Page 44 - Banking Finance April 2016

ARTICLE

Oriental Bank of 1,028.81 1,677.04 12,437.63 15,143.48 6.79% are not standardized or
Commerce streamlined, then it leads to poor
Punjab and Sind Bank 289.93 273.31 4,521.62 5,084.86 5.70% quality of credit. It primarily im-
Punjab National Bank 3,009.51 2,430.35 31,166.87 33,906.73 8.88% pacts on Operational Risk and Sec-
Syndicate Bank 1,182.91 12,257.49 14,422.37 6.81% ondarily impacts on Credit Risk of
UCO Bank 981.97 1,957.90 9,511.37 12,353.68 7.16% the Bank.
Union Bank of India 884.41 1,630.34 20,079.70 23,189.33 6.38%
United Bank of India 1,479.29 4,937.76 6,011.85 8.75% - Error Free, speedy Technology
Vijaya Bank 525.74 548.35 6,133.17 7,010.11 5.43% support should be available in de-
380.35 496.59 livering the credit to the custom-
ers of the bank. If proper technol-
@ Based on BIA-Basic Indicator Approach ogy systems are not in place in the
Credit System, then it leads to Op-
Analysis: erational Risk and in turn leads to
Credit Risk of the Bank.
- Out of the Total Capital Requirements (CRAR), Operational Risk Capital
requirements are in the range of 4.33% to 8.88%. This is due to the simple The same formulae or logic is appli-
formulae applied by the Banks (BIA-Basic Indicator Approach) i.e., Average cable in "Treasury Operations" of the
Gross Income of previous 3 years multiplied by 15%. Due to lower Interest Bank. Quality Personnel, Trained
spreads and Non-Interest Incomes (i.e., Net Interest Income, Exchange, and Good Skill set People are not
Commission and Discount) of Banks, Capital requirement for Operational placed in the "Treasury Operations" of
Risk may not be sufficient to cover the future losses. the Bank, which will increase the Op-
erational Risk and Market Risk of the
- In majority of PSBs, Market Risk Capital Requirements is less than Opera- Bank.
tional Risk. This is due to strict control of Regulator on Investments trading
by the banks through its Treasury Operations. A major share of portfolio of Hence, "Credit-Market-Operational
Investment is SLR Investments, which is less risky, thereby lower Capital re- Risks are interdependent". Once,
quirements for Market Risks. Banks start giving more focus and at-
tention in controlling Operational Risks
- Capital Requirements for Credit Risk of all Banks is almost more than 80%, which areas, then automatic impact will be
needs more attention to be paid by the Banks to minimize the Credit Risk. there on minimizing Credit and Market
Risks of the Banks. So, banks should give
High Credit Risk and Market Risk directly or indirectly depend on the Opera- more focus on Operational Risk and in
tional Risk. As Operational Risk arises due to People, Process, Technology and particular more focus on PEOPLE, PRO-
External Compliance. These People, Process Risks and Technology contribute CESS AND TECHNOLOGY areas.
more Operational Risk than External Compliance. These THREE may create
additional Credit and Market Risks in the Banks. Challenges of Operational
Risk:
Example:
Challenges in identifying Opera-
- People in the Organisation are to adhere to or follow the laid down sys- tional Risks are:
tems and procedures in all operations of the Bank. For example, in credit
process pre-sanction, sanction and post-sanction formalities are very im-  Credit and Market risks are rela-
portant, if these are not properly followed by the people working in Credit tively easy to predict when com-
Department, it not only increases the Operational Risk of the Bank but also pared to operational risk.
Credit Risk.
 Defined rules and systems are
- Credit Processes in the organization should support for increase in the qual- placed to quantify the credit and
ity of lending and productivity and cost effectiveness. If credit processes market risks but not for Opera-
tional Risk.

44 | 2016 | APRIL | BANKING FINANCE