Deposit and credit constitute the core of banking activity and substantial portion of expenditure and income are associated with them. So far as the deposit is concerned, it is a safe area of business, barring a few stray instances of operational risks like human errors, frauds and forgeries. Credit is the real activity that should be managed to generate profitability by keeping the three cardinal principles of banking in mind “Liquidity, Solvency and Profitability”. With the thinning of spreads in the deregulated and liberalized economy, risk management has become all the more crucial. So proper mechanism should be put in place for anticipation and identification of risks, together with a suitable mechanism to deal with such risks in an efficient and pro-active manner. Since every credit decision involves risk, one cannot avoid risk altogether. What is important is that risks have to be managed effectively. As the adage goes” Risks and Profits have a direct relationship though not proportionate”; hence, concept of “no risk, no gain” applies to banking industry as well. So the real mantra for prudent banking lies in successfully managing the risks in a pro-active and integrated manner. Profits, then, will follow automatically.
