Risk Management in Cotton Industries: Opportunities and Challenges discusses the various risks faced by cotton industries and strategies for managing those risks. The document outlines the risk management process and identifies key risks like commodity price risk, concentration risk, and operational risks. It then discusses various risk management strategies used in the cotton industry like hedging, diversification, and developing a risk culture. The presentation emphasizes the importance of knowledge of international trading practices and risk management for sustainability in the cotton industry.

1. Risk Management in Cotton Industries
: Opportunities and Challenges
Md. Nazrul Islam,
CERM
Joint Director
Banking Regulation and Policy Department
Bangladesh Bank –the central Bank of
Bangladesh

2. Outline
Risk
Risk
Management
Process
Risk
Measurement
Risk
Management
Strategies
Shareholders
Value

3. 1. Who is Risk Taker ? First one , Second one or Both ?

4. What is Risk ?
 A risk is a ‘hazard, danger,
chances of loss or injury, degree
of probability of loss, Person,
factor or thing likely to cause
danger, to incur the chances of
unfortunate consequences by
doing something’
 -The Chambers Dictionary

5. What is Risk ?
R=ʄ(hazard*vulnerability )
Hazard is probabilistic
Vulnerability is non-probabilistic
Thus Risk is Probabilistic
As Exposure to uncertain
Events
Strike in Shipment Ports
Flood Drought In Cotton
Growing Areas
Default on Contractual
obligation by a buyer or supplier
Fire in Cotton Warehouse
Poor Quality of Cotton Crop
Sharp Increase in cotton price

6. Factors
associated with
term RISK
Uncertainty
Cause of
loss and
Level of
Loss
Frequency
and
severity

7. A Ship is safe in
harbor…………….

8. Necessity Knows no law

9. Risk Management Process
MonitorandReview Identify Risk
Analyze Risks
Evaluate Risks
Establish Context
Treat Risk
Risk Assessment
CommunicateandConsult
Strategic Process
Commit and
Mandate
Communicate
and Train
Structure and
AccountabilityReview and
Improve
StrategicProcess
StrategicProcess
Strategic Process

10. Risk Map
Severity
Probability High
High
Low
Source
Risk
Country
Risk Exchange
Risk
Price
Volatility
Risk
Counter
Party
Risk
Global
Economic
Slowdown Interest
Rate Risk
Operational Risk
(Knowledge Gap)
Covenant
Risk
Reputational
Risk

11. The Process for
effective Risk
Management
Transfer
Better Cost Control
Collateral Management
Purchase of Insurance
Manage
/Internalize Avoid /Transfer
Accept Share/ Transfer
Objectives
1. Risk
Analysis
S
e
v
e
r
i
t
y
Probability High
High
Low
2. Mitigation
Retain
Transfer
3. Monitor
4. Review

12. Negative
Positive
Internal
External
Environmental Assessment and Strategic move :
SWOT Analysis
Strength
•Skilled and Lower Wage Human Resources
• Export Contribution- 81.70% and GDP-
13.10%
•Forward looking Govt. & Banking Policy
• Reputed Entrepreneurship
•Advanced Technology
•Prompt Customer Services
•Innovative Products
•increased mobile and Online Banking service
Weaknesses
• Practice of commodity Market and Associated
Risk
• Non-availability of Risk Management Tools
• Less Local Production of Cotton (2% of Total)
• Interest rate Risk
• Poor Infrastructure and Red tapes
•Unrest Political situation
Opportunities
• Overseas New Cotton Market
• New product development
• Highly market focused
•High Demand of Finished
Product
Threats
• Cotton Source Risk
• Sustainable Cotton Trading
• Volatility of Raw Cotton Price
•Country risk- new act & law by government
•Exchange rate risk
•Economic slowdown or global recession
Identify
SupportCapitalize
Invest
12

13. Types of Corporate
Risk Faced
Business Risk
• a) Commodity
Risk:
• Price Risk:
Price
Fluctuations
• Quantitative
Risk : Natural
Calamity,
weather etc.
• b)
Concentration
Risk :
• c) International
Operations Risk
Financial Risk
• a) Credit Risk
• b) For-ex Risk
Operational
Risks

14. Commodity Risk
Reasons
Change in
inventory
Value
Inflation
Leading to –
Increase in
Production –
infrastructure
cost and
production
raw materials
cost
Change in
selling price
fluctuations

15. Commodity Risk
Countering the Risk :
Hedging
Making an Investment to
reduce the risk of adverse
price movement in an
asset
Prediction: A farmer
predicts price will go
down from Tk. 72/kg
(Spot price-oct) to tk.
65/kg(spot price dec)
Hence, the farmer sells a
december 20th futures
contract at tk.72/kg
Present Price
tk. 72/kg
Future
Tk. 65/kg
Buy Futures
of dec@65
Turnover: 65
+7=72
Future
Tk. 80/kg
Buy Futures
of dec@80
Spot 1st
December

16. Bangladesh Bank
Policy: Foreign
Exchange
Guidelines Vol-1
Sec-3
Hedging the price
risk of
Commodities
AD can hedge the price risk of commodities
that are traded on the exchanges or OTC
Subject to prior Approval
No Speculation is permitted
AD must have ability to monitor credit or
market risk

17. Counterparty risk
Non performing of Contract
Cotton Supplier not shipping when cotton prices increase sharply
Customers not opening L/C when cotton prices drop
Cotton
Industry and
its associates

18. Operational risk
People
Unexpected losses due to physical catastrophe
Fraud , Documentation
Reputation
Failure of management
Internal process errors
Unforeseeable external events.
Cotton
Industry
and its
associates

19. 1.Field
Risk : supply chain of cotton
4.Port
5.Warehouse
6.Buyer (PTS-
Spinner/Rotor)
3.Warehouse2.Ginn

20. Risk Measurement
Methods
• Measure uncertainty or Volatility based on historical Data
• VAR is for measuring Market risk (price, Basis, currency )
Methods
• Stress Testing
• Back testing

21. Cotton
Traders
Property
All Risks
Money
In
Transit
Non-
delivery
or Non
Payment
War at Sea
or on land
or
terrorism
Comprehe
nsive
Cargo
Insurance
Strike or
Riot, Civil
commotion
or
Malicious
Damage

22. Risk Framework
Identification of risk
Risk Control Process and
Procedures
Risk Limits and Risk Cap
Allocation
Risk Capture, Measurement
and reporting
Aligning System-PMS &
Annual Incentives

23. Governance Structure

24. Segregation of
Duties

25. Bangladesh Bank Initiatives
Business Process Innovation
And As per Foreign Exchange Guidelines (Ch-
7)-34 Payment of Import Liability
Show Cause/Imposing Fine for Delay Payment
–Punitive Action including revocation of AD
licence by BB
Exit Plan has been asked to submit by 31
January, 2017.

26. Major Risk Management Strategies
• Gain Knowledge in International Trading Practices' and risk
Management
• To operate ICA rules and by laws.
• Work with International Org.(WTO, ICA, ICAC)
Sustainability in Cotton Trading
and sanctity of contracts
• Backward linkage and efficient worker
Cost Reduction Strategy,
Labor Productivity
Improvement
New Market or Product
development Strategy
• Research on new product , Development and
Market
Product & Market
Diversification Strategy
Diversify Product effectively
Diversify Market efficiently

27. • People Ask Difficult questions
• People Admit Ignorance
• Whistle Blowing( Public interest
disclosure) is encouraged
• Performance evaluation of
business and people are based
on Risk Adjusted Returns and
not on absolute profit levels
Developing
Risk Culture
• Implement Sound Risk
management & Risk Governance
• Maximization of Share Holders
Value
Sound Risk
Management
and Governance
Risk Management Strategies cont.

28. Reference
 1. Export Promotion Bureau , Bangladesh
 2. The Financial Express, 08 October, 2012
 3. www. bgmea.com.bd
 4. Cotton Exporters Guide August 2013, ITC
 4. www.mckinsey.com

29. Q/A ?

30. Thank you
Md. Nazrul Islam
Joint Director
Banking Regulation and Policy Department
Bangladesh Bank, Dhaka-1000.
Email: mdnazrul.islam@bb.org.bd
website: www.nazrulin.com
Contact No. 88-01552494409