What is Risk Management?

Risk Management is defined as a process of identification, analysis and acceptance  of unreliability in investment decisions. The need of risk management generally occurs when when an investor or fund manager analyzes to quantify the potential for losses in an investment and then takes appropriate action to save his investment objectives and risk tolerance.

Risk management is necessary in the financial world. It generally occurs when investors tend to buy low-risk government bonds over riskier corporate bonds. Every official in the finance world uses different ways to reduce risk management. For ex: Stockbrokers generally use financial instruments like options and futures. Money managers on other hand use strategies like portfolio and investment diversification to mitigate or effectively manage risk.

Risk Management faced by India Corporates :

Large scale cyber attacks, massive incidents of data theft and extreme weather conditions are the top three risks faced by India.

A report titled ‘Marsh RIMS – State of Risk Management in India’ addresses the major risks faced by Indian corporates and explains the key factors of risk management the risks of adopting emerging technologies, and key recommendations for risk management executives.

The biggest risk faced by Indian corporates is that of cyber-attacks. 88% of the representatives across 19 industries have faced this problem. This is followed by data fraud, volatile weather, severe energy price shock and major financial failures  among the other top risks faced by Indian corporates.

The other risks which are identified among the top risks include financial crises in major economies, water problems, a shortfall of critical infrastructure, failure of urban planning and failure of national governance.

The inter-dependant nature of global politics, technology and the global economy means that one risk is likely to influence another one. The high degree of inter connectivity between new and current risks creates bigger challenges which makes it difficult for organizations to predict risks of the future. Hence, upgrading risk assessment methods is a priority for businesses in India given the rapidly changing business landscape.

Camera manufacturer Kodak is a great example of this environment. People have been buying cameras and rolls for many many decades. With the introduction of camera phones, people started using their phones to click pictures. People stopped buying cameras specifically for capturing moments.

This led to a massive drop in sales and resulted in the company filing for bankruptcy. Who could have imagined that mobile phones would be responsible for the demise of an iconic brand founded in 1888? Technology took Kodak completely by surprise.

Who could have imagined that a brand which was so strong, could lose its footing in a few short years! This is why risk identification is a necessity.

Risk management practices among Indian companies have evolved over a period of time and today they are much better prepared to handle newer risks. Having said that, there is definitely room for improvement particularly when it comes to quantifying the risks.

BSE Institute (bsevarsity.com) provides short term/ executive courses for students and senior officials who wish to learn about Risk Management. An Executive course on Risk Management is a great way to keep yourself abreast with all the changes happening in your industry and beyond.