A

SYNOPSIS

ON

FINANCIAL RISK MANAGEMENT

AT

INDIABULLS SECURITIES LTD

A synopsis report submitted to Osmania University

In partial fulfillment for the Award of the Degree of

MASTER OF BUSIUNESS ADMINISTRATION

Submitted by

GAGAM BHARATHWAJ

HT NO: 2121-19-672-147

UNDER THE GUIDANCE OF

MR. T. RAMESH

ASST PROFESSOR

ARISTOTLE PG COLLEGE
(Affliated To Osmania University,Hyderabad)
Recognized By UGC under section 2(f) of UGC Act 1956
Beside Moinabad Police Station,
Chilkur, Moinabad , Ranga Reddy District, Telangana.
 CHAPTER-I
INTRODUCTION
FINANCIAL RISK MANAGEMENT

INTRODUCTION

Over the last ten years, major securities firms, money center banks and other commercial and
savings banks nationwide have undertaken financial commitments involving risks they did
not fully understand, later resulting in major losses and unexpected write offs. As a result,
senior managers in these firms are seeking new ways to identify, evaluate and predict
changes in financial risks to reduce the likelihood of similar outcomes. Investing in
information technologies (ITS) that improve the control of risk -- a new area of investment
which we refer to as risk management technology (RMT) -- is one such approach that is
increasingly viewed as having the potential to affect the strategic and competitive position of
financial firms.
Financial Risk Management
In a financial services context, risk is defined as "the lack of predictability of outcomes"
affecting the set of financial transactions and positions which cumulatively form the firm's
business [DOHESS, p. 151. Thus, risk includes the possibility of both pleasant surprises as
well as adverse business outcomes. Since prediction is facilitated by the availability of
information to a decision maker, RMT can be used to proactively gauge risk in financial
operations, where the outcomes of regional lending operations, involvement in selected
financial markets and instruments and positions taken by traders are uncertain and may
change from day to day. Risk management, on the other hand, is the management of the
resources and commitments of a firm so as to maximize its value, taking into account the
impact that unpredictable outcomes or events can have on firm performance.
Risk management activities normally involve three basic steps:
 Exhaustive identification and classification of the risks that can impact a firm's
business outcomes;
 Measurement of the risk associated with a set of potential events that affect the value
of the firm, in terms of the likelihood of their occurrence and the magnitude of the
expected losses they may entail;
 Timely formulation of the actions required to bring business risks within acceptable
bounds.
The sources of risk that a firm may encounter are varied and depend on the businesses in
which it participates. For example, a financial firm involved in trading financial instruments
will face the market risk associated with unpredictable price changes of the different financial
instruments. A second source is interest rate risk arising from interest rate fluctuations,
rendering the returns on financial assets uncertain. Interest rate risk also poses significant
financial uncertainty when there are gaps in value between the set of claims made on a firm's
assets at a specific point in time and the assets' value when the claims are due. With a
substantial gap between these values, it may become necessary for the firm to purchase funds
in the market at an unexpectedly high cost. Some other types of risk include credit risk and
operating risk. Credit risk is associated with defaults in repayment of loans by a borrower and
operating risk stems from frequent changes in or discontinuance of a revenue stream against a
continuing level of fixed cost expenditures in the operating infrastructure.

Definition of Risk Management

Risk management is a process for identifying, assessing, and prioritizing risks of different
kinds. Once the risks are identified, the risk manager will create a plan to minimize or
eliminate the impact of negative events. A variety of strategies is available, depending on the
type of risk and the type of business. There are a number of risk management standards,
including those developed by the Project Management Institute, the International
Organization for Standardization (ISO), the National Institute of Science and Technology,
and actuarial societies.
Types of Risk
There are many different types of risk that risk management plans can mitigate. Common
risks include things like accidents in the workplace or fires, tornadoes, earthquakes, and other
natural disasters. It can also include legal risks like fraud, theft, and sexual harassment
lawsuits. Risks can also relate to business practices, uncertainty in financial markets, failures
in projects, credit risks, or the security and storage of data and records.
Process for Identifying and Managing Risk
While a variety of different strategies can mitigate or eliminate risk, the process for
identifying and managing the risk is fairly standard and consists of five basic steps. First,
threats or risks are identified. Second, the vulnerability of key assets like information to the
identified threats is assessed. Next, the risk manager must determine the expected
consequences of specific threats to assets. The last two steps in the process.
 CHAPTER-II
REVIEW OF LITERATURE
REVIEW OF LITERATURE

Risk Management and Risk based Supervision in Banks has been the subject of study

of many Agencies and Researchers and Academicians. There is a treasure of literature

available on the subject.

Crouhy, Gala, Marick have summarised the core principles of Enterprise wide Risk

Management. As per the authors Risk Management culture should percolate from the

Board Level to the lowest level employee. Firms will be required to make significant

investment necessary to comply with the latest best practices in the new generation of

Risk Regulation and Management. Corporate Governance regulation with the advent of

Sarbanes-Oxley Act in US and several other legislations in various countries also

provide the framework for sound Risk Management structures. Hitherto, Enterprise

wide Risk Management existed only for name sake. Generally firms did not institute a

truly integrated set of Risk measures, methodologies or Risk Management

Architecture. The ensuing decades will usher in a new set of Risk Management tools

encompassing all the activities of a Corporation. The integrated Risk Management

infrastructure would cover areas like Corporate Compliance, Corporate Governance,

Capital Management etc. Areas like business risk, reputation risk and strategic risk also

will be incorporated in the overall Risk Architecture more formally. As always it will

be the Banks and the Financial Services firms which will lead the way in this

evolutionary process. The compliance requirements of Basel II and III accords will also

oblige Banks and Financial institutions to put in place robust Risk Management

methodologies.

Carl Felsenfeld outlined the patterns of international Banking regulation and the

sources of governing law. He reviewed the present practices and evolving changes in
the field of control systems and regulatory environment. The book dealt a wide area of

regulatory aspects of Banking in the United States, regulation of international Banking,

international Bank services and international monetary exchange. The work attempted

in depth analysis of all aspects of Bank Regulation and Supervision.

Hannan and Hanweck felt that the insolvency for Banks become true when current

losses exhaust capital completely. It also occurs when the return on assets (ROA) is

less than the negative capital- asset ratio. The probability of insolvency is explained in

terms of an equation p, 1/(2(Z2 ). The help of Z-statistics is commonly employed by

Academicians in computing probabilities.

Daniele Nouy elaborates the Basel Core Principles for effective Banking Supervision,

its innovativeness, content and the challenges of quality implementation. Core

Principles are a set of supervisory guidelines aimed at providing a general framework

for effective Banking supervision in all countries. They are innovative in the way that

they were developed by a mixed drafting group and they were comprehensive in

coverage, providing a checklist of the principal features of a well designed supervisory

system.

Patrick Honohan explains the use of budgetary funds to help restructure a large failed

Bank/Banking system and the various consequences associated with it. The article

discusses how instruments can best be designed to restore Bank capital, liquidity and

incentives. It considers how recapitalization can be modeled to ensure right incentives

for new operators/managers to operate in a prudent manner ensuring good subsequent

performance It discusses how Government’s budget and the interest of the tax payer

can be protected and suggest that monetary policy should respond to the

recapitalization rather determine its design.

Jacques de Larosiere, former Managing Director of the International Monetary Fund
discusses the implications of the new Prudential Framework. He explains at length how the
new Regulatory code could have some dangerous side effects. The increased capital
requirements as decided by the Basel Committee on Banking Supervision in September 2010
will affect the amount of own funds would affect the profitability of the Banks. The
consequences of such increased capital requirements would incentivize the Banks to transfer
certain operations that are heavily taxed in terms of capital requirements to shadow Banking
to avoid the scope of regulation.

William Allen of Cass Business School, City University London strongly criticizes the Basel
Committee on Banking Supervision announcement increasing the capital requirements as part
of Basel III. The aims of increasing the capital are two-fold. Firstly the objective is to
increase the amount of liquid assets held by Banks and reduce their reliance on short term
funding. It also aims at limiting the extent to which Banks can achieve maturity
transformation. This focus on liability management, as per him will prove counter-
productive, as has been proved historically by the recent financial crisis. As a strategy to meet
the new Capital Accord Banks will be forced to amass large amounts of liquid assets, in
addition to the amounts they will need to repay special facilities provided by the
Governments and Central Banks.

As per G.Dalai, D.Rutherberg, M.Sarnat and B.Z.Schreiber (2017) Risk is intrinsic to

banking. However the management of risk has gained prominence in view of the growing
sophistication of banking operations, derivatives trading, securities underwriting and
corporate advisory business etc.
Risks have also increased on account of the on-line electronic banking, provision of bill
presentation and payment services etc. The major risks faced by financial institutions are of
course credit risk, interest rate risk, foreign exchange risk and liquidity risk. Financial Risk
Managamentrequires that Banks develop loan assessment policies and administration of loan
portfolio, fixing prudential per borrower, per group limits etc. The tendency for excessive
dependence on collateral should also be looked into. The other weaknesses in Financial Risk
Managamentare inadequate risk pricing, absence of loan review mechanism and post sanction
surveillance. Interest rate risk arises due to changes in interest rates significantly impacting
the net interest income, mismatches between the time when interest rates on asset and
liability are reset etc. Management of interest rate risk involves employing methods like
Value-at-Risk (VaR), a standard approach to assess potential loss that could crystallise on
trading portfolio due to variations in market interest rates and prices. Foreign Exchange risk
is due to running open positions. The risk of open positions of late has increased due to wide
variations in exchange risks. The Board of Directors should law down strict intra-day and
overnight positions to ensure that the Foreign Exchange risk is under control.
Chief Risk Officer, Alden Toevs of Commonwealth Bank of Australia(2018) states that a
major failure of risk management highlighted by the global financial crisis was the inability
of financial institutions to view risk on a holistic basis. ‘The global financial crisis exposed,
with chilling clarity, the dangers of thinking in silos, particularly where risk management is
concerned’ says the author. The malady is due to the Banks focussing on individual risk
exposures without taking into consideration the broader picture. As per the author the root of
the problem is the failure of the Banks to consider risks on an enterprise-wide basis. The new
relevance and urgency for implementing the Enterprise Risk Management (ERM) is due to
the regulatory insistence with a number of proposals to ensure that institutions stay focussed
on the big picture. In a way the Three Pillar Approach frame work of the Basel II Accord is
an effort to fulfill this requirement. The risk weighted approaches to Credit Risk on the basis
of the asset quality, allocation of capital to Operational Risk and Market Risks nearly capture
all the risks attendant to a Bank’s functioning.

PROCESS:

According to the standard ISO 31000 "Risk management -- Principles and guidelines on
implementation”, the process of risk management consists of several steps as follows:

Establishing the context

Establishing the context involves

Identification of risk in a selected domain of interest

Planning the remainder of the process.

Mapping out the following:

The social scope of risk management

The identity and objectives of stakeholders

The basis upon which risks will be evaluated, constraints.

Defining a framework for the activity and an agenda for identification.

Developing an analysis of risks involved in the process.

Mitigation of risks using available technological, human and organizational resources.

Identification:

After establishing the context, the next step in the process of managing risk is to identify
potential risks. Risks are about events that, when triggered, cause problems. Hence, risk
identification can start with the source of problems, or with the problem itself.
Source analysis:

Risk sources may be internal or external to the system that is the target of risk management.

Examples of risk sources are: stakeholders of a project, employees of a company or

the weather over an airport.

Problem analysis:

Risks are related to identify threats. For example: the threat of losing money, the threat of
abuse of privacy information or the threat of accidents and casualties. The threats may exist
with various entities, most important with shareholders, customers and legislative bodies such
as the government.

When either source or problem is known, the events that a source may trigger or the events
that can lead to a problem can be investigated. For example: stakeholders withdrawing during
a project may endanger funding of the project; privacy information may be stolen by
employees even within a closed network; lightning striking a Boeing 747 during takeoff may
make all people onboard immediate casualties.

The chosen method of identifying risks may depend on culture, industry practice and
compliance. The identification methods are formed by templates or the development of
templates for identifying source, problem or event. Common risk identification methods are

Objectives-based risk identification:

Organizations and project teams have objectives. Any event that may endanger achieving an
objective partly or completely is identified as risk.

Scenario-based risk identification in scenario analysis different scenarios is created. The

scenarios may be the alternative ways to achieve an objective, or an analysis of the
interaction of forces in, for example, a market or battle. Any event that triggers an undesired
scenario alternative is identified as risk - see Futures Studies for methodology used by
Futurists.

Taxonomy-based risk identification the taxonomy in taxonomy-based risk identification is a

breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices,
a questionnaire is compiled. The answers to the questions reveal risks. Taxonomy-based risk
identification in software industry can be found in CMU/SEI-93-TR-6.

Common-risk checking in several industries lists with known risks is available. Each risk in
the list can be checked for application to a particular situation. An example of known risks in
the software industry is the Common Vulnerability and Exposures list found at
http://cve.mitre.org.

Risk charting (risk mapping):

This method combines the above approaches by listing Resources at risk, Threats to those
resources Modifying Factors which may increase or decrease the risk and Consequences it is
wished to avoid. Creating a matrix under these headings enables a variety of approaches. One
can begin with resources and consider the threats they are exposed to and the consequences
of each. Alternatively one can start with the threats and examine which resources they would
affect, or one can begin with the consequences and determine which combination of threats
and resources would be involved to bring them about.
 CHAPTER-III

RESEARCH METHODOLOGY
NEED AND IMPORTANCE OF THE STUDY

Credit risk management is one of the key areas of financial decision-making. It is significant
because, the management must see that an excessive investment in current assets should
protect the company from the problems of stock-out. Current assets will also determine the
liquidity position of the firm.

The goal of Credit risk management is to manage the firm current assets and current
liabilities in such a way that a satisfactory level of working capital is maintained. If the firm
cannot maintain a satisfactory level of working capital, it is likely to become insolvent and
may be even forced into bankruptcy.

SCOPE OF THE STUDY

The scope of the study is limited to collecting financial data published in the annual reports of
the company every year. The analysis is done to suggest the possible solutions. The study is
carried out for 5 years (2016-2020).
Credit risk is the risk arising from the uncertainty of an obligor’s ability to perform its
contractual obligations. Credit risk could stem from both on- and off-balance sheet
transactions. An institution is also exposed to credit risk from diverse financial instruments
such as trade finance products and acceptances, foreign exchange, financial futures, swaps,
bonds, options, commitments and guarantees.

OBJECTIVES OF THE STUDY:

1. To analysis the credit policies of INDIABULLS SECURITIES LTD

2. To find out debtor turnover ratio and average collection period.
3. To find out whether it is profitable to extend credit period or reduce credit Period.
4. How all areas of business are influenced by Credit Risk Management?
5. How to manage information to create a volume driven business.
RESEARCH METHODOLOGY

The data used for analysis and interpretation from annual reports of the company. that is
secondary forms of data. DDR, ACP and Increase in credit period analysis are the
Techniques used for calculation purpose.

The project is presented by using tables, graphs and with their interpretations.

Secondary data:

Secondary data obtained from the annual reports, books, magazines and websites.

LIMITATIONS

 The study is based on only secondary data.

 The period of study was 2016-2020financial years only.
 Another limitation is that of standard ratio with which the actual ratios may be
compared generally there is no such ratio, which may be treated as standard for the
purpose of comparison because conditions of one concern differ significantly from
those of another concern.
 The accuracy and correctness of ratios are totally dependent upon the reliability of the
data contained in financial statements on the basis of which ratios are calculated.