Credit risk management in India: Risk based models

"All of life is the management of risk, not its elimination."

Walter Wriston, former chairman of Citicorp

Corporations are in the business of managing risks. The most adept ones succeed; others fail. Whereas some firms passively accept financial risks, others attempt to create a competitive advantage by judicious exposure to financial risks. In both cases, however, these risks should be monitored carefully because of their potential for damage. The primary function of financial institutions is to manage financial risks actively. The purpose of financial institutions is to assume, intermediate, or advise on financial risks. These institutions realize that they must measure sources of risk as precisely as possible in order to control and properly price risks. Understanding risk means that financial managers can consciously plan for the consequences of adverse outcomes and, by doing so be better prepared for the inevitable uncertainty. Risk comes from many resources. Risk can be human-created, such as business cycles, inflation, changes in government policies, and wars. Risks also occur from unforeseen natural phenomena, including weather and earthquakes. Risk also arises from technological innovations, which can render existing technology obsolete and create dislocations in employment. Thus risk and the willingness to take risk are essential to the growth of an economy. In this paper I have covered prevailing risks and their management.