Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. In recent years, failure of the banks due to operational risk has compelled the policymakers (Basel and the RBI, in India) to devise prudent risk management mechanism. In this regard, the RBI had issued guidelines on operational risk management on October 15, 2005. This paper is designed to study the implementation of the risk management framework and operational risk management framework by the commercial banks. To achieve the objective, a primary survey was conducted. The results show that irrespective of sector and size of bank, the risk management and the operational risk management framework of banks in India are on the right track and they are based on the RBI's guidelines issued in this regard. Many banks have set up risk management committees for the management of risks (credit, market, and operational). Credit risk is the most important risk faced by the schedule commercial banks in India. In order to manage the operational risk, many banks have designed operational risk management framework on the lines of Basel Accords. The `board of directors' and `operational risk management committees' are responsible for the management of this risk in many banks, and the task of identification and assessment of operational risk in many banks is based on the experience of bankers. As per the RBI guidelines, banks in India are following Basic Indicator Approach (BIA) for operational risk capital charge calculation.

Operational risk is a result of failure of operating system in a bank due to certain reasons such as fraudulent activities, natural disasters, human errors or omissions, use of highly automated technology, the growth of e-commerce, large-scale mergers and acquisitions and the emergence of banks as very large volume service providers. Operational risk has proved to be an important cause of huge financial losses in banks and financial institutions, the most recent one being the loss suffered by Societe Generale of 7.1 bn. The financial industry, which has developed standard methods to measure and manage market risk and credit risk, is now focusing on operational risk.

Operational Risk (OR), which was initially understood as every type of unquantifiable risk faced by a bank, has now been specifically defined by regulators and recognized by banks to be critical in shaping their risk profile. This recognition has led to an increased emphasis on the importance of sound operational risk management in banks and financial institutions. However, management of operational risks is not a new idea. What is new is the organization of the components of operational risk in a coherent and structured framework to facilitate efficient management of the same.

In fact, Basel has defined operational risk as "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events". This definition of operational risk alone hints that the scope of this risk class may be the first challenge. It demands understanding of the nature of various risk types within each business lines. Basel definition of operational risk seeks to identify why a loss happened and at the broadest level includes the breakdown of operating system in a bank. In fact, Moody's estimated that the 20 largest publicized `risk events' in the past decade cost the banking sector a cumulative $23.5 bn. Major loss events, directly due to internal process failure such as Barings (1995, $1.3 bn), Allfirst (2002, $750 mn) and NAB (2004, A$360 mn) are today classified as OR events, even though the ultimate nature of the loss is related to market risk.

Operational Risk Management Framework, Internal processes, Natural disasters, Human errors, Automated technologies, E-commerce, Mergers and Acquisitions, Market risk, Credit risk, Operational risks, Financial risk models, Value-at-Risk, VAR.