Market trivia/news

Operational risk can be a major source of loss for banks

Mitigation of this risk is today a well defined practice. Executive editor N. Mohan talks to four senior bankers to elicit their views: Towards Basel II

Operational risk is a complex issue for bankers to tackle and is gaining increasing attention in today's scheme of things.

With globalization and deregulation of the banking sector and deployment of sophisticated technology, online and realtime transactions, outsourcing and consolidation through M&A activity, operational risk is considered as grave or as serious, if not more, as credit and market risks. More importantly, it covers the entire spectrum of the business and therefore is rather difficult to quantify, identify, measure and mitigate.

Broadly the causes of operational risk can be: frauds - internal and external, theft and misuse of customer information, money laundering, loss on account of eventualities like natural calamities, terrorist activities, system failures and the resultant disruption in operations, and unintentional yet critical mistakes on the part of employees. In various calculations, losses as a result of operational risk have been qualified as more than those due to credit risk and market risk. The 1995 collapse of Barings Bank is touted as the most relevant example of how operational risk can destroy a financial institution of repute.Banks in India today are adequately focused on operational risks.

Almost all of them have dedicated operational risk management teams, have evolved well-laid out policies, put in place full-.edged systems and processes and devised business continuity plan and disaster management.

Operational heads of four banks shared with Banking Frontiers how they perceive operational risk, how they tackle it and how effective are their systems indicate the importance the banks attach to contain this risk.

Says Don Koch, chief operating officer of Bangalore-headquartered private bank ING Vysya Bank, to a query on various techniques adopted by the bank to minimize operational risk at the individual level: "At ING Vysya Bank, we have a number of methodological techniques, shaped through experience covering multiple business types across multiple countries. These techniques are positioned so that they can deep dive or stay strategically at the business process level of evaluation to provide indicative operational risk indicators.

The methods commonly used are the Risk and Self Control Assessments (R&CSAs), Key Risk Indicators (KRIs) and Loss Data Management (LDM) to move towards an Advanced Measurement Approach (AMA) in the near future. The OR capital is a function of the number of employees, IT costs, legal costs and money .ows in the bank." Dr Rajeev Uberoi, regional head - Operational Risk, India & South Asia, Standard Chartered Bank, lists the key measures adopted by the bank:

* robust departmental operating instructions/process maps with embedded controls built in

* standardized induction programmes followed by customized trainings depending on profile and role

* mandatory training on operational risk within 3 months of joining

* maker-checker principle followed for transactions / dual controls for systems / keys, etc

* sharing of lessons learnt and root cause analysis and strengthening of process/ areas of weakness

* robust recruitment process, reiteration of brand values and strong code of conduct

* robust and efficient technological solutions

* dedicated operational risk resources in business and functions to oversee the risk identification and management process

* self-assessment by the business / function on an ongoing basis to determine status of compliance with key group, business and local requirements.

Executive director of Chennai-based public sector Indian Overseas Bank Y.L. Madan believes that operational risk generally arises out of non-compliance of instructions/guidelines - both internal and external -at different levels. Says he: "There may also be cases, where the bank may have to face the operational risk losses on account of system and systemic deficiencies apart from human failure. These have to be tackled differently. The bank has well defined and laid down systems and procedures, which are time tested, and strict compliance of these systems and procedures will minimize the operational risk losses to a great extent.

Secondly, the bank has a well-established training system to impart training to all its sta. members at different centers,which is an on going process. This takes care of knowledge gaps at operating sta. levels, which is the main cause for operational risk.

Once, these two areas are taken care of, the operational risk factors at individual level are properly addressed to, which would minimize the risk levels."

How do cooperative banks handle the situation? Some of the tech-savvy cooperative banks have very effective controls in place.

For example, the Hyderabad-based AP Mahesh Cooperative Urban Bank is very conscious of the critical nature of operational risk. Umesh Chand Asava, general manager of the bank, says the bank imparts the required training to its personnel at various levels at frequent intervals to inculcate awareness among them and there are uniform parameters for charges application and interest application, which reduces the possibility of incorrect application of charges/interest, which in turn minimizes revenue leakage.

"In addition, there are methods and measures like signature scanning and cheque number inputs," he adds.

ADAYAPANA 2008 begins today

ADYAPANA 2008 Organised by the Lanka Exhibition and Conference Services (Pvt) Ltd, with main sponsor being APIIT will be held for the third consecutive year from October 10 to 12 at the Sirimavo Bandaranaike Memorial Exhibition Center.

Many opportunities available for education will be highlighted at this event theme, 'Guiding to pursue your dreams.' This year there will be 145 stalls on display.

ADYAPANA 2008 plays the perfect middleman helping young students find their ideal institute of higher education. The timing of the event was purposefully planned to coincide with the post A/L purgatory period. Over 200,000 students sit for the local Advanced Level Examination and the 150,000 students who get through the examination are left in a state of limbo trying to figure out what to do next.

This is mainly due to the lack of guidance facilities in Sri Lanka and the fact that only 14,500 students each year are entitled to enter the local universities.

The exhibition will feature numerous higher educational institutes both local and international that specialise in fields such as business, airlines, secretarial, computer, finance, marketing, medical and nursing, aviation and maritime, architecture, hotel management and more. They will exhibit a unlimited range of career pathways, degree and certificate programmes such as undergraduate, postgraduate and vocational studies. It will also be a platform where parents can receive guidance on how to advise their children when making these decisions.

The Times of India has organized for an International Pavilion to show case at ADYAPANA 2008, which will be comprised of Indian University and College representatives. The aim behind this Pavilion is to encourage Sri Lankan students to realise and take advantage of the great educational opportunities that are available closer to home.

The exhibition will also feature seminars for school levers as well as the exhibition's first ever debating competition, titled 'The Voice of Sri Lanka', which will take place on all three days of the exhibition.