Increasing use of innovative technologies and cross-border transactions in banks are forcing Indian Banks to concentrate more on operational risk (OR) issues. Basel II norms also stress on operational risk identification and management besides other risks. While RBI has issued guidelines on operational risk management to the banks, vigil through effective system control and competent staff is more important in minimizing losses.
Reserve Bank of India has issued draft guidelines on operational risk management in commercial banks. Such guidelines have been necessitated in the light of the Basel II Capital Adequacy Norms, and Capital Charge on Operational Risk. While it will be extremely difficult to quantify the operational risk in each bank, RBI proposes a standardized approach method which involves setting aside a percentage equal to the average of previous three years of a fixed percentage of positive annual gross income. At present, it is indicated to be at 15%, as per the draft guidelines.
Operational risk is the potential risk of loss arising from inadequate or failed internal processes, people and systems are from external events. It also includes potential legal risk involving claims, penalties and damages resulting from supervisory decisions. Banks have guidelines and instructions either developed internally or by way of directive from RBI.
Based on the experience, it was also intended to prevent fraud, provide integrity for internal controls and reduce errors in transaction processing. Only in the context of the Basel II Norms, management of operational risk involves identification, assessment, monitoring and mitigation. The system envisages proper definition of operational risk and manifestation, organizational set-up, policy requirements and action plan for identification and assessment and mitigation details. |
