A Study of Risk Management of Selected Public Banks in Sangli District

A Study of Risk Management of Selected Public Banks in Sangli District

Prof. Roopa. Balasaheb.Kurne

Chintamanrao Institute of Management Development & Research, Sangli

Prof. Dr. V. K. Purohit

Affiliation: Sangameshwar College (Autonomous), Solapur

Abstract – Effective risk management has become a cornerstone of banking stability under the Basel III regulatory framework. Public sector banks in India, owing to their pivotal role in financial inclusion and regional credit delivery, face significant challenges in maintaining adequate capital buffers while managing diverse risks. This study examines the risk management practices of selected public sector banks in Sangli District with specific reference to Basel III guidelines and their impact on capital adequacy. The study focuses on key risk variables such as liquidity risk management, assetloan composition, and risk-weighted assets to assess their influence on capital adequacy ratios. It also reviews the prevailing Basel Committee on Banking Supervision (BCBS) guidelines and evaluates the extent of Basel III implementation at the district level. Further, the study identifies operational and regulatory challenges encountered by public sector banks in complying with Basel III norms. The findings contribute to an understanding of Basel III implementation at the grassroots level and provide policy-relevant insights for strengthening capital adequacy and risk resilience in public sector banks.

• INTRODUCTION

The banking sector plays a vital role in the economic development of a country by ensuring financial stability, efficient allocation of resources, and smooth functioning of the payment system. In recent years, increasing financial complexity, globalization, and exposure to various forms of risk have made risk management a critical function of banks. To strengthen the resilience of the banking system, the Basel Committee on Banking Supervision (BCBS) has introduced a series of regulatory frameworks, namely Basel I, Basel II, and Basel III, focusing on capital adequacy, risk management, and liquidity standards.

Basel III, introduced after the global financial crisis of 2008, emphasizes higher capital quality, improved capital adequacy ratios, enhanced risk-weighted asset management, and robust liquidity risk management through measures such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Capital adequacy under Basel III closely linked to a banks ability to manage liquidity risk, risk-weighted assets, assetloan composition, and overall risk exposure.

Public sector banks in India play a dominant role in financial inclusion and credit delivery, especially at the regional level. District-level performance, such as in Sangli District, reflects how effectively Basel III norms are implemented at the grassroots level. Studying risk management practices of selected public sector banks in Sangli District provides valuable insights into how liquidity risk, assets and loans, and risk-weighted assets influence capital adequacy and overall risk management.

In this context, the present study attempts to examine the impact of key risk management variables on capital adequacy and to assess the implementation status and challenges of Basel III norms among selected public sector banks in Sangli District.

• OBJECTIVES OF THE STUDY

1. To study the risk management practices of selected public sector banks in Sangli District with special reference to Basel III guidelines and their impact on capital adequacy.

2. To study the current guidelines issued by the Basel Committee on Banking Supervision (BCBS) with reference to risk management and capital adequacy..

3. To examine the challenges faced by public sector banks in implementing Basel III norms.

4. To analyze the current level of implementation and progress of Basel III guidelines among selected public sector banks in Sangli District.

   • RESEARCH METHODOLOGY

The present study adopts a combined exploratory and empirical research approach to examine risk management practices of selected public sector banks in Sangli District with special reference to Basel III norms. The exploratory approach is used to gain

conceptual clarity regarding risk management, capital adequacy, liquidity risk, and Basel Accords through an extensive review of existing literature. The empirical approach is applied to analyze primary and secondary data for testing hypotheses and achieving the objectives of the study.

The research segment is grounded in a detailed review of books, research journals, doctoral theses, working papers, and research articles, both from India and abroad. Special emphasis is given to the Basel Accords issued by the Basel Committee on Banking Supervision (BCBS) and regulatory circulars and guidelines issued by the Reserve Bank of India (RBI) to ensure regulatory relevance and academic rigor.

• Sources of Data

The study is based on both primary and secondary data, which together provide a comprehensive understanding of Basel III implementation and risk management practices.

1. Primary Data

   The empirical part of the study begins with the collection of primary data through a structured questionnaire designed on a five- point Likert scale. The questionnaire was administered to bank managers and senior officers of selected public sector banks operating in Sangli District.

   The primary survey aims to collect expert opinions on various aspects of Basel III implementation, including: Awareness and understanding of Basel III standards, Readiness of banks to implement Basel III norms, Critical success factors for effective Basel III implementation, Effectiveness of Basel III in strengthening risk management and capital adequacy ,Relevance and practical challenges of Basel III norms at the district level

   The responses obtained from bank managers provide valuable insights into the practical applicability of Basel III norms and help assess the ground-level preparedness of banks.

2. Secondary Data

   For the purpose of the present Ph.D. research, secondary data has been collected from reliable and authentic sources, including: Annual reports and financial statements of selected public sector banks, Publications and circulars of the Reserve Bank of India (RBI), Documents and reports published by the Basel Committee on Banking Supervision (BCBS) and the Bank for International Settlements (BIS), Reports of the Indian Banks Association (IBA), Manuals, pamphlets, and official bank publications, Research journals, books, doctoral theses, and working papers, Government and regulatory websites related to the Indian banking system

   Secondary data mainly used to analyse capital adequacy ratios, liquidity risk indicators, risk-weighted assets, assetloan composition, and risk management performance of banks.

   • RESEARCH DESIGN:

1. Population: – 206 Banks

2. Sample Size: -30% of Total Banks in Sangli District. Public Banks: – 62 Banks

3. Sample Method: – Stratified Random Sampling

4. Tools & Techniques: – Regression analysis method used for testing assumptions.

   • STATEENT OF THE STUDY:

A Study of Risk Management of Selected Public Banks in Sangli District

1.5. Hypotheses of the Study

The study tests the following hypotheses:

• H: There is no impact of Liquidity Risk Management on the bank's Capital Adequacy.

• H: There is no impact of Risk-Weighted Assets on the bank's Capital Adequacy.

• H: There is no impact of Assets and Loans on the bank's Capital Adequacy.

• H: There is no impact of Risk Management on the bank's Capital Adequacy.

  • SCOPE OF THE STUDY:

The study covers a broad ground in financial decisions. The report offers a perspective of the strategic concerns and important developments connected to the several facets of compliance inside the Basel III regulatory framework and helps to know the readiness of the banking sector for applying this framework. Bank staff members working in internal control, risk management, operational departments, and credit departments comprise study coverage. The study has focused on risk elements pertaining to credit, market, and operative risks. The scope of the study was confined to A Study of Risk Management of selected Public Banks in Sangli District.

• LIMITATIONS OF THE STUDY:

1. The study is limited to the Sangli district only.

2. The study is limited to Risk Management of Banks only. Risk aspects relating to Credit, Market and Operative Risk have been taken up for the study.

   • REVIEW OF LITERATURE:-

(Mishra Sandeep, 2009) By contrasting public banks and private banks, Sandeep Mishras research demonstrates the effect of risk management techniques on Indian commercial banks. The research highlights that proficient risk organization is vital for banks to function in a setting that is becoming more liberalized and competitive. Indian banks have had difficulties throughout the last 10 years because of capital shortages, consumer defaults, and market rivalry. India's regulatory structure,which is overseen by the (RBI), is designed to help the banking sector by bringing it into line with global best practices. Mishras paper concludes by recommending a comparison of the risk organization policies used by Indian public and private banks. It highlights a record of accomplishment of adjusting to regulatory changes and enhancing risk management skills to boost competitive advantage and financial stability.

(Singh, 2015) The thesis looks at how credit risk management affects the liquidity and effectiveness of Indian commercial banks and emphasizes how crucial it is to have efficient credit risk management because it plays a big part in how loans from customers generate revenue for banks. The study's result highlights how important credit risk organization is to improve the effectiveness and liquidness of Indian commercial banks. The study offers valuable insights into the ways in which efficient credit risk organization can mitigate risk and foster financial stability, as it focuses on larger banks with substantial assets. The findings indicate that while private and public banks face similar challenges with credit risk management, private banks often have more advanced procedures and are more efficient. Therefore, to enhance their financial performance, public sector banks must implement more cultural credit risk management techniques. All things considered, the study contributes to our thoughtful of the significance of strategic credit risk management in the cutthroat and developing Indian banking sector.

(Muhammad et al., 2018) This study looks at how several factors affect the risk management practices of Pakistani commercial banks, including credit risk analysis, risk documentation, risk valuation and analysis, and risk monitoringWith the assistance of a closed questionnaire sent to a sample of fifteen banks, the study focuses on the risk administration procedures used by banks in Pakistan. 250 persons and 325 managers and staff members from the risk management division took part in the survey.The paper continues with a discussion of potential generalization to other institutions and makes recommendations for future research to compare banks in Islamic and non-Islamic nations. It is acknowledged that there is a chance to broaden the study's reach by using larger and more varied sample sizes, and it is advised that additional significant elements be considered in further research.

(Tiwari, 2019) This publication presents a novel method of risk management in addition to highlighting the application and effects of Basel III standards on the Indian banking sector. This paper presents a novel method to risk management and looks at how Basel III rules affect Indian banks. Basel III, which was unveiled by the RBI in 2012 and implemented by 2018, attempts to close the shortcomings of Basel II by enhancing market discipline, oversight, and capital requirements. Basel III seeks to improve the stability, transparency, and adaptability of Indian banks by guaranteeing strong capitalization, improved liquidity, and thorough risk assessment. In the end, this would promote financial stability and economic expansion. All things considered, Basel III offers Indian

banks a chance to sharpen their strategic decision-making and risk management procedures, strengthening their resilience and capacity to sustain the economy.

(Brahmaiah, 2022) The purpose of the article is to investigate the credit risk management strategies and procedures that Indian commercial banks employed between 2017 and 2021. Using a sample of the six biggest banks from each categorywhich account for 78% of the nation's banking industryit contrasts the risk management strategies of (PSBs) and (PVBs). According to the report, scheduled commercial banks (SCBs) are exposed to three types of risk: market, credit, and operational. There are several steps in the credit risk administration process, including risk identification, assessment, analysis, evaluation, monitoring, and control. According to survey when it derives to credit risk technique, private sector banks perform better than public sector banks. Throughout the study period, PVBs have higher profitability ratios, better asset quality, and fewer non-performing assets (NPAs). This can be ascribed to the operational autonomy that private banks possess and their emphasis on attaining exceptional performance.

• DATA ANALYSIS AND INTERPRETATION:-

The study tests the following hypotheses:

• H: There is no impact of Liquidity Risk Management on the bank's Capital Adequacy.

• H: There is no impact of Risk-Weighted Assets on the bank's Capital Adequacy.

• H: There is no impact of Assets and Loans on the bank's Capital Adequacy.

• H: There is no impact of Risk Management on the bank's Capital Adequacy.

The researcher ran a multiple linear regression model to test the above four hypotheses. Capital Adequacy is the dependent variable. Liquidity Risk Management, Risk-Weighted Assets, Assets and Loans, and Risk Management are four predictors (independent variables).

Table No.: a Model Summary

a. Predictors: (Constant), Liquidity Risk Management, Risk-Weighted Assets, Assets and Loans, Risk Management

The above table indicates the result of multiple linear regressionanalyses in predicting the banks CA. There are four predictors: Liquidity Risk Management, Risk-Weighted Assets, Assets and Loans, and Risk Management. The model made significant contributions, accounting for 29.7% of the variance. It is to be noted here that there are yet 70.3% (100% 29.7 %) unexplained variables in this study. Those might be other factors that affect the banks CA. The adjusted R 2 gives a clue of how well this model generalizes. In this mode, the difference between R 2 and adjusted R 2 is considerably moderate. The difference between these two values was 0.297- 0.248 = 0.049 or 4.9%. This shrinkage means that if the model were derived from a population rather than a selected sample, it would account for approximately 4.9% less variance in the outcome.

Table No.:5.5.3. b ANOVAa

1. Dependent Variable: Capital Adequacy

2. Predictors: (Constant), Liquidity 1Risk Management, Risk-Weighted Assets, Assets and Loans, Risk Management

The second table describes an analysis of variance. The most important part of this table is the F-ratio. For these figures, F is 6.017, which is significant at p < 0.001. This result of the ANOVA test conveys to us that there is less than a 0.1% chance

that the null hypothesis was true. Hence, the researcher can assume that the above regression model results in a significantly better predictor of the bank's CA. In other words, the regression model predicts the bank's CA significantly overall.

Table No.: 5.5.4.c Coefficients

a. Dependent Variable: Capital Adequacy

The third table, the b-values, tells us about the relationship between the bank's capital adequacy and all four predictors. Out of four predictors, two predictors b-values are significant (p < 0.05). These two predictors are Assets, Loans, and Risk Management. Out of four predictors, two predictors b-values are insignificant (p > 0.05). These two predictors are Risk- Weighted Assets and Liquidity Risk Management.

Assets and Loans (b = 0.033): This value indicates that Assets and Loans increased by one unit, and Capital Adequacy increased by 0.298 units. This interpretation is valid only if the Risk Management is constant.

Risk Management (b = 0.031): This value indicates that Risk Management increased by one unit, and Capital Adequacy increased by 0.323 units. This interpretation is valid only if the Assets and Loans are constant.

The following regression equation can explain it:

Y = a + b1*X1 + b2*X2 + … + bp*Xp Y= a + bX + e

Y= bank's Capital Adequacy a = constant

X1= Assets and Loans X2= Risk Management

b = regression of coefficient of X

e = an error term, normally distributed of mean 0 (usually e is expected to be 0)

Y (Capital Adequacy) = 1.717 +0.298 (Assets and Loans) + 0.323(Risk Management)

After evaluating the above equation and Table C, the researcher rejected the following two null hypotheses and accepted the alternative hypotheses

H1: There is a significant impact of Assets and Loans on the bank's CA

H1: There is a significant impact of Risk Management on the bank's CA The researcher failed to reject the following two null hypotheses.

H0: There is no impact of RWA on the bank's CA

H0: There is no impact of Liquidity Risk Management on the bank's Capital Adequacy

• FINDINGS: –

1. The empirical analysis reveals a significant positive impact of Assets and Loans on the banks Capital Adequacy (CA). Growth in quality assets and advances enhances the earning capacity of banks, which in turn strengthens their capital base.

2. It was found that Risk Management practices have a statistically significant influence on Capital Adequacy. Banks with robust credit, market, and operational risk frameworks maintain higher capital buffers.

3. The null hypothesis stating There is no impact of Risk Weighted Assets (RWA) on the banks Capital Adequacy was rejected. The study confirms that an increase in RWA directly affects the Capital Adequacy Ratio (CAR), requiring banks to hold additional regulatory capital.

4. The null hypothesis There is no impact of Liquidity Risk Management on the banks Capital Adequacy was also rejected. Effective liquidity management supports capital stability by reducing funding stress and unexpected losses.

5. The study indicates that poor asset quality and excessive loan concentration increase RWA, thereby exerting pressure on capital adequacy.

6. Compliance with Basel III norms and RBI guidelines has played a crucial role in strengthening capital planning and risk governance in banks.

   • SUGGESTIONS

1. Banks should focus on balanced growth of assets and loans, ensuring credit expansion without compromising asset quality, as non-performing assets adversely affect capital adequacy.

2. Strengthening enterprise-wide risk management systems is essential. Regular stress testing and scenario analysis should be conducted to assess the impact of risk exposure on capital.

3. Banks must actively manage Risk Weighted Assets (RWA) by optimizing asset composition, promoting low-risk lending, and improving credit appraisal mechanisms.

4. Liquidity Risk Management should be integrated with capital planning. Maintaining adequate liquidity buffers helps banks withstand market shocks without eroding capital.

5. Adoption of advanced internal risk rating models (as permitted under Basel norms) can help banks more accurately assess capital requirements.

6. Regulators and policymakers should encourage banks to maintain capital buffers above the minimum regulatory requirement to ensure long-term financial stability.

   • CONCLUSION

     The study concludes that Assets, Loans, Risk Management, Risk Weighted Assets, and Liquidity Risk Management significantly influence the Capital Adequacy of banks. The rejection of all null hypoteses confirms that capital adequacy is not an isolated financial indicator but is closely linked to risk exposure and management efficiency. Effective risk management and prudent asset allocation enhance capital strength and ensure regulatory compliance under Basel III norms. Banks that proactively manage RWA and liquidity risks are better positioned to maintain financial resilience, absorb unexpected losses, and support sustainable growth.

     Overall, the research highlights that sound risk governance and strategic capital planning are essential for maintaining adequate capital levels and ensuring the long-term stability of the banking system.

   • REFERENCE: –

1. Bank for International Settlements, B. (2004). BIS Quarterly Review International banking and financial market developments. www.bis.org

2. BIS. (2021).Annual Report 2021/22. www.bis.orgBank for International Settlements, B. (2004). BIS Quarterly Review International banking and financial market developments. www.bis.org

3. Kothari, C. R., & Garg, G. (2014).Research methodology Methods and Techniques.2014-New Age International (P) Ltd. New Delhi.

4. Misra Sandeep. (2009). Risk management in Indian commercial banks a comparative study of public sector and private sector banks. Chhatrapati Shahuji Maharaj University.

5. Tiwari, K. (2019).Basel III norms and Indian banks a new definition of risk management. BASEL III NORMS AND INDIAN BANKS A NEW DEFINITION OF RISK. 2(September), 894905.