Academic journal article Asian Social Science

A Credit Risk Analysis of Banks: The Users of Credit Cards Influences Financial and Operational Risk in Banks Leading to Credit Risk

Academic journal article Asian Social Science

A Credit Risk Analysis of Banks: The Users of Credit Cards Influences Financial and Operational Risk in Banks Leading to Credit Risk

Article excerpt

Abstract

Risk gives the source for opportunity. The concepts of risk and exposure have insignificant differences in their meaning. Risk refers to the probability of loss while exposure is the possibility of loss, though they are habitually used interchangeably. The risk matrix explains that the risk analysis in which rows show the risks and columns show their probability of occurrence and their impact. Financial risk and operational risk occur through countless transactions of a financial and operational nature, including sales and purchases, investments and loans, and various other trade activities. The sample size taken for the study was 230 and the data was collected by way of questionnaire. The study was taken with an objective of analyzing the factors causing financial and operational risk and to examine the protective measures available for such exposures. The findings of the study were to suggest the steps to minimize the financial risk and control the operational risk.

Keywords: credit card risk, operational risk, financial risk, credit card grievances

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Financial markets are becoming increasingly sophisticated in pricing, isolating, repackaging, and transferring risks. The meaning of risk is discussed in different context but every theory defines risk as the variability of return or income, the chance of nonpayment of debt, the probability of occurrence. A probability or threat of a damage, injury, liability, loss, or other negative occurrence that is caused by external or internal vulnerabilities, and that may be neutralized through preemptive action. Risk provides the basis for opportunity. In this paper we have analyzed only two types of risk: financial risk and operational risk of the customer's point of view to analyze the risk portfolio of the credit card users. The risk matrix explains that the risk analysis in which rows show the risks and columns show their probability of occurrence and their impact. Operational risk, however defined as any risk that is not categorized as market or credit risk, is the risk of loss arising from insufficient or failed internal processes, people and systems or from external events. In order to alleviate this, internal control and internal audit systems are used as the key means. Risk education for disseminate the complex operations at all levels of staff can also diminish operational risk. The recent survey (Excerpts from Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best Practice Recommendations) gives us the fact that the usage of credit card is less comparing to the debit card usage. Now the need had emerged to take up a study relating to the awareness and acceptance of degree of risk present in the usage of the plastic money. One thing the card users must keep in mind is that the banks/ financial institutions them as a "sale target". Banks will flatter the card users by calling them as 'valued customer' but in reality the user is simply a potential cash cow. The customers are classified as a 'revolver' (potential cash cow) borrows heavily and regularly, and make only the required minimum payments and never ever makes full payment. Card issuing banks imposes the penalties, fees, service charges when withdrawing cash, paying late, exceeding the credit limit, asking for duplicate receipts, statements etc.

2. Review of Literature

* Not only is the plastic money in circulation in India declining, it is also underutilized. On an average, the annual number of transactions per credit cards stands at 11; it is only one in case of debit cards. "Debit cards have had a slow start and their growth only took off in the last three years. On the other hand, credit cards grew faster since inception, with the growth turning negative in the latest year,"

* There is security risk in using credit card. This type of risk is experienced around the world. …

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