Operations in

Banking & Financial Services

Operations in

Banking & Financial Services

The Changing Banking ParadigmThe Changing Banking Paradigm

External drivers compel banks to leverage the developments in Information Technology and continuously innovate

Regulatory change and consolidation Competitive forces Changing Consumer Preference Technological developments Basel II IAS

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Operational RiskOperational Risk

Operational risk can arise from failure to comply with policies, laws and regulations, from fraud or forgery, or from a breakdown in the availability or integrity of services, systems or information.

» Event risk (Year 2000, Euro, Basel 2, IAS)

» Payments/settlement risk

» Technology/systems exposure

» Fraud/compliance risk

» Natural disaster

» Change management

Sources of Operational RiskSources of Operational Risk

Differences between Three Lines of BusinessDifferences between Three Lines of Business

Risk In Banking SectorRisk In Banking Sector

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FinancialRisks Liquidity Risk

Operational Risk

Regulatory Risk

Human FactorRisk

Market Risk

Equity Risk

Interest Rate Risk

Currency Risk

Commodity Risk

Trading Risk

Gap Risk

Credit RiskPortfolio

Concentration Risk

Transaction Risk Counterparty Risk

Issuer Risk

Understanding Market RiskUnderstanding Market Risk

It is the risk that the value of tangible and intangible of a financial institution will be adversely affected by movements in market rates or prices such as

Interest rates, Equity prices, Foreign exchange rates Credit spreads Commodity prices

Resulting in a loss to earnings and capital.

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Waste In BankingWaste In Banking

»Waste No.1: Over-Processing: Adding more value to a service or product than customers want or will pay for

»Waste No. 2: Transportation: Unnecessary movement of materials, products or information

»Waste No. 3: Motion: Needless movement of people

»Waste No. 4: Inventory: Any work-in-process that is in excess of what is required to produce for the customer

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Waste In Banking…Waste In Banking…

»Waste No. 5: Waiting: Any delay between when one process step/activity ends and the next step/activity begins

»Waste No. 6: Defects: Any aspect of the service that does not conform to customer needs

»Waste No. 7: Overproduction: Production of service outputs or products beyond what is needed for immediate use

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Example…Pain AreasExample…Pain Areas

» The account opening process had many inter-linked & sequential processes.

» One of the most critical ones was the “Dispatch of PIN” to use the ATM services.

» Many customers did not receive the PIN at all resulting in customer complaints, hence belying their expectation of a hassle-free banking.

» Losing Customer Base

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CRISIL VaR ModelCRISIL VaR Model

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Variance-Variance-covariancecovariance

Matrix

Variance-Variance-covariancecovariance

Matrix

MultiplePortfoliosMultiple

Portfolios

YieldsDurationYields

Duration

Incremental VaR

Incremental VaR

Stop LossStop Loss

PortfolioOptimization

PortfolioOptimization

VaRVaR

What Needs to be doneWhat Needs to be done

Incorporates best-business practices Straight Through Processing Workflows to automate processes Process Centralization Single window service Control through relevant and timely MIS

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Efficiency – cost effective automationEfficiency – cost effective automation

Efficiency has become necessary evil and no longer an competitive tool for Banks:

Eliminates manual intervention Enables process integration (workflow, document imaging) More Automation Reducing TAT Reduction In Errors

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EffectivenessEffectiveness

Measure, Monitor & Manage – Value at Risk Establish good operational processes Deploy Best practices framework Streamlining the processes Innovation

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Thank YouThank You