Financial Risk Management

They say there is no gain without risk. In an ideal world, we would all love to have maximum returns for zero risk. However, risk and return are too often two sides of the same coin. Any event or situation that can potentially cause a loss (financial / reputational etc.) to a firm is termed as a risk. Broadly, Financial Risk can be categorized into:

  1. Market Risk: This is the risk arising from exposure to the financial markets and is linked to the uncertainties inherent in the markets
  2. Credit Risk: This is the risk arising from having lent money to a credit-unworthy entity or not being able to recover the loan lent out to an entity
  3. Liquidity Risk: This is the risk of not being able to meet your funding needs, not being able to liquidate assets whenever required
  4. Operational Risk: Any sort of risk that could potentially cause a loss to the firm but is not covered above is usually part of Operational Risk. Having said that, Operational Risk is often linked to the mistakes made by people, errors in systems or legal issues. Fraud and misdemeanor also fall under this umbrella

Risk Management is nothing but identifying the potential pitfalls called risks, prioritizing them and finding solutions to minimize or completely do away with such risks. 
The global recession around 2008 showed the world how Risk Management is an essential, important part of any ongoing business. Many of the risks that a firm faces can be minimized or even fully controlled by proper systems and checkpoints in place. Consequently, several firms have their own Risk Management teams that track, estimate and try to minimize various risks.

Risk Management executives are hired across several types of firms:
  1. Banks and Financial Institutions: Apart from the fact that these firms directly work with market fluctuations and manage huge assets, they are also mandated by regulatory authorities to stay within well-defined risk benchmarks. Hence, they need extensive Risk Management across divisions
  2. Consultants: Firms that find it difficult to have their own in-house Risk team often rely on consultants
  3. Large or Diversified conglomerates: Large or diversified firms have several divisions sometimes spread over many geographies, so it becomes essential to have a Risk team that keeps a watch over the entire gamut of operations

  4. Risk teams of any other firm looking to minimize risks

Key skills for an entry-level role would be:

  1. Strong analytical and quantitative skills: Risk Analysis requires heavy quantitative skills and a lot of number crunching
  2. Knowledge of theories of risk, risk metrics: Risk terms are quite different from regular financial parlance and requires some knowledge and studying
  3. Attention to detail and diligence: Risk Management strives to reduce risk. Needless to say, not being accurate would just add to these risks!
  4. Knowledge of financial markets,asset classes and regulations: A Risk Analyst should be familiar with the financial markets, asset classes and should keep abreast of the latest regulatory environment
  5. Comfort with Quant models/Statistical software: Risk analysis requires using complex quantitative models and statistical software. Hence knowledge and comfort with these would be an advantage

How to get in:

A major chunk of Risk Management candidates are hired by Banks and Consultancy companies
•  Do an MBA in Finance or Masters in Mathematics / Statistics / Economics and focus on subjects related to risk in your syllabus. Take additional electives if needed
•  Try to hone your quantitative modeling and statistical skills
•  Financial Risk Manager (FRM) or Professional Risk Manager (PRM) certifications are extremely sought after in this field
•  Quantitative Risk Modeling is an essential skillset and it would be good to take up courses on this

At the entry level, candidates join as Analysts. They typically have MBAs in finance or are post graduates in Science, Mathematics, Statistics or Economics

  • Risk Management deals with first identifying, measuring and prioritizing risks and then addressing or treating those risks appropriately
  • Apart from this, the risk teams also need to come up with firm wide policies and processes with regards to risk
  • They work closely with all divisions within the firm so that they can identify, treat and monitor the risks at each level
  • They also need to work hand in hand with the legal and compliance teams in a firm

  • The job requires a lot of grunge work around regulations, processes and documentation apart from the more interesting bits of risk analysis
  • The timings are regular usually, however if you are working in a consultancy, then there may be some hectic times when you are on a tight deadline project

Companies to target:

  • Banks and Financial Institutions: All MNC as well as domestic Banks, MNC Investment Banks
  • Consultancies: Deloitte, E&Y, KPMG, Accenture, CRISIL etc.

A day in the life of a Risk Manager / Risk Analyst(entry level):

  • The day starts off with catching up with any news that may affect risk metrics
  • You then work on any pending projects and perform risk analysis 
  • A meeting due soon may require a report on gap areas in risk policies that need to be filled
  • You probably need to attend meetings with other divisions to understand their risk issues
  • Daily or weekly risk reports may need to be worked on
  • You may need to chase other teams for some of the documentation and process notes

Salary and perks:

  • The starting salary for Risk ManagementAnalystsis around INR 5-7Lakhs/ annum
  • Consultancies and MNC Investment Banks often pay higher
  • At the senior level, Risk Managers are very handsomely rewarded based on their experience

Interview with Mridul Sharma, who has 6+ years of experience in Risk Managementin an MNC Consulting company

Proschool : Please tell us about your background and qualifications
Mridul : I have a BE in Electronics and Communication post which I did an MBA in Finance. I then pursued and completed FRM, PMP certifications and have also cleared CFA L1

Proschool : Why did you decide to pursue this career and how did you get into this role?
Mridul : Coming from an engineering background I was always interested in the quantitative aspect of analyses and found myself pursuing this career to build on my strengths while keeping my interests in finance in mind. I got through my job by applying online

Proschool : Your current role and a typical day?
Mridul : I’m currently a Risk Consultant - Delivery (multiple projects). On a typical day, I perform regulatory requirement analysis, current Project analysis, interact with stakeholders and vendors, identify gaps (requirement as well as planning) and strive to close them through stakeholders

Proschool : High points in your career so far?
Mridul : Several come to mind, but I felt great when the Rating Models developed by me were adopted by an MNC as a standard offering for the region

Proschool : Important projects you have worked on?
Mridul : I have worked on numerous projects in terms of variety and complexity. All projects were with Corporate and Investment Banks

Proschool : Challenges faced?
Mridul : Some of the challenges faced are changing regulations, inconsistent rules across geographies (subsidiary related work), no standard processes at the client’s end, unaccountability of ownership, duplication of work, low budget, clashing business requirements and unreasonable delivery expectations from business 

Proschool : Outlook for the industry?
Mridul : The Financial Services industry is recovering slowly. Risk is picking up momentum through regulatory initiatives. More and more clients are becoming aware of the benefits of doing additional or advanced risk management work than what the regulators demand

Proschool : Career opportunities for aspirants in India (and elsewhere)?
Mridul : Consultancies and Banks are primary employers for Risk Management talent. There is a lot of demand for people specialized in Quantitative Risk modeling

Proschool : Word of advice for aspirants?
Mridul : Focus your career towards the goal for getting into a Risk Management profile. Choose relevant subjects during your postgraduate program. Enroll for either FRM or PRM. Apply outside the campus as well. Keep trying to get into a risk related project/profile even when you are not recruited directly into a risk department and build up your risk related skills through reading updated regulations, attending relevant seminars and workshops