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RISK MANAGEMENT – External Risks

Warren Buffet’s famous quote “Only when the tide goes out you discover who has been swimming naked” maybe in the context of investment management but the quote would be as relevant in the context of risk management. The Reserve Bank of India recently had deliberations with the directors of the banks in India and one […]

Warren Buffet’s famous quote “Only when the tide goes out you discover who has been swimming naked” maybe in the context of investment management but the quote would be as relevant in the context of risk management. The Reserve Bank of India recently had deliberations with the directors of the banks in India and one of the key issues of the deliberations was on the risk management practices invoke in the banking system. What is evident is the concerns that the regulators has for its principal constituents and one can imagine that this principle should be applicable when it comes to the banks for its principal customers namely the borrowers or the depositors

Risk management, as a concept, unfortunately is seen to be more relevant to large organizations and not the smaller ones. Unfortunately, the type of risks that the smaller ones are exposed to are sometimes more existential ones whereas the larger ones more often can survive big risks. Risk management tends to get associated with events that are fresh in memory than the ones that have a greater probability of occurrence which tend to get ignored. Even now unfortunately when questioned about the top of the mind risks people tend to refer either the COVID pandemic or even the tsunami or an earthquake. These are events where impact very high but less frequent in occurrence and referred to has the Black Swan events where the probability of occurrence is very low but the impact of which is extremely high. So much so that one of issues pointed out by some doctors during pandemic was the fact that there were far more people dying due to diabetes or even malaria but not addressed in the same manner.

 One is also increasingly hearing of the risk “Gray Rhino” that signifies large slow-moving ones with a high probability with high impact of occurrence that tend to get ignored. One of often cited examples include that of the implications of the actions being initiated by European countries in the context of the global warming, the levy of the carbon border access mechanism tax that would have profound  implications on the  trade  happens in the European region is a classic example of what everyone knew was inevitable, but chose to ignore.

These large one, be the black swan or the slow-moving gray rhino, are unpredictable for its occurrence but the consequences extremely high. It is imperative at least in so far as these are concerned, organizations should plan to deal with mitigations to deal with such existential threats rather than trying to predict their occurrence but the consequences are large.

Risks can broadly be categorized into external risks and internal risks.  This article, in parts, will address some of the sources of these, the assessment to identify them, including the review mechanism and way to mitigate the risks.

The first part of this to cover the external risks that one is faced.  The pest way to determine the sources of the external risks to analyze the sources of these which is often referred to as the PESTEL Analysis.  What is a enumerated  below is only a sample  assessment of the types external risks and it is incumbent on every organization to expand this in the context of their own industry and location

PESTEL ANALYSIS

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