Page 31 - Banking Finance April 2025

ARTICLE

Understanding

Operational Risk

Management in

Banks Goutham Gosai

Chief Manager (Faculty)
Union Learning Academy (Rural & FI)
Union Bank of India, Hyderabad.

Unlike other types of financial risks, operational risks are inherent in day-to-day banking activities
and require continuous monitoring and management. Effective operational risk management
ensures that banks can withstand unexpected disruptions, maintain compliance with regulations,
and protect their reputation and financial integrity.

Introduction to Operational Risk significant financial losses arising from operational
failures, ensuring the bank's financial health.
Operational risk is defined by the Basel Committee on
Banking Supervision as "the risk of loss resulting from 2. Regulatory Compliance: Regulatory bodies like the
inadequate or failed internal processes, people, and systems Basel Committee mandate robust ORM practices,
or from external events." This broad definition encompasses making compliance essential to avoid penalties.
a variety of potential threats that can disrupt a bank's 3. Reputation Protection: Operational failures can
operations, ranging from fraud and employee errors to severely damage a bank's reputation, leading to loss
technological failures and natural disasters. of customer trust and business opportunities.

4. Efficiency and Effectiveness: ORM promotes the
Unlike other types of financial risks, operational risks are optimization of internal processes, enhancing overall
inherent in day-to-day banking activities and require operational efficiency and effectiveness.
continuous monitoring and management. Effective
5. Strategic Decision Making: By understanding
operational risk management ensures that banks can
withstand unexpected disruptions, maintain compliance operational risks, banks can make informed strategic
decisions that align with their risk appetite and business
with regulations, and protect their reputation and financial
objectives.
integrity.
Frameworks and Regulatory Guidelines
Importance of Operational Risk
Operational risk management in banking is guided by
Management in Banking several frameworks and regulatory guidelines designed to

Operational risk management is pivotal for several reasons: standardize practices and ensure comprehensive risk
1. Financial Stability: Effective ORM helps prevent coverage.

28 | 2025 | APRIL | BANKING FINANCE