What is financial risk management?

Repo rate is also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. The current repo rate is 6%

Reverse Repo rate is the short-term borrowing rate at which RBI borrows money from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies, etc.) which are always risky. Rate - 6%

CRR - Cash Reserve Ratio - Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, banks don’t hold these as cash with themselves, they deposit such cash (aka currency chests) with the Reserve Bank of India, which is considered equivalent to holding cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.

Rate - 4% SLR - Statutory Liquidity Ratio - Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as the Statutory Liquidity Ratio (SLR). Rate –19.5%

Financial Risk Management deals with identification, quantification, and management of exposure to the risk by means of financial instruments. Risk is inherent to every business and it cannot be eliminated completely however, it needs to be hedged to make sure it is within the risk tolerance levels of the entity.

Financial Risk Management takes into account Credit Risk, Liquidity Risk, Market Risk.

FRM is important in hedging company against the risk of defaults against loans, liquidity crunch or working capital mismatch and market volatility risks