Operational risk management in Indian commercial banks

Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. Basel-II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel-II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulation about how much capital banks need to put aside to guard against the types of financial and operational risks bank face. Basel-II defines operational risk for the purpose of capital adequacy. The Basel Committee in February 2003 has defined the principles for the risk management process. This is known as “Sound Practices for the Management and Supervision of Operational Risk (SPOR). These set of practices have also been outlined by the Reserve Bank of India (RBI) in its guidance note to all banks in India on 14 October 2005. For operational risk management, banks should assess the operational risk based on both direct and indirect losses. This paper examines banks have to consider the operational risk management.