Risk Management Practices of Corporate Firms in India: A Comparative Study of Public Sector, Private Sector Business Houses and Foreign Controlled Firms

Abstract

Developed countries and is becoming increasingly relevant for corporate firms in India. This paper examines the practices and policies of foreign exchange risk and interest rate risk management followed by the corporate firms in India. The study reveals that Indian firms are aware of the risk management techniques and many of them are using the same to manage various risks. However, all the risks are not managed and the type of ownership control significantly influences the usage of the techniques to manage exchange rate risk and interest rate risk. 'Exposures are not large enough' is the most widespread and prominent reason for not managing risks. Risks inherent in derivatives are a significant reason in making the firms desist from using risk management techniques. The prominent barriers hindering the routine use of derivatives are monitoring and evaluating the risk of derivatives, pricing, valuing and accounting in conjunction with credit and liquidity risk. About two-fifths of the firms are risk averse but do not hedge their full exposure. A majority of the firms follow cost-center approach towards risk management. Ownership has been observed to be a significant determinant of firms' strategy towards risk management. While a majority of foreign controlled firms and private sector business group firms can be characterized as partial hedgers, the majority of the public sector firms belong to the category of negligible hedgers. In sum, the adoption of risk management techniques is still in infancy. It is desirable that decision makers and managers review their risk management practices afresh and devise anticipatory and proactive policies in order to have competitive advantages internationally.