Relevance of Financial Risk with Financial Performance: An Insight of Indian Banking Sector
Authors: Prof. S. M. Imamul Haque, Arif Ahmad Wani
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Banking sector is considered as the lifeline of a nation, whichh translates the aspirations and hopes of people into reality. The mounting and massive expansion and diversification of banking sector has not been without its strains. With the elapsing time, Indian banking sector is entering continuously into newer phases, facing increasing competition from non-bank institutions not only in the domestic market but also in the international market. In the direction of successfulness and excellence, Indian banking sector, with the dawn of financial reforms, knocked the door of a new phase, where it witnessed major changes which include, but are not limited to interest rate deregulation, prudential norms, liberalization, globalization and more importantly entry of new private sector banks. This completely changed the style of operating of Indian commercial Banks. Despite the praiseworthy progression, Indian banking sector became prone to serious problems which resulted in decline of efficiency and productivity, eroded profits, deteriorated capital base which was further followed by bad quality of loan portfolios. These problems became greater setback in the process of bank's income generation and in beautifying their capital base. The deteriorated picture of capital has further led to inadequate loss provisions resulting into the adverse impact on depositor's and investor's confidence. Ultimately there appears the highest possibility of reputational risk to take place. Laconically, one of the main reasons behind such distortion and erosion of profits and capital base of commercial banks is financial risk to a greater extent. So, it is quite imperative to know the ups and downs of Indian commercial banks by studying and analyzing the relationship between their financial performance and financial risk. The present study is devoted in this direction which intends to explore the relationship between financial performance and financial risk by using the Linear Multiple Regression Model. The researchers have selected ten leading banks, five from each sector i.e. public and private, as representatives on the basis of their total assets. The analysis of the study validated that the two balance sheet risks (i.e. Interest Rate Risk and Liquidity Risk) are insignificant to the profitability whereas Credit Risk, Capital Risk and particularly Solvency Risk are statistically significant to the financial performance of Indian Commercial Banks. The study educed with a conclusion to have instrumental risk management approaches in practice to tackle financial risk exposure, aiming to stall the risk events before their intensity increases beyond the risk appetite of Indian commercial banks and snowball into a debacle.