Is Risk management a cost function or revenue function?
B. Yerram Raju*
Ever since enterprises and firms as well as banks and
financial institutions got a hang on risk management function, two things
happened. One, most viewed it as a regulatory imperative and felt that
compliance is firm’s major responsibility. Two, when the enterprises started
practicing risk management, it became more its risk culture than a regulatory
function. Broadly, all the enterprises, banks and financial institutions realized
that we continue to live in a complex and uncertain world despite improvements
in technology and data collection. However, not many institutions realize that
costs incurred on setting up good risk management practices would enhance their
revenues even in the short term. How? Certainly not through mere data
collection, and modelling.
The current year and the years ahead seem to pose as many
challenges as opportunities and there will be many more border level
institutions like the non-government organizations (NGOs) coming to interplay
with the rest of the enterprise sector. It is difficult to predict or control
with a degree of certainty the future, climate change, environment and social
governance would bring together private players and NGOs.
For example, during the pandemic, health of individuals in
organizations, migration of individuals from the enterprises to their
homesteads out of fear of the outbreak of Covid-19, resettlement of people,
work from home and its tracking exposed new risks and there are no models built
for tackling such risks. But the enterprises developed common sense based
approaches initially to combat them. Governments stepped in with fiscal,
financial, and non-fiscal support measures and the whole world evolved coping
mechanisms.
Many nations came to conclusion that it is better to learn
to live with those risks and cope with them than running away from them. Supposing that it is a cost
function, can these risks be managed without incurring them? If they are not
incurred, sustainability of firms would be in grave danger. The profit curve
dented but loss is minimized. and many firms could bounce back to normalcy in a
few nations like India. China, continuing its lockdown as a higher risk
mitigation suffered the risks of sustenance and growth.
Pandemic, more than the recession, taught risk managers the
lesson that risk management is a revenue function. Further, it also taught us
that such risks in the short term will also turn out as opportunities. India
became the vaccine producer for the world. Pharmaceuticals, packaging and
packing industry and goods transportation have seized the opportunity for
growth on a sustainable basis.
E-commerce firms of various hues, that started as small
ventures, became big. Food delivery firms like Zomato and Swiggy showed that it
is yet another business opportunity in the waiting for many. Several cafes
closed only to give space for several households to become food producers to
deliver through e-commerce firms. A sea-change occurred in the firms’ growth
path.
Cristian deRitis in an optimistic discourse on GARP, says: ‘How much effort we exert to avoid a
negative outcome depends on how highly we discount the future. The higher the
discount rate, the lower the value to us of avoiding a loss in the future.’
A unified theory of risk management would enable cohesive and
integrated risk management function. Persons good at credit and operational
risk would realize that they should enhance their knowledge into all other
forms of risk to enhance the value of the firm. Such unified theory of risk
management provides for better risk identification and assessment capabilities
across the geographical spaces and the spaces between the credit, operational,
market, reputational, and sovereign risks.
Enterprise Risk Management (ERM)
of firms have to develop, train, and cultivate risk management techniques
easily understandable to each of the staff and other stakeholders to enable
risk culture to thrive and flourish in the organisation not just confining to
the cabins of risk managers and chief risk managers. A realisation has to come
that risk management enables growth of profit. It is an investment and not
cost. The net result would be effective risk culture and governance.
*The author is an economist and risk management specialist
and the views are personal.
