SYNOPSIS ON RISK MANAGEMENT IN INDIAN BANKING SECTOR

Submitted by Shweta Roll No 1175041

Submitted to Ms. Ritika Gupta

in the partial fulfillment for the award of the degree of

Masters of Business Administration

Rayat and Bahra Institute of Management,Mohali Punjab Technical University, Kapurthala

INTRODUCTION
Risk management in Indian banks is a relatively newer practice, but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the corporate governance of a financial institution. In times of volatility and fluctuations in the market, financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. Hence, an essential component of risk management framework would be to mitigate all the risks and rewards of the products and service offered by the bank. Thus the need for an efficient risk management framework is paramount in order to factor in internal and external risks. The financial sector in various economies like that of India are undergoing a monumental change factoring into account world events such as the ongoing Banking Crisis across the globe. The 2007present recession in the United States has highlighted the need for banks to incorporate the concept of Risk Management into their regular procedures. The various aspects of increasing global competition to Indian Banks by Foreign banks, increasing Deregulation, introduction of innovative products, and financial instruments as well as innovation in delivery channels have highlighted the need for Indian Banks to be prepared in terms of risk management. Indian Banks have been making great advancements in terms of progress in terms of technology, quality, quantity as well as stability such that they have started to expand and diversify at a rapid rate. However, such expansion brings these banks into the context of risk especially at the onset of increasing Globalization and Liberalization. In banks and other financial institution risk plays a major part in the earnings of a bank. Higher the risk, higher is the return, hence, it is most essential to maintain a parity between risk and return. Hence, management of Financial risk incorporating a set systematic and professional methods especially those defined by the Basel II norms because a essential requirement of banks. The more risk averse a bank is, the safer is their Capital base

REVIEW OF LITERATURE
A large number of studies on the growth and financial performance of mutual funds have been carried out during the past, in the developed and developing countries. Brief reviews of the following research works reveal the wealth of contributions towards the performance evaluation of mutual fund, market timing and stock selection abilities of fund managers. In India, one of the earliest attempts was made by National Council of Applied Economics Research (NCAER) in 1964 when a survey of households was undertaken to understand the attitude towards and motivation for savings of individuals. Another NCAER study in 1996 analyzed the structure of the capital market and presented the views and attitudes of individual shareholders. SEBI NCAER Survey (2000) was carried out to estimate the number of households and the population of individual investors, their economic and demographic profile, portfolio size, and investment preference for equity as well as other savings instruments. Since 1986, a number of articles and brief essays have been published in financial dailies, periodicals, professional and research journals, 20 explaining the basic concept of Mutual Funds and highlighted their importance in the Indian capital market environment. They touched upon varied aspects like regulation of Mutual Funds, Investor expectations, Investor protection, and growth of Mutual Funds and some on the performance and functioning of Mutual Funds. A few among them are Vidyashankar (1990), Sarkar (1991), Agarwal (1992), Sadhak (1991), Sharma C. Lall (1991), Samir K. Barua et al., (1991), Sandeep Bamzai (2001), Atmaramani (1995), Atmaramani (1996), Subramanyam (1999), Krishnan (1999), Ajay Srinivsasn (1999). Segmentation of investors on the basis of their characteristics was highlighted by Raja Rajan (1997). Investors characteristics on the basis of their investment size Raja Rajan (1997), and the relationship between stages in life cycle of the investors and their investment pattern was studied Raja Rajan (1998). Irwin, Brown, FE (1965) analyzed issues relating to investment policy, portfolio turnover rate, performance of mutual funds and its impact on the stock markets. They identified that mutual funds had a significant impact on the price movement in the stock market. They concluded that,

on an average, funds did not perform better than the composite markets and there was no persistent relationship between portfolio turnover and fund performance. Treynor (1965) used characteristic line for relating expected rate of return of a fund to the rate of return of a suitable market average. He coined a fund performance measure taking investment risk into account. Further, to deal with a portfolio, portfolio-possibility line was used to relate expected return to the portfolio owners risk preference. Sharpe, William F (1966) developed a composite measure of return and risk. He evaluated 34 open-end mutual funds for the period 1944-63. Reward to variability ratio for each scheme was significantly less than DJIA (Dow Jones Industrial Average) and ranged from 0.43 to 0.78. Expense ratio was inversely related with the fund performance, as correlation coefficient was 0.0505. The results depicted that good performance was associated with low expense ratio and not with the size. Sample schemes showed consistency in risk measure. Jensen (1968) developed a composite portfolio evaluation technique concerning risk-adjusted returns. He evaluated the ability of 115 fund managers in selecting securities during the period 1945-66. Analysis of net returns indicated that, 39 funds had above average returns, while 76 funds yielded abnormally poor returns. Using gross returns, 48 funds showed above average results and 67 funds below average results. Jensen concluded that, there was very little evidence that funds were able to 22 perform significantly better than expected as fund managers were not able to forecast securities price movements. Klemosky (1977) examined performance consistency of 158 fund managers for the period 196875. The ranking of performance showed better consistency between four-year periods and relatively lower consistency between adjacent two-year periods. Ippolitos (1989) results and conclusions were relevant and consistent with the theory of efficiency of informed investors. He estimated that risk-adjusted return for the mutual fund industry was greater than zero and attributed positive alpha before load charges and identified that fund performance was not related to expenses and turnover as predicted by efficiency arguments.

Ronay and Kim (2006) have pointed out that there is no difference in risk attitude between individuals of different gender, but between the groups, males indicate a stronger inclination to risk tolerance. Gender difference was found at an individual level, but in groups, males expressed a stronger pro-risk position than females. Gupta and Sehgal (1997) evaluated investment performance for the period 1992 to 1996. Aspects of Mutual fund such as fund diversification, consistency of performance, consistency between risk measures, fund objectives and risk return relation in general were studied. For the study 80 mutual fund schemes of private and public sector were taken. Out of 80 schemes, 54 were close ended and the 26 were open-ended. Results showed that income growth schemes were the best performers with mean weekly returns of .0087 against mean weekly returns from income growth schemes of .0021 and .0023 respectively

Mutual fund industry is a twenty century phenomenon in the global context. And strictly speaking the real efflorescence of the Indian mutual fund industry started in the far end of the last century and is more effectively a phenomenon of the new millennium. But it holds tremendous promise both in the global and Indian market as its basic philosophy i.e. quick and exponential returns coupled with reasonable amount of security from risk is in tune with the philosophy of the new age and its investors. So it can be said that given the right push and the environment along with all the facilities the mutual fund industry can become the investment industry of the future, of which it is already showing signs.

NEED OF THE STUDY

Mutual funds are considered as one of the best available investment options as compare to others alternatives. They are very cost efficient and also easy to invest in. The biggest advantage of mutual funds is they provide diversification, by reducing risk & maximizing returns. India is ranked one of the fastest growing economies in the world. Despite this huge progression in the industry, there still lies huge potential and room for growth. India has a saving rate of more than 35% of GDP, with 80% of the population who save. These savings could be channelized in the mutual funds sector as it offers a wide investment option. In addition, focusing on the rapidly growing tier II and tier III cities within India will provide a huge scope for this sector. Further tapping rural markets in India will benefit mutual fund companies from the growth in agriculture and allied sectors. With subsequent easing of regulations, it is estimated that the mutual fund industry will grow at a rate of 30% - 35% in the next 3 to 5 years and reach US 300 billion by 2015. Over the last couple of years mutual funds have given impressive returns, especially equity funds. The growth period first started during early 2005 with markets appreciating significantly. With 2006 approaching more towards 2007, markets rallied like never before. The financial year 2007-08 was a year of reckoning for the mutual fund industry in many ways. Most stocks were trading in green. All fund houses boasted of giving phenomenal returns. Many funds outperformed markets. Equity markets were in the limelight. Investors who were not exposed to equity stocks suddenly infused funds. AUM grew considerably and fund houses were on a spree of launching new schemes. As it can be noted, there is huge growth and potential in the mutual fund industry. The development of this sector so far has been commendable and with the above positive factors we are looking at a more evolved industry.

OBJECTIVES OF THE STUDY

To study broad outline of management of credit, market and operational risks associated with banking sector . Though the risk management area is very wide and elaborated, still the project covers whole subject in concise manner. The study aims at learning the techniques involved to manage the various types of risks, various methodologies undertaken. The application of the techniques involves us to gain an insight into the following aspects: An overview of the risks in general. An insight of the various credit, market and operational risks attached to the banking sector. Tools applied in for measurement and management of various types of risks. Having an insight into the practical aspects of the working of various departments in banks.

HYPOTHESIS
There is a general notion that an investment in mutual fund is always risky. Investors should always be conscious of the fact that Mutual Funds invest their funds in capital market instruments such as shares, debentures, bonds etc and that all the capital market instruments have risk. Risks can be Investor Psychology Risks, Prediction Risks, Choice Risks, and Cost Risks etc.

Although there is no one mutual fund that will be suitable to all kinds of investors. Hence, mutual fund investors need to identify a suitable fund for them. It will be the first step towards making successful investments in mutual funds to make Mutual Funds their "CUP OF TEA". Identifying a suitable fund can be done in a two-step manner as follows: * Selecting a fund with investment objectives and preferences, return objectives, time horizon and risk tolerances that meet the requirements of the investor. * Selecting a fund that has a detailed asset allocation strategy by fund type category to reflect the investment objectives of the fund.

Mutual funds can be win-win option available to the investors who are not willing to take any exposure directly to the security markets as well as it helps the investors to build their wealth over a period of time. But the thing which must be remembered by the investors is: "INVESTMENT IN MUTUAL FUND IS SUBJECT TO MARKET RISK"

The Indian Equity Market has grown significantly during the last three years; Mutual Funds are not left far behind. Both the avenues have created wealth for the investors. But for the creation of wealth through this avenue a proper understanding of the Mutual Funds is must.

RESEARCH METHODOLOGY
The dissertation will involve collection of data about the Mutual Funds and its future scenario with the help of Primary and Secondary Data Collection Techniques. SOURCES OF DATA Primary sources :(a) Questionnaire technique

In Secondary data the information will mainly be accessed through the following sources: Information regarding the growth of Mutual Fund industry and performance of various Mutual Fund schemes will be collected from the factsheets of the various mutual fund houses. Newspapers such as Business Standard, Economic Times etc. Websites such as moneycontrol.com, mutualfundsindia.com etc.

DATA COLLECTION Primary Research: The primary study is done on the basis of questionnaire that had got filled up directly from the investors of different age, income and profession. Secondary Research: The study is done on secondary basis. It will be consisting of data collected from various journals, internet, books, magazines etc. Convenience Sampling: In convenience sampling, the selection of units from the population is based on easy availability and/or accessibility. SAMPLE AREA- Sector-17 of Chandigarh.

SAMPLE SIZE- 50-75 customers of Banks. RESEARCH DESIGN- Exploratory Research DATA ANALYSIS TOOLS- Frequency counts (numbers and percentages)

QUESTIONNAIRE
1. Name: 2. Address: 3. Contact No.: 4. Age group: a. 25-35 c. 50 onwards 5. Income range (Annually) a. Up to 1.5lakhs c. > 5 lakhs 6. At present you invest in: (number 1-10), 1 being lowest and 10 highest. a. b. c. d. Bank FD ____ PF ____ Bonds____ Post Office ____ e. Stock market ____ f. Mutual funds ____ b. 5-3 lakhs b. 35-50

g. Real estates ____ h. Insurance ____ j. Others ____

e. Gold ____

6. Among various investment alternatives you think is best for you and why? _____________________________________________________________________ 7. Objective of your investment is? Rate on scale of 1-5 (1-lowest, 5-highest) a. Rate of return _____ b. Security _____

c. Speculation _____ e. Tax Free Return _____

d. Marketability _____

8. Who influence your investment decision the most? Rate On Scale 1-5 (1-lowest, 5highest) a. Financial experts _____ c. Attractive advertisements _____ e. Financial Advisors _____ 9. Awareness towards mutual fund through: Rate On 1-5, (1-lowest, 5-highest) a. b. c. d. e. T.V & Newspapers Magazines Friends & Relatives Financial Advisor Others _________ _________ _________ _________ _________ b. Friends _____ d. Your own decision _____

11. What is the most preferred period of investment in the mutual fund? Rate 1-5, (1-lowest, 5-highest) a. Below 1 year _________ _________ _________ _________ _________

b. 1-2 year c. 2-3 years d. 3-5 years e. Above 5 year

12. Do you have any future plan for investing in mutual funds? a. Yes 13. IF yes, in which fund you want to invest in future? a. Equity b. Balanced c. Debt b. No

14.

Any

other

information

or

suggestions.

___________________________________________________________________________ ___________________________________________________

THANK YOU FOR YOUR PRECIOUS TIME

REFERENCES
http://www.mutualfundsindia.com/mfi_5july.asp http://www.indianmba.com/Faculty_Column/FC589/fc589.html http://shodhganga.inflibnet.ac.in/bitstream/10603/3455/6/06_chapter%202.pdf http://finance.indiamart.com/india_business_information/advantage_mutual_funds.html http://www.google.com/search?hl=en&lr=&rls=WZPA,WZPA:200606,WZPA:en&defl=en& q=define:Mutual+fund&sa=X&oi=glossary_definition&ct=title http://amfiindia.com/showhtml.asp?page=mfconcept http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1 http://www.sebi.gov.in/Index.jsp?contentDisp=SubSection&sec_id=52&sub_sec_id=52 Sadhak H, Mutual Funds in India, Response Publication House 2003 Turan MS and Bodla BS, Performance Appraisal of Mutual Funds, Excel Publication House 2001 Value Research, Mutual Fund Insight, 15 Jan-14 Feb issue 2007 Mathur BL, Management of Financial Services, RBSA Publication House 1996 Chander Ramesh, Performance Appraisal of Mutual Funds in India, Excel Publication House 2002