Hemant Mrp Synopsis

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Text of Hemant Mrp Synopsis

MAJOR RESEARCH PROJECT

On operational risk analysis in banks

(a Perceptual study of public & private sector banks)Submitted in the partial fulfillment of Degree of

MBA (FT) (2011-2013)

Guided by:-

Submitted by:

Dr. Swaranjeet Arora

Hemant Singh Sisodiya

MBA (FT) CONTENTSChapter :- 1Introduction

Conceptual framework Types of risk

An overview of Operational RiskChapter :- 2

Literature ReviewRational Of studyChapter :- 3

Objectives

Research MethodologyChapter :- 4

Data Presentation & InterpretationChapter :- 5

Findings

Suggestions

LimitationsChapter :- 6

Referance

Student declaration

I declare that the project entitled operational risk analysis by banks(a Perceptual study of public & private sector banks). Is an original done by me and no part of the project is taken from any other project or material published or otherwise or submitted earlier to any other college or university.(Hemant Singh)DECLARATION CERTIFICATEThis is to certify that the work presented in the project entitled Operational risk analysis by banks (a Perceptual study of public & private sector banks). in partial fulfilment of the requirement for the award of degree of M.B.A, PRESTIGE INSTITUTE OF MANAGEMENT AND RESEARCH INDORE, is an authentic work carried out under my supervision and guidance.

To the best of my knowledge, the content of this project does not form a basis for the award of any previous degree to anyone else.

Date: (Dr.Swarnjeet Arora )

INTRODUCTIONConceptual frameworkThe financial sector especially the banking industry in most emerging economies including India is passing through a process of change .As the financial activity has become a major economic activity in most economies, any disruption or imbalance in its infrastructure will have significant impact on the entire economy. By developing a sound financial system the banking industry can bring stability within financial markets.

Deregulation in the financial sector had widened the product range in the developed market. Some of the new products introduced are LBOs, credit cards, housing finance, derivatives and various off balance sheet items. Thus new vistas have created multiple sources for banks to generate higher profits than the traditional financial intermediation. Simultaneously they have opened new areas of risks also. During the past decade, the Indian banking industry continued to respond to the emerging challenges of competition, risks and uncertainties. Risks originate in the forms of customer default, funding a gap or adverse movements of markets. Measuring and quantifying risks in neither easy nor intuitive. Our regulators have made some sincere attempts to bring prudential and supervisory norms conforming to international bank practices with an intention to strengthen the stability of the banking system. Growing number of high-profile operational loss events worldwide have led banks and supervisors to increasingly view operational risk management as an integral part of the risk management activity. Management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, reduce errors in transaction processing, and so on. However, what is relatively new is the view of operational risk management as a comprehensive practice comparable to the management of credit and market risk. 'Management' of operational risk is taken to mean the 'identification, assessment, and / or measurement, monitoring and control /mitigation' of this risk.

Banks in India work in a controlled regime similar to several other countries. The focus of the research is to test the operational risk of sample banks operating in India and identify the extent to which banks are capable of bearing operational risks. The capital adequacy criteria to account for the operational risk using the Basic Indicator Approach points out that several banks do not meet the regulatory requirements. Risk management strategies of banks to reflect the price behaviour have been examined and banks that have adequate exposure to risk cover have been contrasted with banks having inadequate risk exposure cover. Growing number of high-profile operational loss events worldwide have led banks and supervisors to increasingly view operational risk management as an integral part of risk management activity.Growing number of high-profile operational loss events worldwide have led banks and supervisors to increasingly view operational risk management as an integral part of the risk management activity. Management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, reduce errors in transaction processing,

and so on. However, what is relatively new is the view of operational risk management as a comprehensive practice comparable to the management of credit and market risk. 'Management' of operational risk is taken to mean the 'identification, assessment, and / or measurement, monitoring and control /mitigation' of this risk.

Management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, reduce errors in transaction processing, and so on. However, what is relatively new is the view that operational risk management is a comprehensive practice comparable to the management of credit and market risks.Operational Risk differs from other banking risks in that it is typically not directly taken in return for an expected reward but is implicit in the ordinary course of corporate activity and has the potential to affect the risk management process. However, it is recognised that in some business lines with minimal credit or market risks, the decision to incur operational risk, or compete based on the perceived ability to manage and effectively price this risk, is an integral part of a bank's risk reward calculus. At the same time, failure to properly manage operational risk can result in a misstatement of an institution's risk profile and expose the institution to significant losses. 'Management' of operational risk is taken to mean the 'identification, assessment or measurement, monitoring and control / mitigation' of this risk.Operational Risk Management policies, processes, and procedures should be documented and communicated to appropriate staff i.e., the personnel at all levels in units that incur material operational risks. The policies and procedures should outline all aspects of the institution's Operational Risk Management framework, including: - The roles and responsibilities of the independent bank-wide Operational Risk Management function and line of business management. A definition for operational risk, including the loss event types that will be monitored.

The capture and use of internal and external operational risk loss data including data potential events (including the use of Scenario analysis). The development and incorporation of business environment and internal control factor assessments into the operational risk framework. A description of the internally derived analytical framework that quantifies the operational risk exposure of the institution. A discussion of qualitative factors and risk mitigants and how they are incorporated into the operational risk framework. A discussion of the testing and verification processes and procedures. A discussion of other factors that affect the measurement of operational risk.

Provisions for the review and approval of significant policy and procedural exceptions.

Regular reporting of critical risk issues facing the banks and its control/mitigations to senior management and Board.

Top-level reviews of the bank's progress towards the stated objectives.

Checking for compliance with management controls.

Provisions for review, treatment and resolution of non-compliance issues.

A system of documented approvals and authorisations to ensure accountability at an appropriate level of management.

Define the risk tolerance level for the bank, break it down to appropriate sublimits and prescribe reporting levels and breach of limits.

Indicate the process to be adopted for immediate corrective action.VARIOUS TYPE OF RISKSa) Business Related Risk

Credit Risk

Market Risk

Country Risk

Business Environment Risk

Operational Risk

Group Risk

b) Control Related Risk

OPERATIONAL RISK :- The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external

events (BIS, 1988).Always banks live with the risks arising out of human error, financial fraud and natural disasters. The recent happenings such as WTC tragedy, Barings debacle etc. has highlighted the potential losses on account of operational risk. Exponential growth in the use of technology and increase in global financial inter-linkages are the two primary changes that contributed to such risks. Operational risk, though defined as any risk that is not categorized as market or creditrisk, is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. In order to mitigate this, internal control and internal audit systems are used as the primary means.Growing number of high-profile operational loss events worldwide have led banks

and supervisors to increasingly view operational risk management as an integral