Risk”

category during October, 2019--April, 2020.

Remaining periods were categorized as

“Medium Risk” affecting the financial system

in India.

As per the survey outcomes, Political

Uncertainty / Governance / Policy I Risks are

perceived as a “Medium Risk” category during

the entire period of the study April, 2018-

October, 2021and Other Macro-Economic

Risks are viewed as “Very Low Risk” category

affecting the financial system in India.

The overall change in the risk

perceptions (Table 9) towards Macro-

Economic Risks is described below.

Domestic Growth Risks were

“Increased” during April, 2018 to April, 2020

and then declined during the remaining period.

Domestic Inflation Rate Risks were declined

during April, 2018 to April, 2019 and then

increased gradually till October, 2021.

Sovereign Rating Downgrade Risks

were “Increased” during April, 2018-April,

2020 and all other periods are characterized as

6237 Journal of Positive School Psychology

“Declined”. Fiscal Deficit Risks, Corporate

Sector Risks, Pace of Infrastructure

Development Risks, and Real Estate Prices

Risks were also observed the same perceptions

as Sovereign Rating Downgrade Risks.

Household Savings Risks were

declined during the periods April, 2020 –

October, 2020 and April, 2021-October, 2021,

whereas all other periods were exhibited

perceptions as “Increased”. Political

Uncertainty / Governance / Policy

Implementation Risks were “Increased” during

the periods April, 2018-October, 2018,

October, 2019-April, 2020 and October, 2020-

April, 2021 and were “Declined” during other

periods. Whereas Other Macro-Economical

Risks were “Increased” during the periods

April, 2018-October, 2018, April, 2019-

October, 2019 and October, 2020-April, 2021

and were “Declined” during other periods.

Table 10

Ratings of Category Wise Financial Market Risks

from April, 2018 to October, 2021

Financial

Market Risks /

Period

Foreign

Exchange

Rate Risk

Equity

Price

Volatility

Interest

Rate Risk

Liquidity

Risk

Other Financial

Market Risks

April, 2018

Medium

Very Low

October, 2018

High

Medium

High

Low

April, 2019

Medium

High

Medium

High

Very Low

October, 2019

Medium

Very Low

April, 2020

High

Medium

High

Low

October, 2020

Medium

High

Medium

Very Low

April, 2021

Medium

High

Medium

Very Low

October, 2021

Medium

High

Medium

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

From the above Table 10, and As per the survey

outcomes, Financial Market Risks such as

Foreign Exchange Rate Risk, Equity Price

Volatility, Interest Rate Risk, Liquidity Risk,

and Other Financial Market Risks are perceived

differently by the experts including market

participants participated in the series of surveys

conducted by RBI during April, 2018 to

October, 2021.

As per the survey outcomes, Foreign

Exchange Rate Risks are perceived as a “High

Risk” category during April, 2018, and April,

2020. Remaining all other periods was

categorized as “Medium Risk” affecting the

financial system in India.

As per the survey outcomes, Equity

Price Validity Risks are perceived as a

“Medium Risk” category during April, 2018,

and October, 2019. Remaining all periods was

categorized as “High Risk” affecting the

financial system in India.

As per the survey outcomes, Interest

Rate Risks are perceived as a “Medium Risk”

category during all periods from April, 2018 to

October, 2021 affecting the financial system in

India.

As per the survey outcomes, Liquidity

Risks are perceived as a “High Risk” category

during all periods from October, 2018 to April,

2019 and April, 2020. All other periods are

perceived as “Medium Risk” affecting the

financial system in India.

All Other Financial Market Risks were

categorized as “Low Risk” to “Very Low Risk”

during the study period and negligible effect on

financial system in India.

Sara Safa Neama 6238

Table 11

Change in the Risk Perceptions towards Financial Market Risks

from April, 2018 to October, 2021

Financial Market

Risks / Period

Foreign

Exchange

Rate Risk

Equity

Price

Volatility

Interest

Rate Risk

Liquidity

Risk

Other Financial

Market Risks

April, 2018-

October, 2018

Increased

October, 2018-

April, 2019

Declined

No Change

Declined

April, 2019-

October, 2019

Declined

October, 2019-

April, 2020

Increased

April, 2020-

October, 2020

Declined

October, 2020-

April, 2021

Increased

Declined

Increased

April, 2021-

October, 2021

No Change

Increased

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

The overall change in the risk perceptions

towards Financial Market Risks (Table 11) is

described below.

Foreign Exchange Rate Risks were

“Increased” during April, 2018 to April, 2020

and then declined during the remaining period.

Domestic Inflation Rate Risks were declined

during April, 2018 to April, 2019 and then

increased gradually till October, 2021. Interest

Rate Risks were “Increased” during the periods

April, 2018-October, 2018, October, 2019-

April, 2019 and October, 2020 to October,

2021. Remaining the periods was perceived as

“Declined”.

Liquidity Risks were “Increased”

during the periods April, 2018 to April, 2019,

October, 2019 to April, 2020 and April, 2021 to

October, 2021. Remaining periods was viewed

as “Declined”. Other Financial Market Risks

were “Declined” during October, 2018 to

October, 2019 and April, 2020 to October,

2020. Remaining periods was noted as

“Increased”.

6239 Journal of Positive School Psychology

Table 12

Ratings of Category Wise Institutional Risks from April, 2018 to October, 2021

Institutional Risks /

Period

Regulatory Risk

Asset Quality

Deterioration

Additional Capital

Requirements of

Banks

Access to Funding

By Banks

Level of Credit

Growth

Cyber Risk

Operational Risk

Other Institutional

Risks

April, 2018

Medium

High

Medium

High

Medium

Very Low

October, 2018

Medium

High

Medium

High

Medium

Very Low

April, 2019

Medium

High

Medium

High

Medium

Very Low

October, 2019

Medium

High

Medium

High

Medium

Very Low

April, 2020

Medium

High

Medium

High

Medium

Very Low

October, 2020

Medium

High

Medium

High

Medium

Very Low

April, 2021

Medium

High

Medium

High

Medium

Very Low

October, 2021

Medium

High

Medium

High

Medium

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

Sara Safa Neama 6240

Table 13

Change in the Risk Perceptions towards Institutional Risks from April, 2018 to October, 2021

Institutional Risks /

Period

Regulatory Risk

Asset Quality

Deterioration

Additional Capital

Requirements of

Banks

Access to Funding By

Banks

Level of Credit

Growth

Cyber Risk

Operational Risk

Other Institutional

Risks

April, 2018 - October,

2018

Increased

Declined

Increased

Declined

Increased

October, 2018 - April,

2019

Increased

Declined

Increased

Declined

No Change

Increased

Declined

April, 2019 - October,

2019

Declined

Increased

Declined

Increased

Declined

Increased

October, 2019 - April,

2020

Increased

Declined

April, 2020 - October,

2020

Declined

Increased

Declined

No Change

October, 2020 - April,

2021

Declined

Increased

April, 2021 - October,

2021

Declined

Increased

No Change

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

6241 Journal of Positive School Psychology

From the above Table 12, and As per the survey

outcomes, Institutional Risks such as

Regulatory Risk, Asset Quality Deterioration,

Additional Capital Requirements of Banks,

Access to Funding by Banks, Level of Credit

Growth, Cyber Risk, Operational Risk and

Other Institutional Risks are perceived

differently by the experts including market

participants participated in the series of surveys

conducted by RBI during April, 2018 to

October, 2021.

As per the survey outcomes,

Regulatory Risks are perceived as a “Medium

Risk” category during all periods from April,

2018 to October, 2021 affecting the financial

system in India.

As per the survey outcomes, Asset

Quality Deterioration Risks are perceived as a

“Medium Risk” category during April, 2019.

Remaining all periods was categorized as “High

Risk” affecting the financial system in India.

As per the survey outcomes, Additional

Capital Requirements of Banks Risks are

perceived as a “Medium Risk” category during

the period from October, 2021 to October,

2021. Remaining all periods was perceived as

“High Risk” affecting the financial system in

India.

As per the survey outcomes, Access to

Funding by Banks Risks was perceived as a

“Medium Risk” category during all periods

from October, 2018 to October, 2021 affecting

the financial system in India.

As per the survey outcomes, Level of

Credit Growth Risks was perceived as a

“Medium Risk” category during the period

from April, 2018 to April, 2019. Remaining all

periods was viewed as “High Risk” affecting

the financial system in India.

As per the survey outcomes, Cyber

Risks was perceived as a “Medium Risk”

category during the period from October, 2019

to October, 2019. Remaining all periods was

viewed as “High Risk” affecting the financial

system in India.

As per the survey outcomes,

Operational Risks was perceived as a “Medium

Risk” category and Other Institutional Risks

was perceived as “Very Low” during all the

periods from April, 2018 to October, 2021,

affecting the financial system in India.

The overall change in the risk

perceptions towards Institutional Risks (Table

13) is described below.

Regulatory Risks were “Increased”

during April, 2018 to April, 2019 and October,

2019 to April, 2020. The same were observed

as “Declined” during the remaining period.

Asset Quality Deterioration Risks were

“Increased” during April, 2019 to April, 2020

and remaining periods were noted as

“Declined”.

Additional Capital Requirements of

Banks Risks were “Increased” during the

periods October, 2019-April, 2020. Remaining

the periods was perceived as “Declined”.

Accesses to Funding by Banks Risks

were “Increased” during the periods April,

2018 to April, 2019, and October, 2019 to

April, 2020. Remaining periods was viewed as

“Declined”. Levels of Credit Growth Risks

were “Increased” during April, 2019 to April,

2020. Remaining periods was noted as

“Declined”.

Cyber Risks were “Increased” during

the periods October, 2019 to October, 2020 and

April, 2021 to October, 2021. Remaining

periods was viewed as “Declined”. Operational

Risks were “Increased” during October, 2018 to

April, 2020. Remaining periods was noted as

“Declined”.

Other Institutional Risks were

“Increased” during the periods April, 2018-

October, 2018, April, 2019-October, 2019 and

October, 2020-April, 2021. Remaining periods

were noted as “Declined”.

Table 14

Ratings of Category Wise General Risks from April, 2018 to October, 2021

General Risks /

Period

Terrorism

Climate

Related Risks

Social Unrest

(Increasing

Inequality)

Other

General

Risks

April, 2018

Medium

Very Low

October, 2018

Medium

Very Low

April, 2019

Medium

Very Low

Sara Safa Neama 6242

October, 2019

Medium

Very Low

April, 2020

Medium

High

Very Low

October, 2020

Medium

Very Low

April, 2021

Low

Medium

Very Low

October, 2021

Medium

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

Table 14

Change in the Risk Perceptions towards General Risks

from April, 2018 to October, 2021

General Risks /

Period

Terrorism

Climate Related

Risks

Social Unrest

(Increasing

Inequality)

Other General

Risks

April, 2018- Oct,

2018

Declined

Increased

Oct, 2018- April,

2019

Increased

Declined

April, 2019-

October, 2019

Declined

No Change

October, 2019-

April, 2020

No Change

Declined

Increased

Declined

April, 2020-

October, 2020

Increased

Declined

Increased

October, 2020-

April, 2021

Declined

Increased

April, 2021-

October, 2021

Increased

Declined

---

Source: Systematic Risk Survey Reports, Reserve Bank of India.

From the above Table 14, and As per

the survey outcomes, General Risks such as

Terrorism Risk, Climate Related Risks, Social

Unrest (Increasing Inequality) Risk, and Other

General Risks are perceived differently by the

experts including market participants

participated in the series of surveys conducted

by RBI during April, 2018 to October, 2021.

As per the survey outcomes, Terrorism

Risks are perceived as a “Low” category during

April, 2021. Remaining all other periods was

categorized as “Medium Risk” affecting the

financial system in India.

As per the survey outcomes, Climate

Related Risks are perceived as a “Medium

Risk” category during April, 2018-October,

2021, affecting the financial system in India.

As per the survey outcomes, Social

Unrest (Increasing Inequality) Risks are

perceived as a “High Risk” category during the

period from April, 2020. Remaining all periods

was perceived as “Medium Risk” affecting the

financial system in India.

As per the survey outcomes, Other

General Risks are perceived as a “Very Low

Risk” category during all periods from October,

2018 to April, 2021 and affecting the financial

system in India.

The overall change in the risk

perceptions towards General Risks (Table 15)

is described below.

Terrorism Risks were “Increased”

during the periods October, 2018 to April,

2019, April, 2020 to October, 2020 and April,

2021 to October, 2021. The same were

observed as “Declined” during the remaining

period.

Climate Related Risks were

“Increased” during the periods October, 2018 to

April, 2019, April, 2020 to October, 2020 and

April, 2021-October, 2021. The same were

observed as “Declined” during the remaining

period.

6243 Journal of Positive School Psychology

Social Unrest (Increasing Inequality)

Risks were “Increased” during the periods

April, 2018 to April, 2019, October, 2019 to

April, 2020 and October, 2020 to April, 2021.

The same were observed as “Declined” during

the remaining period.

Other General Risks were “Increased”

during the periods April, 2018 to October,

2018, and April, 2020 to April, 2021.

Remaining periods were identified as

“Declined”.

10. Conclusions

The COVID-19 pandemic will put the

strengthened risk management and capital

adequacy mechanisms put in place after the

2008 financial crisis to the test, especially since

no scenario analysis could have predicted an

incident of this magnitude. Reserve Bank of

India, has conducted the series of Systematic

Risk Surverys during 2018 to 2021. The risk

perception, as shown in the change tables, may

fluctuate (increase/decrease) from one category

to the other, as a result of the systemic risk

survey done at different time periods (on a half-

yearly basis in April and October). However,

within the same risk category, risk perception

can rise, fall, or remain constant, as

demonstrated by words. The comparative study

of a series of successive polls reveals a shift in

risk perception.

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Financial Risk Management of Banks in India -A Study of Indian Banks

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