Importance of Risk Management

CHAPTER I

1.1 INTRODUCTION TO THE TOPIC

The importance of Risk Management has been extensively recognized by banks and securities firms when deciding the amount of risk they are willing to take. Moreover, bank regulators now put an emphasis on Risk Management practices in attempting to reduce the fragility of financial and banking system.

India had earlier followed a tightly regulated foreign exchange regime. The liberalization of the Indian economy started in 1991. The 1992-93 Budget provided for partial convertibility of Indian Rupee in current accounts and, in March 1993, the Rupee was made fully convertible in current account. Demand and supply conditions now govern the exchange rates in our foreign exchange market. A fast developing economy has to cope with a multitude of changes, ranging from individual and institutional preferences to changes in technology, in economic policies, in regulations etc. Besides, there are changes arising from external trade and capital account interactions. These generate a variety of risks, which have to be managed. There has been a sharp increase in foreign investment in India. Multi-national and transnational corporations are playing increasingly important roles in Indian business. Indian corporate units are also engaging in a much wider range of cross border transactions with different countries and products. Indian firms have also been more active in raising financial resources abroad. All these developments combine to give a boost to cross-currency cash flows, involving different currencies and different countries.

With increased emphasis on Risk Management in business, the use and varieties of derivatives have multiplied. Similarly in the management of foreign exchange, derivatives have a significant role to play.

1.2 NEED FOR THE STUDY

The face of banking in India is changing rapidly. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalization, thus, leading the corporate and banks to face various challenges and risks.

The major risk the global firms face is the exchange risk which is caused by the fluctuations in the exchange rates. These fluctuations have created unbalanced profit and loss patterns to the global business firms. Thus, in order to reduce these risks, the corporate make use of the various derivative instruments available with the banks.

The utmost need for this project is to ensure whether the customers of Indian Overseas Bank are aware of the exchange risks and the tools used to mitigate them. Further, this study also deals with the analysis of the present trend of the NRI accounts