Page 45 - Banking Finance April 2016

ARTICLE

 Banks are equipped with good technology systems,  Historical data requires quantifying the operational risks
knowledge and skills in identification and quantifying of banks for at least past five years i.e., type of opera-

credit and market risks but for Operational Risk it is tional risk and its loss amount to the bank.

missing. Strengthening Internal Controls and implementation of Sys-

 In Operational Risk the scope is wider than credit and tems and Procedures of the Bank is one of the important

market risks. areas in mitigating Operational Risk.

 Quantifying in monetary terms for Operational Risk is Organisation & Methods (O&M) - What

not that easy as credit and market risks.

 More money, time and efforts are required to control is it?

the operational risk areas. Some operational risk areas Organisation & Methods originally came from the pioneers
are very difficult to quantify and degree of risk involved of scientific management developed by Taylor and Gilbreth.
and amount of loss to be incurred to the bank cannot Their work influenced the early approaches and establish-
be controlled. ment of the function. Organisation & Methods, commonly

 Training the people of the bank in 'Operational Risk known as O&M, is defined by B.S. 3138.10001 as:

Management' requires more fund and time.

 More focus on Operational Risk Management dilutes The systematic examination of activities in order to im-
prove the effective use of human and other material re-
core activities of the bank.
sources: Essentially it is a specialist function that has a pri-
 Incremental Cost is more than incremental benefit in
implementation of mitigating measures of operational mary objective of improving an "organizations efficiency and
risks. control". In this way it can be seen as an essential function
that should be part of the makeup of any organization.
 Full-fledged IT tools in identifying: Quantifying operational

risk is not available in banking industry and it is difficult Earlier, in most of the Commercial Banks 'Organization and

to develop IT systems as it requires lot of expertise and Methods Department (O&M)' looked after the design,

skills. implementation and reviewed the various processes and

 As research and development in Operational Risk ar- systems from time to time and rectified risks in system
eas in the banks are in the initial stages, it requires based on the feedback from operating staff. Over a period
some more time to develop full-fledged IT tools in this of time, this department is defunct and replaced with ORM.

regard. Officials of O&M department are frequently interacting

with the operational level management people of the bank

for arriving at solutions or conclusions on each and every

process and try to minimize the risks involved in the pro-

cesses / systems. These departments are managed by the

staffs who are qualified in "Operational Research Subject"

drawn from reputed Universities and Indian Statistics Insti-

tute, Kolkata etc.

Now creation of this department is need of hour in Indian
Banks in view of the increase in importance for "opera-
tional risk management".

Strategies to mitigate the Operational
Risks in Banks are:

o Standardization of Internal Checks of critical processes

BANKING FINANCE | APRIL | 2016 | 45