Operational risks in banks have been increasing in the past few decades due to globalization, increasing deregulation, etc. These changes have been making the activities of banks more diverse and complex, and compelling them to set up and have a proper structure to manage operational risk.

Operational Risk Management is a new management discipline. It is the risk of loss arising from various types of technical or human error or failed internal process, legal hurdles, fraud, failure of people and system and from external agencies. The Basel Committee defined operational risk as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events". Operational risk events are associated with weak links in internal control systems or laxity in complying with the existing internal control procedures. Operational risk involves breakdown of internal controls and corporate governance leading to error, fraud, failure to perform in a timely manner, and compromise on the interest of the bank resulting in financial loss. This article seeks to examine the process of operational risks in banks.

Banks face operational risk in day-to-day operations. Such risks may be related to its activities of traditional banking business or the business related to new generation banking business and use of computers and telecommunications systems. While the nature of risks in both type of activities may be more or less similar, for example, breakdown of systems and procedures, errors, frauds etc., but the level of risk in computerized environment is much more than the level of risk in traditional banking business.

Systems and procedures in banks are prescribed with the aim to safeguard the banks' assets from external or internal threats. Internally, the risk comes from breakdowns in internal controls and corporate governance that can lead to financial losses through error, fraud, theft, burglary, or failure to perform in a timely manner. Such breakdowns can also cause the interests of the bank to be compromised in some other way; for example, by the dealers, lending officers, or other staff exceeding their authority or conducting business in an unethical manner. There can be numerous examples of disregard of systems and procedures leading to operational risk in banks such as nonadherence to the guidelines and procedures for opening and operating deposit accounts; disregard of safeguards against unscrupulous persons opening accounts mainly to use the accounts as conduit for fraudulently encashing payment instruments; disregard of instructions for accepting and handling cash, clearing of payment instruments from customers; guidelines for granting credit facilities, monitoring and follow up and recovery.

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