Volume : 1 | Issue : 3 | March 2012 ISSN - 2250-1991

Research Paper Banking

Operational Risk Assessment for Bank

Branches

* Dr. Mahalaxmi Krishnan

* Associate Professor of Commerce, K J Somaiya College of Arts and Commerce, Mumbai
ABSTRACT

Risk management has become all pervasive and is the concern of all banks. In the emerging scenario with a large number
of branches as sales outlets, management of operational risks at branch level has become important to banks. This paper
postulates an operational risk assessment template for bank branches to identify and aggregate the operational risk elements
thereat using simple empirical model. The model can be used to study operational risk profile of branches for initiating
corrective actions.

Keywords : Operational Risk Management, Risk Architecture, Technology, Basel II

1. Introduction risk assessment template at branch level, as a self assess-

Bank Branch scenario has changed enormously in the last ment tool for the Branch Head, to identify and aggregate the
two decades due to rapid changes taking place in the bank- risk elements at the branch. By aggregating the branch-level
ing sector. While the trigger is the reform process, it is ac- data, bank can measure operational risks at different bank
celerated by the shifting customer preferences and their life levels.
styles. Branch contours however have undergone remarkable
changes in recent times with massive induction of technol- 4. Research Methodology
ogy and alternate delivery channels being made available to Research methodology used is exploratory in nature based
customers in the form of ATMs, Net Banking, Mobile Banking, on published literature. Data and information for the research
etc. The central focus continues to be the customer but with study were gathered and analyzed from secondary published
new ways of communication and interfaces. Branch head to- sources viz., books, newspapers, periodicals, journals, web
day has to dynamically manager people, processes, systems, sites, research studies, etc.
etc. at the branch level than hitherto before. The concomitant
risks have therefore shot up. 5. Limitation of the Study and Scope for Further Study
This study is confined to operational risk elements at Branch
Since the reform process started in the 1990s, banks in India level. This does not cover other risk categories. This model
have initiated several changes and have emerged stronger. can be amplified for further research for putting in place ro-
The Reserve Bank of India has introduced risk based super- bust risk management systems encompassing people, proc-
vision of banks in India and advised banks to progressively esses and systems.
adopt risk management framework. Banks have to, therefore,
fully prepare themselves to meet these requirements and 6. Findings of the Study
strengthen their MIS for the purpose. 6.1 Formulation of a Template for Bank Branch Opera-
tional Risk Assessment
Capital requirement, the foundation of the regulatory frame- A template listing the Operational risk elements as shown in
work, is the key indicator of the health of the banking sector. Exhibit 1 is prepared. Sample testing / verification of each
Capital Adequacy Ratios are intended to ensure that banks risk element is carried out. The extant of deviations of each
maintain a minimum amount of own funds in relation to the parameter from the laid down systems and procedures, rules
risks they face, to absorb unexpected losses, and run the and regulations are weighted against the degree of risk in-
bank on safe lines. Advances in technology and communica- volved and the Branch exposure for heat mapping. The
tions, innovation in banking products and services and the in- movement of risk (increasing, steady or decreasing) is as-
creasing globalization of financial markets have changed the sessed and causes identified.
way the banks measure and manage risk. Risk management
has become all pervasive from the apex level to Branches. In The technique is described below step by step.
the emerging scenario, the management of operational risks
at the bank branches have become critical for banks. Howev- i. List the risk parameters under operational risk.
er, it is still to percolate down to the operating level. Advanced
statistical models may be developed at bank level but at the ii. On the basis of verification of branch books, records, doc-
operating level it has to be simple. uments and analysis / scrutiny of accounts, for each risk pa-
rameter, assess / quantify the deviations in percentage terms
2. Rationale of the Study and indicate the same in the appropriate column under the
With a view to sensitizing branch level functionaries to risk head “Deviation”. The following table gives a suggested de-
management, this paper postulates a simple risk assessment gree of deviation on the basis of the percentage of accounts
method for the branches using simple empirical model. The with deviations in the risk parameter to the total accounts:
model will help in determining how efficiently the branch is
functioning with reference to operational risk management. Percentage of Deviations Description
From To
3. Objectives 0% 5% VERY FEW
The objective of the study is to formulate a simple operational

8 X PARIPEX - NDIAN JOURNAL OF RESEARCH

Volume : 1 | Issue : 3 | March 2012 ISSN - 2250-1991

Above 5% 10% FEW

Above 10% 20% SOME
Above 20% MANY
iii. The above deviations have to be then related to the degree of risk involved and indicated in the appropriate column under
“Risk”.
Degree of Risk involved
VERY LOW RISK Above 90%
LOW RISK Above 70% to 90%
MEDIUM RISK Above 60% to 70%
HIGH RISK 50% or below
iv. There after the heat mapping is done based on the emerging risk sensitivity of the extant of deviations and degree of risk
involved.

Heatmap Indicator ---------------- Very Low Risk Low Risk Medium Risk High Risk

v. The next step is to identify the trend of risk as follows.

Movement of Risk ------------------ ↑ Increasing ↔ Steady ↓ Decreasing

vi. Lastly, the heat map should be evaluated in conjunction with the movement of risk to identify the critical areas of concern at the
branch for taking corrective actions.

The above model can be used to study the risk profile of the branch for initiating suitable corrective actions at the operating level.
The beauty of the model lies in its simplicity. The model can be used by branches themselves from time to time to make self as-
sessment and corrections to minimize risk.

A typical model of the templates for operational risks is given in the exhibit in the annexure. One can suitably add elements, sub-
elements under each risk parameter for a more detailed analysis.

6.2 Advantages of the Model

The method helps in
- anticipating areas of potential risk
- determining level of risk (high, medium, low) and
- trend of risk (increasing, stable, decreasing
- identifying causative factors
- continually evaluate and thereby minimize risk

The model is risk focused. The format helps assessment of operational risk of each activity / process and trend of the risk. It ena-
bles to clearly identify and quantify high risk areas at branch. It can help in risk alleviation to reduce / eliminate risks. The results
of the assessment can be used to discuss and sensitize staff at branch. This will not only strengthen the risk architecture but also
help in improving customer service.

The model also facilitates aggregation of the branch-wise data to measure risk at different bank levels for each process / sub-
process / product / service level. This can help in initiating enterprise-wide actions to contain risks.

7. Conclusion
Risk management should not be understood as zero risk approach but as containment of risk by adopting proper systems and
procedures. By instituting a robust risk management across the bank, the customer service can be enhanced. Training and sen-
sitizing the work force is essential. Staff should be familiar with proper use of ICT to exploit them to enhance their productivity.

With Basel II implementation, the need for improved risk management in banks has become increasingly clear. There is a felt need
to develop a framework that introduces greater transparency around the bank’s risk profile through consistent and comprehensive
risk measurement, aggregation and management.

Knowledgeable work force is essential for effective risk management. Therefore, re-skilling of staff with proper training inputs at all
levels is required. The suggested simple model can sensitize the work force at branches to risk management.

Reputation of a Bank is the sum total of its various service outlets. Banks have to ensure that proper laid down systems and
procedures are followed at the operating level. Continuous monitoring and analysis of the branch functioning would help identify
weak links. While branch head would ensure the micro management by periodically making self-risk assessment on the lines of
the suggested model, apex level offices should extend necessary support functions. This will supplement periodic internal audits
for effectively measuring, managing and mitigating risks at the delivery points.

REFERENCES

1. Harishankar Singhania, “Economic Issues Global and National – A Business Perspective”, Vikas Publishing | 2. HiruBijlani, “Globalisation – An Overview”, Heinemen
Asia | 3. KPMG, “The Professional Handbook of Financial Risk Management” | 4. World Economic Forum, “Global Competitiveness Report 2010-11 | 5. M P Shrivastava,
S R Singh, “Indian Banking in the New Millennium” | 6. RBI Reports and website | 7. Times of India, Economic Times

PARIPEX - INDIAN JOURNAL OF RESEARCH X 9