In this essay we will discuss about:- 1. Meaning of Risk 2. Fire Fighting 3. Consequences of Risk 4. Types of Risks 5. Business is always Risky 6. Causes of Risk 7. SWOT Analysis 8. Requirement of Good Risk Management 9. Qualitative/Quantitative Analysis 10. Risk Manager 11. Disaster 12. Other Causes.
Contents:
- Essay on the Meaning of Risk
- Essay on Fire Fighting
- Essay on the Consequences of Risk
- Essay on the Types of Risks
- Essay on Business is always Risky
- Essay on the Causes of Risk
- Essay on SWOT Analysis
- Essay on the Requirement of Good Risk Management
- Essay on Qualitative/Quantitative Analysis
- Essay on Risk Manager
- Essay on Disaster
- Other Causes
Essay # 1. Meaning of Risk:
Risk is the possibility of an unacceptable outcome or the absence of acceptable outcome. Risk management is identifying and controlling the undesired outcome. Risk may or may not happen and one may not know until it happens and there is always uncertainty. Inherent uncertainty cannot be eliminated. But it is possible to reduce the effect of uncertainty. Dealing with risk means dealing with uncertainty.
Since the risk is uncertain one has to guess the probability of risk occurrence, consequences and causative factors and manage it. The probability analysis will help to reduce the extent of uncertainty. Risk events are not only uncertain, but also lurk with possibility of loss. Hence need arises for probability analysis. But probability analysis is subjective and so it is not precise and accurate.
Essay # 2. Fire Fighting:
A successful fire-fighting exercise save the people and the organization from fire i.e. crisis. It produces dramatic effect and in contrast a good risk management process is dull and quiet with no excitement. So a firefighter is noticed and rewarded more often than a good risk manager. It is antithesis of risk management but it is the reality. It is impossible to eliminate risks altogether. Sometime risk and uncertainty can be a rewarding experience by opening the gates for new business.
Essay # 3. Consequences of Risk:
Risk affects finance and non-finance matters. But the consequences of all most all risks are measured in terms of money. Despite innumerable risks faced by people in their day to day life the world goes on and so also banks, insurance companies and other financial organizations.
So there is no need to panic or fear the end of the world. What is required is resilience and self-confidence so that one can pull out of crisis and restart the project. Standard risk model include risk event, triggering factor, probability, impact and loss. Concatenation is series of risk events, occurring one after another, their interplay and impact.
Risk management include various steps viz., planning, identification of risk, analysis, prioritization, implementation, monitoring, successfully preventing escalation, mitigation and deal with new risks.
In risk management one has to avoid risk that does not add value and stay flexible in unresolved issues, maintain communication with key functionaries and address risky items first. Risk can be deceptive like an empty petrol drum appearing innocuous but can contain petrol vapour and explode in heat or fire.
Essay # 4. Types of Risks:
Internal Risks, External Risks, Financial Risks, Technology Risk, Business Risk, Organizational Risk, Cultural Risk, Security Risks, Management Risk, Legal Risk, Environmental Risk, Quality Risk, Process Risk and so on.
I. Common Risks:
Cost overrun, loss of key employees, funds constraints, environmental threats, Unrealistic objectives, Labour strikes, work to rule, complex technology, New unproven technology, non-availability of resources and materials, Unrealistic performance goals, standards that are not easily measurable, Lack of involvement, resistance to change, seasonal and cyclical events, Lack of business experts, Lack of technical experts, Lack of knowledge and skills of business, incompatible organizational structure, cultural barriers, theft of customer data or company information, poor skills and ability of the managers, high volume and complexity of business.
II. Catastrophe Risk:
Earthquakes, Cyclone, floods, landslide.
III. Political Risk:
Government policy, civil unrest, acts of war, terrorist attack and social instability.
IV. People Risk:
1. Lack of motivation, low productivity
2. Dishonesty
3. Theft of real and intellectual property
4. Sabotage, poor quality, conflicts with other team members
5. Lack of discipline
6. Lawsuits, harassment claims.
Essay # 5. Business is always Risky:
Business involves risk although entrepreneurs focus more on benefits from business. Risk is integral and unavoidable part of business. All risks do not generate profit. But profit is the result of risk taking. If there is an opportunity with profit, then there is always element of risk. The success lies in one’s ability to see the profit in the risk. It is important to choose those opportunities where there is less Likelihood of adverse impact. Business is becoming more and more complex and hence there is compulsion to manage complex risks.
If a customer does not get value for money a firm cannot remain in business for long. If a company can identify more options, to deliver value to customers then it is likely to reduce the risk by choosing the best option with less risk. The way to design number of options depends on innovation and research and also SWOT Analysis.
Among the risks demand risk, competition risk and capability risk are very important. Demand risk relates to customer willingness to buy. Competition risk lies with competitor ability to provide better value for money. Capability risk lies with company’s own shortcomings and deficiencies.
Nowadays most companies outsource certain jobs on cost and quality considerations. The moot point is what to outsource? Can it include critical areas of business? Conventional wisdom says ‘No’. It is because outsourcing has its own risk and not risk free.
The purpose of risk management is to eliminate or defuse the adverse impact of risk. But a more important objective is to take full advantage of the risky opportunity and generate maximum profit or benefit as otherwise risk management will become a ritual.
Risk has potential to cause damages to person or property and financial loss, but at the same time, it has a potential for profit. Organizations will take risk when the benefit arising out of risk outweigh the consequences of undesirable outcome.
The risk management plan shall contain details of the ways and means to carry-out the risk processes and also communicate the details and the status of the process. Here lies the risk of communication gap which is a common deficiency in every organization.
Bank business consist of deposit mobilization, lending, remittance, collection, transfer of funds, safe deposit lockers, etc. All of them carry their own risk. In addition, customers (borrowers) financial problems, get transferred to bank. The function of insurers is to protect others from risk and consequently carry all those risks on their shoulders so their position is more precarious than banks.
Essay # 6. Causes of Risk:
1. Over confidence on overrated officers
2. Speculative activities
3. Manipulation of accounts
4. Too big to fail attitude
5. Aggressive business model
6. Inadequate disclosure
7. Weak audit system
8. Lack of sound knowledge of business and casual attitude on risk management
9. Vague description of roles and responsibilities.
10. More than one person handling the same job without clear demarcation of duties
A banker wears several caps, accountant, human relation manager, computer savvy, marketing expert with Knowledge of customers business more particularly that of borrowers.
It is not easy to find good number of people in an organization with sound and integrated knowledge on all the above matters. In addition risk measurement requires sound mathematical and statistical knowledge. Most bankers are at best good in arithmetic’s and not mathematics and statistics.
Risk management vary between stable period, uncertain political situations and unpredictable economic conditions. An organization where the top person is a micro manager he will burn himself by his work style and stifle the juniors by not allowing them to do the tasks by themselves.
Indecision, ill-defined job, vague expectation, poor morale, frequent changes, lack of financial resource cause risk. Loss of key personnel, financial constraint civil unrest, terrorist acts, technology breakdown, data loss lack of skill, experience and expertise also cause risk.
Essay # 7. SWOT Analysis:
SWOT analysis is a technique to understand the organization’s Strength, Weakness, Opportunities and Threats (SWOT). In view of dynamic nature of environment every organization should do SWOT Analysis, to understand the relevance of their strength, their vulnerability on account of their weakness, emerging opportunities and the threat from competitors, technological innovation etc. It is more important to do so while introducing new products or taking new projects as otherwise the organization will only take blind shots and not a planned risk management.
Essay # 8. Requirement of Good Risk Management:
1. Adequate number of staff
2. Competent staff (Capability, skill etc.)
3. Well-designed training and development programme for staff at all levels
4. A well-organized customer relationship
5. Ongoing efforts to understand the customers need and deliver the goods/ services to their full satisfaction
6. Clear understanding and capacity to tackle known risks
7. Ability to foresee remotely possible risk and plan to manage it
8. Maintenance of check list/log book by everyone involved in risk management and also line staff. It will help the persons from the missing steps.
9. Risk management decision is always data based. But the problem is that the data are, usually inadequate, imperfect, delayed, or not available; it is rare when one can get all the information needed. Hence the ability to judge whether the missing information is critical or not is important.
10. In real life situation, everyone takes decision with certain level of ignorance or inadequate data and hence risk is unavoidable
11. In risk management “Business as Usual” attitude will not be helpful.
12. People are not infallible and so weak signals or minor symptoms can escape attention.
13. When there is repeated small errors or lapses each by itself may be of little consequence. But cumulatively they will cause catastrophic risk.
14. Assumptions may fail.
15. An easy attitude to acceptable risk may lead to unacceptable level of danger.
16. Men are fallible and if some think they are infallible there is definite possibility of risk.
17. Discrepancy is easy to notice in hindsight, but hard to see in real time
18. Small discrepancies have tendency to enlarge into big problem
19. Failure is functional and there is limit to foresight, so risk manager should know how to contain or tackle the adverse impact of failure
20. Success breed confidence and then complacency
21. Complacency is the cause for accident
Those who believe life is preordained or who have strong belief on fate and destiny or cynic in nature cannot be good risk managers. They will blame on bad time and plead helplessness. A good risk manager is always confident that he can avert the crisis or mishap by predicting and planning to contain the untoward or unexpected happenings.
It is not that the manager will succeed every time. But what is important is resilience that means ability to move on the track despite the failure and tackle new risks.
Focus on Failure:
Success and failure are like reverse and obverse of a coin. Both exist together while success is appreciated, failure is criticized or even punished. Generally it is said ‘play to win and not to avoid defeat’. But it is better to be failure focused in risk management and if failure is identified and tackled in time, it will automatically contribute for growth and success.
1. Unremitting attention to track minor lapses,
2. Sensitive to operational problems,
3. Not to panic in crisis situation,
4. Simplify the complex issues so as to understand them in a better manner are necessary.
Banks are in the business of lending for over 100 years or have experience of several decades. Risk management received sharp focus in the last 30 years, especially after introduction of Basel norms. The credit risk management techniques got sophisticated. Despite all these developments NPA has grown to an alarming proportion. “Poor credit appraisal” by banks is a major cause.
It means inadequate and imperfect risk assessment. In fact, the banks panic when NPA grow overwhelmingly and plunge into action to recover the bad loans expeditiously. That is ok. But for a running organization, more than recovery, streamlining and strengthening, credit risk management is very important for a durable solution to the problem. One time recovery alone will not do. The problem will recur again and again. It is therefore necessary to be focused on failure in order to find a permanent solution.
Chain of Risks:
Good risk management involve systematic attempt to identify possible source of the problems. Sometime it is necessary to examine the cascading or concatenation effect of risk. Every risk event may not cause catastrophe, but cumulative effect of series of minor lapses unchecked and uncontrolled leads to crisis situation.
Being alert to minor issues and problems ultimately help to avoid crisis and firefighting. The likelihood of risk and its impact are two different aspects of the risk event. Risk management team focus is on the consequences of risk and not business opportunities, although opportunities would have given rise to risk.
Scope:
A risk averse and cautious person decision will differ from bold and brash or pragmatic person. A manager with unduly risk averse attitude cannot help the organization to handle risky opportunities for growth and profit. In risk management it is important to understand and bridge the gap between anticipated and actual results.
In order to understand what risk management “can do” and “cannot do” it is necessary to plan, identify, examine the impact, develop strategies to handle, monitor and control them. A good risk management is always proactive and not reactive or fire-fighting.
It is needless to add that a planned approach will lead to better risk management as otherwise one will suffer surprise and shock. Risk management is required even in a stable and well defined environment. But current environment world over is filled with chaos and complexity. Naturally there will be uncertainty and risk management should deal with uncertainty, chaos, and complexity.
Essay # 9. Qualitative/Quantitative Analysis:
Risk analysis should adopt both qualitative and quantitative techniques in risk assessment. It requires skill to accurately forecast the probabilities of risk occurrence and its intensity. Quantitative measure use both historical data and intelligent projection of the future. While quantitative is numerical qualitative is impressionistic.
Quantitative skill requires statistical and mathematical skill, while qualitative will call for intelligent guess and imagination. Certain amount of vagueness is there in both calculations. But without these calculations one cannot assess the extent of risk and impact.
Essay # 10. Risk Manager:
The operating staff may look at the risk manager’s observations threatening and consider him un-business like and an obstacle. So they may avoid consulting or listening to him. While the risk manager would have discouraged a particular loan because of high risk, Operating staff may be willing to give by charging risk premium on the interest.
Many risk managers recommend implementation of TQM (Total quality management) or ISO 9000 certification for risk reduction although they are primarily meant for quality improvement. Better quality means less risk. But how far the organizations are willing to implement TQM or ISO 9000 is a moot point.
Risk management requires risk assessment, periodical reporting, disaster recovery plan, crisis management plan and use risk check list. They may be view the requirements as additional burden on operating staff diverting their attention from business development.
Essay # 11. Disaster:
The biggest disaster the world has seen in recent times is the demolition of World Trade Center in New York. In this case authorities had enough warning from intelligence agencies about terrorist attack on World Trade Center.
The possibility of demolition of the tower by an aircraft was indicated and also the need for emergency evacuation in case of calamitous happening. Yet the disaster occurred resulting in loss of life and property. The event shattered people’s confidence on the ability of the government to protect them. This is a lesson for risk managers. Similar was the case in Bhopal gas leak tragedy.
In both cases repeated warning though vague and recurrence of minor lapses were ignored without applying serious thought. So also in subprime crisis of 2008 in USA and Harshad Metha Scandal in India during 1992, warning signals, were ignored and repeated minor lapses were covered up and consequently huge financial crises engulfed in catastrophic way.
The financial crises in the past were always originated or abetted with dishonest and fraudulent motives of atleast quite a few people in the organization, by taking advantage of the weakness and gaps in system and procedure in the banks. Banks could have easily plugged the loopholes. But it is not done in time due to carelessness and complacency.
Essay # 12. Other Causes:
(1) Problems may relate to machines, equipment’s, staff training and development, marketing, etc. But many times solutions do not lie with one department but with more than one department. Engineering problem may need financial solution, marketing problem may depend on H.R.D. solution. The problem is lack of understanding by the concerned departments and lack of coordination between departments.
(2) Sometime risks are identified, but no action plan for the solution is drawn and responsibility fixed on particular person/department.
(3) Vague description of role and responsibilities, haphazard organization matrix, disorganized team of project manager, I.T. Manager and Finance Manager, Internal Conflicts, etc.
(4) So also complex procedure and rules; questionable reliability of support from the top management aggravate the problem.
(5) Lack of focus, absence of reporting system, routine and easy going attitude, resistance to change, Lack of trust and openness, lack of culture of encouragement and appreciation of good work, but well entrenched punishment system for errors and such other negative practices create risks.
(6) The managements of the organizations when they retrospect may often find to their horror or discomfiture, that they have failed to do many things which ought to have been done and did many things which ought not to have been done and that have lead to the sorry state of affairs in the organizations.