Says Andhra Bank's chief officer (funds and investment cell) B Rajkumar: ``We are in the process of building a mid-office for risk management... as of now, we have a full-fledged mechanism for managing risk only in the forex department.'' Others like SBI Funds Management are also following suit. ``As for investment risk, we have appointed Arthur Anderson to make a draft investment-risk policy. Market and liquidity risk will be part of this," says SBI Funds Management Ltd's vice-president (debt) Piyush K Das.

Risk management as a part of deliberate business strategy is gathering momentum. Most local financial entities are in the process of formulating policy for managing market risk - be it interest-rate, price or equity risk.

There are three steps for management of risk - identification, measurement and control of the risk factors. The widely accepted method to quantify the risk level is the value-at risk (VaR). VaR measures the worst expected loss over a given time interval under normal market conditions at a given confidence level. It helps bring down the risk to an accepted level. FIs have turned to VaR for better risk management. Since January 1, 1998, VaR has become a compulsory risk reporting mechanism. ``These tools differ from banks to banks. Banks operate their risk management mechanisms in line with Reserve Bank guidelines,'' says Centurion Bank's dealer in rupee (treasury & derivatives) MM Pitale.

The calculation of VaR is only of academic interest, but the question is: Can the method alone help risk managers to avoid unexpected disasters?``Risk management should not only include econometric analysis or quantitative study, it should include qualitative study as well,'' feels Sebi board member JR Varma. ``Risk management begins at the point where certain strategic decisions are to be taken; so it is a part of the strategic decision-making process.''

The biggest challenge for local risk-measurement is the data structure and its source. Internal thinking and computing set-up suffer from outdated systems. A point to note is that risk management in banks and risk management in non-banking financial entities are different. For a bank, the problem of computation arises as a result of credit and market-risk overlap.

Another concern is that all the quantifications are based on past data. Quite a few feel that use of past data in the calculation of risk is inappropriate as the local market is characterised by long periods of relative stability and sudden erratic movements.

``Perhaps in India, past is not the best way to look at future,'' says SBI Gilts Ltd managing director RC Royappa. ICICI Ltd's senior general manager Nachiket Mor also has a like view. The fluctuations arise owing to the fact that in risk analysis, 20 per cent of all relevant variables are actually exogenous shocks which can neither be predicted, nor accounted for satisfactorily.

``The exogenous shocks can be taken care of using stress management process,'' notes Bank of Punjab's assistant vice-president (treasury) Jayant Lele. Taking the idea one step further, ICICI's Mr Mor wants a horizontal integration of financial entities locally as he feels this will improve risk-management activities. The Reserve Bank of India has in recent times urged banks and non-banking institutions to formulate a policy for effective risk management. Organisations like the Fixed Income, Money Market and Derivatives Association of India (FIMMDA) and the Invest India Economic Foundation Pvt Ltd are also raising awareness on the subject. And the overall picture is slowly changing.