Finalle

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OPERATIONAL RISK MODEL
INTRODUCTION
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk but excludes strategic and reputation risk. Operational risk management is perhaps coordinated centrally but most commonly implemented in different operational units (e.g. the IT department takes care of information risks, the HR department takes care of personnel risks, etc.) With Basel II, operational risk is subject to regulatory review: There will be a capital charge for operational risk similar to capital charges of both credit risk and market risk Management of operational risk needs to fulfill quantitative requirements
For measuring capital charges for operational risk there are basically three approaches. Basic Indicator Approach (BIA) Standardized Approach (SA) Advance Measurement Approach (AMA)
As with market and credit risk, the management of operational risk follows a sequence of logical steps: (1) Identification (2) Assessment, (3) Monitoring, and (4) Control or mitigation.
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Historically, operational risk has been managed by internal control mechanisms within business lines, supplemented by the audit function. The industry is now starting to use specific structures and control processes specifically tailored to operational risk.
RELEVANCE
Growing number of high profile operation loss events worldwide have led bank and supervisors to increasingly view operational risk management as an integral part of risk management activity . 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. The project aims at designing a framework to quantify the operational risk in banks. It will guide the bank to measure the adequate amount of capital it needs to maintain so as to hedge against future operational losses. Past history has shown us that Operational losses can play a significant role in the downfall of banks.
Past major operational losses

January 2008- Socit Gnrale (4.9 billion loss) A French trader, Jrme Kerviel, was charged in January 2008 trading loss incident, resulting in losses valued at approximately 4.9 billion. February 2002Allied Irish Bank ($691 million loss). A rogue trader, John Rusnack, hides three years of losing trades on the yen/dollar exchange rate at the U.S. subsidiary. The banks reputation is damaged.
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March 1997NatWest ($127 million loss). A swaption trader, Kyriacos Papouis, deliberately covers up losses by mispricing and overvaluing option contracts. The banks reputation is damaged. NatWest is eventually taken over by the Royal Bank of Scotland. September 1996Morgan Grenfell Asset Management ($720 million loss). A fund manager, Peter Young, exceeds his guidelines, leading to a large loss. Deutsche Bank, the German owner of MGAM, agrees to compensate the investors in the fund. June 1996Sumitomo ($2.6 billion loss). A copper trader amasses unreported losses over three years. Yasuo Hamanaka, known as Mr. Five Percent, after the proportion of the copper market he controlled, is sentenced to prison for forgery and fraud. The banks reputation is severely damaged. September 1995Daiwa ($1.1 billion loss). A bond trader, Toshihide Igushi, amasses unreported losses over 11 years at the U.S. subsidiary. The bank is declared insolvent. February 1995Barings ($1.3 billion loss). Nick Leeson, a derivatives trader, amasses unreported losses over two years. Barings goes bankrupt. October 1994Bankers Trust ($150 million loss). The bank becomes embroiled in a high-profile lawsuit with a customer that accuses it of improper selling practices. Bankers settles, but its reputation is badly damaged. It is later bought out by Deutsche Bank. The largest of these spectacular failures can be traced to a rogue trader, or a case of internal fraud. It should be noted that the cost of these events has been quite high. They led to large, direct monetary losses, sometimes even to bankruptcy. In addition to these direct costs, banks often suffered large indirect losses due to reputation damage. NATIONAL INSTITUTE OF BANK MANAGEMENT
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OBJECTIVE
To study about the various sources of operational risk in the Exim Bank and compare it with the other commercial banks operational risk. Hence the objective of the project is: To find the areas of operational risk in commercial banks To narrow down the areas by eliminating those not relevant for Exim bank. To prepare a framework for measuring operational risk using AMA approach To find out the appropriate amount of capital that needs to be maintained by the
bank to meet these losses.
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REVIEW OF LITERATURE
Operation risk is intrinsic to a bank and should hence be an important component of its enterprise wide risk management systems. It is recognised that the approach for operational risk management that may be chosen by an individual bank will depend on a range of factors, including size and sophistication, nature and complexity of its activities. There are basically three approaches to measure operational risks
Basic Indicator Approach
The basic approach or basic indicator approach is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions. Basel II requires all banking institutions to set aside capital for operational risk. Basic indicator approach is much simpler compared to the alternative approaches (i.e. standardized approach and advanced measurement approach) and this has been recommended for banks without significant international operations. Based on the original Basel Accord, banks using the basic indicator approach must hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average. The fixed percentage alpha is typically 15 percent of annual gross income.
The Standardized Approach
The standardized approach is a set of operational risk measurement techniques proposed under capital adequacy rules for banking institutions. Basel II requires all banking NATIONAL INSTITUTE OF BANK MANAGEMENT
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institutions to set aside capital for operational risk. Standardized approach falls between basic indicator approach and advanced measurement approach in terms of degree of complexity. Based on the original Basel Accord, under the Standardized Approach, banks activities are divided into eight business lines: corporate finance, trading & sales, retail banking, commercial banking, payment & settlement, agency services, asset management, and retail brokerage. Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that business line. The total capital charge is calculated as the three-year average of the simple summation of the regulatory capital charges across each of the business lines in each year. In any given year, negative capital charges (resulting from negative gross income) in any business line may offset positive capital charges in other business lines without limit.
Advance Measurement Approach
Under this approach the banks are allowed to develop their own empirical model to quantify required capital for operational risk. Banks can use this approach only subject to approval from their local regulators. It is suited for large sized banks and those operating at the international level. Based on the analysis of all available and relevant data, by means of a statistical model aimed at estimating the probability distribution of the losses.
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There are four elements to be in place to build an AMA framework. These are: 1. 2. 3. 4. Internal loss data External loss dataScenario analysis Bank specific environmental and Internal control factors
In order to qualify for use of the AMA approach, a bank must satisfy its regulator that, at a minimum: 1. Its board of directors and senior management, as appropriate, are
actively involved in the oversight of the operational risk management framework; 2. 3. It has an operational risk management system that is conceptually It has sufficient resources in the use of the approach in the major sound and is implemented with integrity; and business lines as well as the control and audit areas. Under the AMA approach the Basel guidelines recognizes eight different business lines and seven event types under each.
Business Line Identification

Banks have different business mixes and risk profiles. Hence the most intractable problem banks face in assessing operational risk capital is due to this diversity. The best way to get around this intractable problem in computation is by specifying a range of operational risk multipliers for specified distinct business lines. The following benefits are expected to accrue by specifying business lines:
1.
Banks will be able to crystallise the assessment processes to the underlying The line managers will be aware of operational risk in their line of business;
operational risk and the regulatory framework;

2.
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3.
Confusion and territorial overlap which may be linked to subsets of the overall
risk profile of a bank can be avoided. For the purpose of operational risk management, the activities of a bank may be mapped into eight business lines identified in the New Capital Adequacy Framework. The various products launched by the banks are also to be mapped to the relevant business line. Banks must develop specific policies for mapping a product or an activity to a business line and have the same documented to indicate the criteria. The following are the eight recommended business lines. 1. Corporate finance 2. Trading and sales 3. Retail banking 4. Commercial banking 5. Payment and settlement 6. Agency services 7. Asset management 8. Retail brokerage
The following lists the official Basel II defined event types, which are to be taken into account for calculating capital charges for operational risk, with some examples for each category: Basel II event type categories
1.
Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking External Fraud- theft of information, hacking damage, third-party theft and
of positions, [bribery]
2.
forgery NATIONAL INSTITUTE OF BANK MANAGEMENT
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3.
Employment Practices and Workplace Safety - discrimination, workers Clients, Products, & Business Practice- market manipulation, antitrust, Damage to Physical Assets - natural disasters, terrorism, vandalism Business Disruption & Systems Failures- utility disruptions, software failures, Execution, Delivery, & Process Management - data entry errors, accounting
compensation, employee health and safety

4.
improper trade, product defects, fiduciary breaches, account churning

5. 6.
hardware failures
7.
errors, failed mandatory reporting, negligent loss of client assets.
Like market VAR, the distribution of operational losses can be used to estimate expected losses, as well as the amount of capital required to support this financial risk. The Expected Loss (EL) represents the size of operational losses that should be expected to occur. Typically, this represents high-frequency, low-severity events. This type of loss is generally absorbed as an ongoing cost and managed through internal controls. Such losses are rarely disclosed. The Unexpected Loss (UL) represents the deviation between the quantile loss at some confidence level and the expected loss. Typically, this represents lower-frequency, higher-severity events. This type of loss is generally offset against capital reserves or transferred to an outside insurance company, when available. Such losses are sometimes disclosed publicly, but often with little detail. The Stress Loss (SL) represents a loss in excess of the unexpected loss. By definition, such losses are very infrequent but extremely damaging to the institution. The Barings bankruptcy can be attributed, for instance, in large part to operational risk. This type of NATIONAL INSTITUTE OF BANK MANAGEMENT
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loss cannot be easily offset through capital allocation, as it would require too much capital. Ideally, it should be transferred to an insurance company. Due to their severity, such losses are disclosed publicly.
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METHODOLOGY
Some of the guiding principles for banks to mange operational risks are identification, measurement, monitoring and control of these risks.
I. IDENTIFICATION OF OPERATIONAL RISK

Banks should identify and assess the operational risk inherent in all material products, activities, processes and systems. Banks should also ensure that before new products, activities, processes and systems are introduced or undertaken, the operational risk inherent in them is identified clearly and subjected to adequate assessment procedures. Effective risk identification should consider both internal factors (such as the banks structure, the nature of the banks activities, the quality of the banks human resources, organisational changes and employee turnover) and external factors (such as changes in the industry and technological advances) that could adversely affect the achievement of the banks objectives. The first step towards identifying risk events is to list out all the activities that are susceptible to operational risk. Usually this is carried out at several stages.
list the main business groups viz. corporate finance, trading and sales, retail
banking, commercial banking, payment and settlement, agency services, asset management, and retail brokerage.
The analysis can be further carried out at the level of the product
teams in
these business groups, e.g. transaction banking, trade finance, general banking, cash management and securities markets.
Next, the product offered within these business groups by each product team can After the products are listed, the various operational risk events
be analyzed, e.g. import bills, letter of credit, bank guarantee.
associated with these products are recorded. An operational risk event is an NATIONAL INSTITUTE OF BANK MANAGEMENT
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incident/experience that has caused or has the potential to cause material loss to the bank either directly or indirectly with other incidents. Risk events are associated with the people, process and technology involved with the product.
II. MEASUREMENT OF OPERATIONAL RISK

As specified earlier, Basel II has defined eight business lines and seven event types, which are to be taken into account for calculating capital charges for operational risk. Hence the capital charge required to be kept by banks is the summation of capital charge (VaR) of each business line and event types. EVENT TYPES Internal External Employment Fraud Fraud Practices and Workplace safety VaR 3 VaR 10 VaR 17 VaR 24 Clients, Damage to Products Physical & Business Assets Practices VaR 4 VaR 11 VaR 18 VaR 25 VaR 5 VaR 12 VaR 19 VaR 26 Business Disruption and Systems Failure VaR 6 VaR 13 VaR 20 VaR 27 Execution, Delivery and Process management VaR 7 VaR 14 VaR 21 VaR 28
BUSI NESS LINES Corporate VaR 1 VaR 2 Finance Trading and VaR 8 VaR 9 Sales Retail Banking VaR 15 VaR 16 Commercial Banking Payment and Settlement VaR 22 VaR 23
VaR 29 VaR 30
VaR 31
VaR 32
VaR 33
VaR 34
VaR 35
Agency Service VaR 36 VaR 37 Asset Management Retail Brokerage VaR 43 VaR 44
VaR 38 VaR 45
VaR 39 VaR 46
VaR 40 VaR 47
VaR 41 VaR 48
VaR 42 VaR 49
VaR 50 VaR 51
VaR 52
VaR 53
VaR 54
VaR 55
VaR 56
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CALCULATION OF OPERATIONAL RISK VAR

After having collected the data of the past years operational loss for each business line and event type, we need to follow the Loss Distribution Approach. For this method we shall use the software @ Risk which helps in simulation. The steps will be as follows for calculating the VaR of one particular cell losses. Repeat the process for all simulated frequencies. For each simulated frequency, we now have the corresponding severity or size of Arrange the losses in descending order and mark off the appropriate VaR Choose a loss threshold and estimate the distribution (parameter values) of all This gives the severity distribution. From the loss data, also find the average number of losses per year. Use the average loss number as an input in the frequency distribution (Poisson) of Use each simulated frequency as the assumed number of losses, per year, to Add all the losses, for each simulated frequency, to find out the size of annual losses above the threshold.
losses, to simulate a large number of annual loss frequencies generate random numbers from the severity distribution.
annual losses.
Similarly the VaR for each cell will be calculated and added together to get the overall operational VaR of the bank.
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III. MONITORING OF OPERATIONAL RISK

An effective monitoring process is essential for adequately managing operational risk. Regular monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational risk. Promptly detecting and addressing these deficiencies can substantially reduce the potential frequency and/or severity of a loss event. In addition to monitoring operational loss events, banks should identify appropriate indicators that provide early warning of an increased risk of future losses. Such indicators (often referred to as early warning indicators) should be forward-looking and could reflect potential sources of operational risk such as rapid growth, the introduction of new products, employee turnover, transaction breaks, system downtime, and so on. When thresholds are directly linked to these indicators, an effective monitoring process can help identify key material risks in a transparent manner and enable the bank to act upon these risks appropriately. The frequency of monitoring should reflect the risks involved and the frequency and nature of changes in the operating environment. Monitoring should be an integrated part of a banks activities. The results of these monitoring activities should be included in regular management and Board reports, as should compliance reviews performed by the internal audit and/or risk management functions. Reports generated by (and/or for) intermediary supervisory authorities may also inform the corporate monitoring unit which should likewise be reported internally to senior management and the Board, where appropriate. Senior management should receive regular reports from appropriate areas such as business units, group functions, the operational risk management unit and internal audit. The operational risk reports should contain internal financial, operational, and compliance data, as well as external market information about events and conditions that NATIONAL INSTITUTE OF BANK MANAGEMENT
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are relevant to decision making. Reports should be distributed to appropriate levels of management and to areas of the bank on which areas of concern may have an impact. Reports should fully reflect any identified problem areas and should motivate timely corrective action on outstanding issues. To ensure the usefulness and reliability of these risk reports and audit reports, management should regularly verify the timeliness, accuracy, and relevance of reporting systems and internal controls in general. Management may also use reports prepared by external sources (auditors, supervisors) to assess the usefulness and reliability of internal reports. Reports should be analysed with a view to improving existing risk management performance as well as developing new risk management policies, procedures and practices.
IV. CONTROLLING OPERATIONAL RISK

1.
Internal Control Methods
Separation of functions- Individuals responsible for committing transactions should not perform clearance and accounting functions. Dual entries. Entries (inputs) should be matched from two different sourcesthat is, the trade ticket and the confirmation by the back office. Reconciliations. Results (outputs) should be matched from different sourcesfor instance, the traders profit estimate and the computation by the middle office. Tickler systems. Important dates for a transaction (e.g., settlement and exercise dates) should be entered into a calendar system that automatically generates a message before the due date. Controls over amendments. Any amendment to original deal tickets should be subject to the same strict controls as original trade tickets.
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Confirmations. Trade tickets need to be confirmed with the counterparty, which provides an independent check on the transaction. Verification of prices. To value positions, prices should be obtained from external sources. This implies that an institution should have the capability of valuing a transaction in-house before entering it. Authorization. The counterparty should be provided with a list of personnel authorized to trade, as well as a list of allowed transactions. Settlement. The payment process itself can indicate if some of the terms of the transaction have been incorrectly recordedfor instance, if the first cash payments on a swap are not matched across counterparties. Internal/external audits. These examinations provide useful information on potential weakness areas in the organizational structure or business process.
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ANALYSIS / RESULTS
The Loss Distribution method has been used to prepare the model, using hypothetical data, for the quantification of the operational risk with help of the @ Risk software. The various steps involved in the calculation of the capital charges for operational risk are shown below:
STEP I
Taken 10000 hypothetical operational losses for the last five years. Chosen a threshold, say Rs. 10 lakhs, that is all losses above the threshold limit are considered. Left with 406 losses which are above the threshold. The average losses per year comes out to be 406/5= 81 losses
STEP II
Use the @ Risk software to simulate 1000 numbers of possible losses for the next year, assuming that frequency follows Poisson Distribution.
STEP III
Use each simulated frequency as the assumed number of losses, per year, to generate random numbers from the severity distribution following beta general distribution.
Add all the losses, for each simulated frequency, to find out the size of
annual losses of that particular frequency. For each simulated frequency, we now have the corresponding severity or size of annual losses NATIONAL INSTITUTE OF BANK MANAGEMENT
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The following example is for one of the simulated frequency (77)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 1.713974 1.477576 1.451916 1.027111 1.260047 1.124151 1.126729 1.03285 1.008833 1.138821 1.624023 1.267568 1.058486 1.103286 1.076664 1.405912 1.429015 1.246755 1.062508 1.186215 1.065508 1.040423 1.071543 1.117467 1.592015 1.134189 1.170018 1.153328 1.045434 1.287045 1.098925 1.488481 1.903382 1.183812 1.00513 1.226063 1.069107 1.231744 1.37287 1.790355 1.174178 1.204803 1.390297 1.035344 1.276848 1.556151 1.088116 1.11108 1713974 1477576 1451916 1027111 1260047 1124151 1126729 1032850 1008833 1138821 1624023 1267568 1058486 1103286 1076664 1405912 1429015 1246755 1062508 1186215 1065508 1040423 1071543 1117467 1592015 1134189 1170018 1153328 1045434 1287045 1098925 1488481 1903382 1183812 1005130 1226063 1069107 1231744 1372870 1790355 1174178 1204803 1390297 1035344 1276848 1556151 1088116 1111080 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 1.002235 1.015482 1.027883 1.515971 1.159673 1.244389 1.210144 1.330928 1.219528 1.1147 1.162303 1.364838 1.082884 1.092656 1.343005 1.053794 1.193032 1.013263 1.051613 1.298141 1.1472 2.093391 1.024101 1.096686 1.044751 1.018319 1.317953 1.009739 1.309135 1002235 1015482 1027883 1515971 1159673 1244389 1210144 1330928 1219528 1114700 1162303 1364838 1082884 1092656 1343005 1053794 1193032 1013263 1051613 1298141 1147200 2093391 1024101 1096686 1044751 1018319 1317953 1009739 1309135 61723813
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STEP IV Arrange the losses in descending order and mark off the appropriate VaR.
Simulated losses
Annual Frequency 77 95 84 72 83 97 82 76 73 78 83 86 73 71 69 81 95 77 91 75 Severity Sorted Losses
61723813
116430320 103157004 88491940 101521713 118676061 100518494 92970379 89661047 94180576 101792984 105168276 89297395 87057060 84357010 99175398 116313096 94133271 111627464 91793865
118676061 116430320 116313096 111627464 105168276 103157004 101792984 101521713 100518494 99175398 94180576 94133271 92970379 91793865 89661047 89297395 88491940 87057060 84357010 61723813 95% VaR
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CONCLUSION AND RECOMMENDATIONS

I. CONCLUSION
The management of operational risk is beset by conceptual problems.
First, unlike market and credit risk, operational risk is largely internal to
financial institutions. Because institutions are understandably reluctant to advertise their mistakes, it is more difficult to collect data on operational losses. Another problem is that losses may not be directly applicable to another institution, as they were incurred under possibly different business profiles and internal controls.
Second, market and credit risk can be conceptually separated into exposures
and risk factors. Exposures can be easily measured and controlled. In contrast, the link between risk factors and the likelihood and size of operational losses is not so easy to establish. Here, the line of causation runs through internal controls.
Third, very large operational losses, which can threaten the stability of an
institution, are relatively rare. This leads to a very small number of observations in the tails. This thin tails problem makes it very difficult to come up with a robust value for operational risk (VOR) at a high confidence level. As a result, there is still some scepticism as to whether operational risk can be subject to the same quantification as market and credit risks.
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II. RECOMMENDATIONS
An effective monitoring process is essential for adequately managing operational risk. Regular monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational risk. Promptly detecting and addressing these deficiencies can substantially reduce the potential frequency and/or severity of a loss event. In addition to monitoring operational loss events, banks should identify appropriate indicators that provide early warning of an increased risk of future losses. The frequency of monitoring should reflect the risks involved and the frequency and nature of changes in the operating environment. Monitoring should be an integrated part of a banks activities. Adequate internal controls within banking organisations must be supplemented by an effective internal audit function that independently evaluates the control systems within the organisation. Internal audit is part of the ongoing monitoring of the bank's system of internal controls and of its internal capital assessment procedure, because internal audit provides an independent assessment of the adequacy of, and compliance with, the banks established policies and procedures.
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IMPLEMENTATION STRATEGY
The model prepared under this project is for commercial banks which undertake various business lines recognized by Basel. Hence while applying this model to Exim bank we need scale it down to those areas which are relevant to the banks operations. The operations of Exim bank differ from the commercial banks on the following grounds: Exim bank has not yet totally entered into the retail sector apart from the deposits from the retail customers. Exim bank, in contrast to the other commercial banks, has very few representative offices which reduces the quantum and frequency of operational losses. There is no cash dealing in Exim bank thereby further reducing the possibility of operational losses. One of the major causes of operational loss is PEOPLE, which is very few in Exim bank when compared to other similar sized commercial bank. Hence after taking into account the above points the model should be customised as per the banks operations.
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SUGGESTIONS FOR FUTURE RESEARCH

Apart from the loss distribution method there are two more approaches with which the operational risk of a bank can be measured. They are the Scenario Analysis method and the Extreme Value Theory (EVT). Hence once the bank has applied the Loss Distribution method for measuring its losses it can further do analysis of operations using the Scenario Based approach. A scenario based approach is inherently forward looking and is therefore able to respond at an early stage to any changes. This responsiveness is well suited to a dynamic business and organisational environment and supports a proactive risk management culture. As well as making full use of expert opinion a Scenario based AMA also takes into account empirical data such as internal losses, relevant external losses or key risk indicators. The process of generating and assessing scenarios as well as evaluating the quality of the associated risk factors and control environment provides an important flow of management information. This can be used as the basis for risk management decisions, for example to establish the priorities for reducing risk by improving the quality of specific risk factors or controls. Any such change in the organisations risk profile should prompt a reassessment of the corresponding scenarios. For example, if an increase in risk is introduced through the purchase of a new business, then this will be reflected in increased frequency and/or severity estimates and a higher capital requirement. Correspondingly, a reduction in frequency and/or severity estimates, for example through improved controls, will generate a lower capital requirement. By creating an incentive framework in this way a Scenario Based AMA facilitates a progressive process of improvement in operational risk management. The close involvement of risk takers in all organisational parts increases the transparency of the process and raises risk awareness. The process is clearly seen to be business specific and
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has the flexibility to adjust to the particular needs of an organisational part. Being embedded in this way contributes to meeting the Basel 2 use test requirement.
AREAS OF OPERATIONAL RISK

(APPENDIX I)
I. PROCESSES
1. PAYMENTS
Branch staff do not feed the cheque books issued into the system
Cheques/Withdrawals of higher values, say above Rs. 20000, paid without
examining them thru ultra-violet lamp Cheques received for clearing/collection are not branded with Banks Special Crossing Stamps immediately on receipt Failure to keep proper custody of cheque books and DD/BC and maintain proper stock registers Fraudulent encashment of BC/DD/TC
Payment of cheques which are not properly drawn or are not of apparent tenor
While making payments against withdrawl slips, the usual precautions are ignored-like payments to third parties not beyond 1000/ withdrawals accompanied by the pass book.
2. CHEQUE CLEARING
Clearing cheques wrongly entered NATIONAL INSTITUTE OF BANK MANAGEMENT
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Pilferage and encashment of cheques lodged for clearing
3. CASH HANDLING
ATM cash not tallied on daily basis with the branch records Cash related failures- to maintain cash remittances register, to immediately record the cash movement, to not allow unauthorized persons inside the cash cabin, to maintain proper records of transfer of funds between the cashier, to keep the cashier cabin locked at all times, following guidelines of dual key etc. Cashiers or thrift collectors misappropriating the cash deposited by the customers Failure to observe the guidelines on issuing cash receipts, example- cashier does not write amount received in words, or supervisors signature not obtained on the counterfoil etc Looting the bank staff, outside the bank during cash transit Misappropriation of cash in currency chest/ vault room
4. ACCOUNT OPENING
Accounts where KYC guidelines were not followed Asking for irrelevant private questions Impersonated accounts deliberately opened Not following KYC and not monitoring the initial transactions in the new account
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Specimen signature cards, account opening forms, ledgers/registers are not
held in proper custody at all times whereby unauthorized persons gain access to them
5. DEPOSITS
Accounts closed and with zero balance are not closed immediately deleted from the master Accounts opened/closed without branch managers approval Blind Persons accounts opened without following the checklist A to E Common errors during the closure/transfer of savings account-like-signature of the account holder not obtained, all unused cheque leaves not surrendered, managers consent or approval of all the department not obtained, accounts transferred to wrong branch etc CWD-TEN-register not maintained and the transaction not reported Failure to follow up and pass AWB vouchers, and check and reconcile AWB supplementary on daily Giving details of our depositors to marketing agencies Illiterate persons accounts-where CD or joint accounts opened for them without any reasons, or cheque books issued, or third party withdrawals permitted Instances where the mandate though recorded was not followed Instances where the transactions were executed-ignoring the stop payment instructions NATIONAL INSTITUTE OF BANK MANAGEMENT
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Issue of cheque books without taking into account the frequency of cheque returns, non maintenance of minimum balance, or without verifying the signature of the applicants, or to a third party whose signature is not attested by the accountholder, or without proper receipt/acknowledgement Losses when the changes made in the constituent are not recorded timely. Mandate to operate the account is not recorded timely Misuse of customers confidential information to staff or banks gain Purdanashin ladies accounts- where such accounts opened for illiterate persons, or CD account opened without RO approval, or allowed without attestation from her husband/guardian Revenue leakage in case of issue of cheque books, duplicate pass book, statement of accounts, cheque returns, stop payment instructions, standing instructions etc. Standing instructions not complied on time Wrong accounts debited/credited transactions
6. CREDIT ANALYSIS
Accommodation of friends/relatives with intention of malafide/corrupt practices Account was taken over from another bank when its status was overdue/substandard/doubtful Agency agreement with the principal for units engaged in distribution of products not verified
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Assets and Liability statements furnished by borrowers were not subject to scrutiny Balance sheet from sister concerns on a common date not obtained for ascertaining inter-locking of Bills purchased/discounted for non-constituents who were not assessed for regular limits in violation of RBI circular dated 24 January 2003 Credit limits sanctioned in contravention of the loan policy of the bank prevailing at the time of Credit opinion reports(COR) not obtained from other banks/financial institutions before sanctioning limits/takeover Delayed appraisal and/or disbursal Dependants one/two buyers not analysed properly Details of overdues/excess/irregularity(number of times, period and date/mode of regularization) not provided in the appraisal note Frequent cheque purchase allowed without fixing limits Frequent excesses despite internal norm not to exceed 3 times Harass applicants to submit unwanted papers/documents/information Information on litigation against borrower not obtained Inter-firm comparison not made LCs opened when earlier LCs had devolved Limits sanctioned/enhanced on the basis of ambitious projections NATIONAL INSTITUTE OF BANK MANAGEMENT
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Limits sanctioned/renewed without obtaining projection for the ensuing year Loans against forged deposit receipts or encashing such receipts Managerial capacity not assessed properly No undertaking obtained from borrowing Company to the effect that no consideration was paid by it to its guarantor/directors for guarantees extended Non-obtention of audited balance sheets Non-reporting of excess/ad hoc granted (or bills/cheques purchased beyond discretionary powers) Peer group analysis not done
Presanction appraisal was perfunctory/ad hoc/not done at all
Rating exercise not carried out at branch level Repayment capacity not assessed by analyzing DSCR/cash flow/funds flow statements Repeated ad hocs soon after sanction/ frequent excesses even after enhancement Sanctioning authority has exceeded his discretion/has flagrantly abused his power with malafide intention Sanctioning inadequate amount SSI/registration certificate not obtained while sanctioning credit facilities to SSI
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Supply bill facility sanctioned for purchase of bills covering payment of labour charges in violation of RBI circular DBOD no. BC.42/13.03.00/00.01 dated 1 November 2000 Technical feasibility/Financial viability of the project not done Trend analysis for financials not done Unnecessary asking the applicants to come repeatedly to the bank and not giving a comprehensive list of required documents in the first meeting itself
7. DOCUMENTATION
Availed advances against forged supply bills Availed advances against forged title deeds or fake invoices/salary
certificates Joint documentation not held/done in consortium accounts. (in some
cases the bank was the leader) Revival letters/balance confirmation not obtained and so documents
are time-barred Sanction failed to stipulate appropriate terms/conditions usually
necessary for such credit facility Undertaking for disclosure of name in the event of loan default not
obtained
8. FOLLOW UP AND MONITORING

Account was allowed to be operated without drawing power/adequate
stock of prime security
IDBI BANK
Age-wise breakups of receivables not indicated in the book debt-
statement/book debt-statement not certified by chartered accountants on quarterly basis Consortium meetings not held regularly despite being leader Cover period for book debts not indicated in the sanction terms Delayed review of limits Disclosure of borrower details DP not calculated after netting of the sundry creditors/obsolete
recievables End-use of funds not ascertained/verified/diversion of funds Exchange of credit information not done on a regular basis in
accounts under consortium/multiple banking arrangements Failure to file suit within the time limit and allowing the documents
to become time-barred time No practice to compile credit reports on drawees Non-adherence to specific sanction terms Non-routing of sales proceeds through the account QIS/financial statements not scrutinized Sanction advice not sent or sent with inadequate details Guarantee not invoked despite the account being irregular for a long
IDBI BANK with Unit inspection not done timely/properly
Terms and conditions stipulated in the sanctions were not complied
9. CHARGE CREATION AND COLLATERAL MANAGEMENT

Delayed renewals of insurance/inadequate insurance EC not obtained/EC for broken period not obtained Erosion/depletion of securities due to wrongful act on the part of the bank officers who took fraudulent title deeds/documents Failure of the approved lawyers/valuers to give correct opinion/value Failure to obtain legal opinion from the approved lawyers Failure to obtain valuation report from the approved valuers Formalities relating to creation of charge for securing limits not complete In case of advance against shares- required margin not kept/valuation of securities not done at prescribed intervals, or no undertaking to sell shares in case market value falls 25% below the value accepted at the time of sanction Power of attorney not obtained and registered with the drawees Valuation of property not done at prescribed periodicity
10. INTEREST CHARGES

Interest calculation in deposit and advances are not checked manually(at random) by the supervisory staff Non-charging of interest at monthly rests
IDBI BANK
11. COLLECTION
Collection of cheques credited to wrong accounts Fraudulent encashment of cheques received for collection
12. CUSTODY PROCESSES

Failure to close the locker accounts whenever there is any change in the constituents Premises keys are parted away to clerical/sub staff/outsiders for carrying out sweeping, repairing work etc in the absence of the supervisors Theft due to unauthorized access to vault room or lockers
13. CREDIT CARD TRANSACTIONS

Fraudulent encashment of credit cards Loss due to cash payment against credit cards-without verifying the hot list bulletins
Stolen/lost credit cards misused by 3rd parties
14. MARKETING
Chasing clients(existing/prospective) for business, at odd hours or too frequently Risks due to innovative marketing techniques of the competitors Severity of competition
15. PAYROLL PROCESSESS

Claims arising from the discrimination in promotion or selection policies NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK Claims for the damages caused on duty
Expenditure on treatment or recovery of the employees who met with
accidents on duty Losses on account of strikes/lockouts Medical expenses reimbursed/reimbursiable to the employees on
account of the policies on general health and safety Possible losses due to the compensation claims on termination issues
16. ADMINISTRATION AND HOUSE KEEPING

Access by authorized vendors(For maintenance and trouble shooting purpose like HCL, Wipro etc) is not recorded chronologically Not following guidelines on monitoring and maintenance of user-ids and passwords(not deleting the user-ids of the persons transferred, suspended,retired etc, or not deactivating the user-ids of persons on long leave, allowing access to menus that are not relevant as per the roles, divulging passwords etc) Our officials do not always accompany the outside vendors during their visits and/or unauthorized vendors are allowed access to the systems.
II. SYSTEMS
1. DEPOSIT
Fraudulent withdrawals from the customers account-SB/CD/CC etc System allows desk officers to pass transactions in minors account even after the minor attains majority, without the approval of the senior/branch managers. NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK System does not charge for the stop payments
System does not record the frequency of cheque returns in the accounts and does not charge for the same on a cumulative basis so that all the charges applicable to that account which could not be charged on a earlier date, due to insufficient balance, can be recovered as and when there is
System has no provisions to execute standing instructions and charge for
SME without manual intervention System has no provisions to give warning in case of crediting clearing cheques to NRE accounts while approving/passing the transactions in the supervisory menu System has no provision to give warning in case of crediting collection cheques to NRE accounts
2. LOANS
Advances availed against spurious jewels Credit proposal receipt-register not maintained/updated Discounting bills/cheques despite repeated bill/cheque returns Discounting bill/cheques for accommodation Failure to judge the managerial capability of the applicants Failure to properly assess the economic viability of the project
Failure to properly assess the technical feasibility of the project
Granting loans against deposit receipts already held as security Limits released outside the consortium NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Market intelligence/ information is insufficient/absent Prescribed margin of 30%(internal policy) not maintained while sanctioning loans under Liquirent scheme Purchase of cheques drawn by sister concerns or drawn for no consideration other than to get temporary credits/to siphon funds Rating model is not able to control the qualitative risks appropriately Theft of articles/assets/jewellery/securities pledged to the bank
3. CUSTOMER RELATIONSHIP
Frequency with which the ATMs are out of order
4. MANAGEMENT
Exceptional reports not scrutinized and signed by the branch managers on the daily basis Job rotation is not effected periodically to ensure that no member is allowed to do the same job exclusively for a long time. KYC concept not followed The manager does not go through the previous days vouchers every day to ensure that no unauthorized transactions are put through Transactions involving disproportionate amounts in staff accounts are not verified by the deputy Manager to be satisfied about the genuineness of such transactions
5. INFORMATION SYSTEMS (MIS)

Certificate of compliance to the terms of sanction not submitted
IDBI BANK
Continuous Surveillance Statements (CSS) not submitted regularly Delayed reporting of excess/bunching of excess reports Delayed submission of QIS statements Enhancements to regularize over dues/excess/ad hocs Exposure enhanced when account was showing signs of sickness/borrowers financial were not Iob online does not show the latest guidelines/regulations in a user friendly way (it simply shows the past circulars and the branch has to go thru all the circulars and arrive at a decision- whereas it should be so modified that decision making is computerized as far as possible, and thereby save the errors and time at branch level Monthly statements on credit facilities granted under MDP(CAFI ), TODs granted under MDP(CAF3) Cheques/bills purchased/discounted under MDP(CAF4) not submitted regularly to RO Reporting office suppressed material information/did not report irregularities in the ERI return or provided misleading information
6. GENERAL LEDGER
Deliberately not deducing the TDS as per the existing regulations Expenditure on treatment or recovery of others who met with accidents, inside the bank premises or elsewhere, during the course of banking/dealing with us.
IDBI BANK
Expenses on repairs or replacement of property due to accident or natural disaster/calamity Extent to which the branch does not have the resources and capability, depending upon the local conditions, to manage the power cuts, due to which the system/branch/ATM work is disrupted Fraudulent debits to the nominal accounts like P&L , interest accrued, suspense, sundry creditors etc. Fraudulently vouching the same bills( like TA) on more than one occasion Frequency with which the fax/telephones are out of order Human losses from external sources Instances where the branch/office is using an unauthorized software Theft of articles/assets owned by the bank
7. CUSTOMER PAYMENT
Fraudulent withdrawl through the ATM
8. DATA WAREHOUSES
Possibility of theft of information related to the customers/otherwise and possible losses thereof Sanctioned facility to persons/entities whose names appear in the defaulters list circulated by CIBIL/RBI/ECGC or to persons known to be of dubious integrity Unauthorized transfer of funds via hacking the system
9. CUSTODY
IDBI BANK Bank dacoity/robbery during the business hours
Robbery/burglary in the bank, when the bank currency chest is closed Theft from the vault/strong room/cashiers cabin, during the business hours
10. CREDIT CARD

Phishing- cheating the credit card customers over the internet to obtain their credit card number and password Not communicating the proper details to the credit card customers due to which some transactions are not put through and the customers face embarrassment
11. RCC/CPPD
Frequency with which the leased line, ISDN etc are down Instances when the components are purchased from the unapproved vendors Instances where the branches/offices are not having valid AMC for all the hardwares from the authorized vendors Problems faced at the RCC/CPPD in trouble-shooting branch/software errors RCCs role of advising and teaching the branch staff System is not completely online-if it were so it would be possible to throw options available for various processes as per the latest guidelines/regulations and there shall be general reduction in the

IDBI BANK
(APPENDIX II)
PEOPLE RISK
I. INTEGRITY 1. FRAUD
Fraudulent debits to the nominal accounts like P&L, interest accrued,
suspense, sundry Fraudulent withdrawal from the customers accounts- SB/CD/CC etc Granting of loans against deposit receipts already held as security Pilferage and encashment of cheques lodged for clearing
2. COLLUTION
Accepting bribes for passing bills or for granting contracts Accepting bribes for sanctioning loans or rendering other services Deliberately not deducting the TDS as per the existing regulations Account was taken over from another bank when its status was overdue Fraudulently encashment of cheques received for collection Fraudulently vouching the same bills on more than one occasion Impersonated accounts deliberately opened Sanctioned facility to persons/entities whose names appear in the defaulters list circulated by CIBIL/RBI/ECGC or persons known to be dubious integrity NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
3. MALICE-UNAUTHORISED USE OF INFORMATION

Details of overdue/excess/irregularity not provided in the appraisal note Fraudulent withdrawal from the customers accounts SB/CD/CC etc Non-reporting of excess/ad hoc granted beyond discretionary power Reporting office suppressed material information/did not report irregularities in the ERI return or provided misleading information
4. ROGUE TRADING
Accommodation of friends/ relative with the intension of malafide/corrupt practices Credit limits sanctioned in contravention of the loan policy of the bank prevailing at the time of sanction Discounting bills/cheques despite repeated cheques return Discounting cheques for accommodation Enhancement to regularize over dues/excess/ad hocs
5. THEFT/EMBEZZLEMENT/MISAPPROPRIATION
Cashiers or thrift collectors misappropriating the cash deposited by the customers Misappropriation of cash in currency chests/vault room Stolen/lost credit cards misused by the third party Theft of articles/assets/jewellery/securities pledged to the banks NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK Theft of articles/asset owned by the bank
II. COMPETENCY 1. LACK OF KNOWLEDGE OF BUSINESS OR STARTEGY

Age-wise break-ups of receivables not indicated in the book debtstatement Availed advances against forged supply bills Availed advances against forged title deeds or fake invoices/salary certificates Balance sheet from sisters concerns on a common date not obtained for ascertaining interlocking of funds Bills purchased for non-constituents who were not assessed for regular limits Blind persons accounts opened without following the checklists A to E Cover period for book debts not indicated in the sanction terms DP not calculated after netting of the sundry creditors/obsolete receivables Erosion/depletion of securities due to wrongful act on the part of the bank officers who took fraudulent title deeds/documents Failure to judge the managerial capability of the applicants Failure to properly assess the economic viability of the project Failure to properly assess the technical feasibility of the project NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Formalities relating to creation of charge for securing limits not complete Fraudulent encashment of bankers cheques/DD/TC Guarantee not invoked despite the account being irregular for a long time Illiterate persons accounts-where CD or joint accounts opened for them without any reasons, or cheque book issued, or third party withdrawals permitted Limits sanctioned/enhanced on the basis of ambitious projections Market intelligence/information is absent Non-obtention of audited balance sheets Peer group analyses not done Problems faced at the RCC/CPPD in troubleshooting branch/software errors Purchase of cheques drawn by sisters concerns or drawn for no consideration other than to get temporary credits Purdanashin ladies accounts- where such accounts opened for illiterate persons, or CD account opened without RO approval QIS/financial statements not scrutinised Repayment capacity not assessed by analysing DSCR/cash
flow/funds flow statements
IDBI BANK
Sanctioned failed to stipulate appropriate terms/conditions usually necessary for such credit Trend analysis for financials not done
2. LACK OF KNOWLEDGE OF INSTITUTION

Credit limits sanctioned in contravention of the loan policy of the bank prevailing at the time of sanction Frequent excesses despite internal norm not to exceed 3 times In case of advance against shares required margin not kept/valuation of securities not done at the prescribed intervals, or no undertaking to sell shares in case markets falls 25% below the value accepted at the time of sanction Prescribed margin of 30 % (internal policy) not maintained while sanctioning loans under Liquirent Scheme Sanction failed to stipulate appropriate terms/conditions usually necessary for such credit
3. LACK OF EXPERIENCE
Advances availed against spurious jewels Delayed appraisal and disbursal Discounting bills/cheques despite repeated bill/cheque returns Harass applicants to submit unwanted papers/documents Inter-firm comparison not made
IDBI BANK
Loans against forged deposit receipts or encashing such receipts Sanctioning inadequate amount Unnecessarily asking the applicants to come repeatedly to the bank and not giving a comprehensive list of required documents in the first meeting itself
PROCESS RISK
I. PRETRANSACTION RISK 1. NEW CONNECTION OR BORROWER APPRAISAL
Accounts where KYC guidelines were not followed Agency agreement with the principal for units engaged in distribution of
products not considered legal

Blind persons accounts opened without following the checklists A to E Chasing clients for business, at odd hours or too frequently
Credit Opinion Reports(COR) not obtained from other banks/financial institutions before sanctioning limits/takeover Delayed appraisal and disbursal Dependants one/two buyers not analysed properly NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Harass applicants to submit unwanted papers/documents/information Illiterate persons accounts-where CD or joint accounts opened for them without any reasons, or cheque books issued, or third party withdrawals permitted Information on litigation against borrower not obtained Inter-firm comparison not made Market intelligence/information is insufficient Not following KYC and not monitoring the initial transactions in the new accounts Rating exercise not carried out at branch level Sanctioning inadequate amount Unnecessarily asking the applicants to come repeatedly to the bank and not giving a comprehensive list of required documents in the first meeting itself
2. PRODUCT FLAWS
Not communicating the proper details to the credit card customers due to
which some transactions are not put through embarrassment
and the customers face
Risks due to innovative marketing techniques of the competitors Severity of competition
IDBI BANK
II. TRANSACTION RISK 1. FREQUENCY OF EXECUTION ERRORS IN TRANSACTIONS

ATM cash not tallied on daily basis with the branch records Branch staff do not feed the cheque books issued into the system Clearing cheques wrongly entered Collection of cheques credited to wrong accounts Consortium meetings not held regularly despite being leader Exchange of credit information not done on a regular basis in accounts under consortium/multiple banking arrangements Failure to close the locker accounts whenever there is any change in the constituents Failure to file suit within the tme limit and allowing the documents to become time-barred Guarantee not invoked despite the account being irregular for a long time Instances where the mandate, though recorded, was not followed Loss due to cash payments against credit cards-without verifying the hot list bulletins Losses when the changes made in the constituent are not recorded timely Mandate to operate the account is not recorded timely Payment of cheques which are not properly drawn or not of apparent tenor
Presanction appraisal was perfunctory/ad hoc/not done at all
IDBI BANK
Revenue leakage in case of issue of cheque book, duplicate pass book,
statement of accounts, cheque returns, stop payment instructions, standing instructions etc. Sanction advice not sent or sent with inadequate details Standing instructions not compiled on time Terms and conditions stipulated in the sanctions were not compiled with Unit-inspection not done properly/timely Wrong accounts credited/debited
III. OPERATION CONTROL RISKS 1. FREQUENCY OF VIOLATION OF OPERATIONAL CONTROLS

Accommodation of friends/relatives with the intention of
malafide/corrupt practices
Account was allowed to be operated without drawing
power/adequate stock of prime

Bills purchased/discounted for non-constituents who were not
assessed for regular limits

Exposure enhanced when account was showing signs of
sickness
Limits released outside the consortium Non-adherence to specific sanction terms
IDBI BANK

Non-reporting of excesses/adhoc granted Repeated ad hocs soon after sanction/frequent excesses even
after enhancement
Sanctioning authority has exceeded his discretions with
malafide intention
2. EXTERNAL FRAUD DUE TO WEAK PROCESSES

Discounting bills/cheques for accommodation Fraudulent withdrawal through the ATM
3. INEFFICIENCY OF MIS
Continuous Surveillance Statements(CSS) not submitted regularly Credit proposal receipt-register not maintained/updated CWD-TEN-register not maintained and the transactions not reported Delayed reporting of excess/bunching of excess reports Details of over dues/excess/irregularity not provided in the appraisal note Enhancements to regularize overdue/ excess/ ad hocs Exposure enhanced when account was showing signs of sickness Monthly statements on credit facilities granted under MDP(CAFI), TODs granted under MDP Cheques/bills purchased not submitted regularly
IDBI BANK
4. FREQUENCY OF OPERATIONAL DISTRUPTION 5. LOOSE SECURITY AT OPERATIONAL POINTS

Access by authorized vendors is not recorded chronologically Account was taken over from another bank when its status was overdue/substandard Accounts closed/opened without branch managers approval Advances availed against spurious jewels Allowing the auditors to access system through menus other than those specified and relevant for them Assets and liability statements furnished by borrowers were not subject to scrutiny Availed advanced against forged supply bills Availed advanced against forged title deeds Cash related failures Cashier or thrift collectors misappropriating the cash deposited by the customers Certicate of compliance to the terms of sanction not submitted Cheques/withdrawals of higher values paid without examining them through ultra-violate lamps Cheques received for clearing/collection are not branded with Banks Special Crossing Stamps immediately on receipt NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Common errors during the closure/transfer of saving account-likesignature not obtained, all unused cheques leaves not surrendered, account transferred to wrong person etc. Delayed renewal of insurance/inadequate insurance Delayed review of limits Delated submission of QIS statement Disclosure of borrower details EC not obtained/EC for broken period not obtained End-use of funds not ascertained/verified/diversion of funds Erosion/depletion of securities due to wrongful act on the part of the bank officers who took fraudulent title deeds/documents Exceptional reports not scrutinized and signed by the branch managers on the daily basis Failure to follow up and pass AWB vouchers, and check and reconcile AWB supplementary on daily basis Failure to keep proper custody of cheque books and maintain proper stock Failure to observe the guidelines on issuing cash receipts Failure to obtain legal opinion from the approved lawyers Failure to obtain valuation report from the approved valuer
IDBI BANK
Formalities relating to creation of charge for securing limits not complete Fraudulent debits to the nominal accounts Fraudulent encashment of bankers cheque/DD/TC Fraudulent encashment of cheques received for collection Fraudulently vouching the same bills on more than one occasion Frequent cheque purchase allowed without fixing limits Giving details of banks customers to marketing agencies Granting of loans against deposit receipts already held as security Instances where the transactions were executed-ignoring the stop payment instruction Interest calculation in Deposit and Advances are not checked manually by the supervisory staff Issue of cheque books without taking into account the frequency of cheque returns, non maintenance of minimum balance etc Joint documentation not held/done in consortium accounts KYS concept not followed LCs opened when earlier LCs had devolved Loans against forged deposit receipts or encashing such receipts Managerial capacity not assessed properly
IDBI BANK
Misappropriation of cash in currency chest/ vault room Misuse of customers confidential information for staff or banks gain No practice to compile credit reports on drawees Non-routing of sales proceeds through the account Not following the guidelines on monitoring and maintenance of user-ids and passwords Unauthorised vendors are allowed access to the system Pilferage and encashment of cheques lodged for clearing Power of attorney not obtained and registered with the drawees Premises keys are parted away to clerical/sub staff/outsiders for carrying out sweeping, repairing work etc. in the absence of the supervisor Balance conformation are not obtained and so documents are time-barred
Specimen signature cards, account opening forms, ledgers are not
held in proper custody at all times whereby unauthorised person gain access to them SSI/registration certificate not obtained while sanctioning credit facility to SSI Manager does not goes through the previous days vouchers everyday to ensure that no unauthorised transactions are put through NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Theft due to unauthorised access to vault room Theft of articles, jewellery, securities pledged to the bank Theft of articles and securities owned by the bank Valuation of property not done at prescribed periodicity While making payments against the withdrawal slips, the usual precautions are not taken care of
IDBI BANK
SYSTEM RISK
I. PROGRAMME ERRORS/FRAUD
Rating model is not able to control the qualitative risks
appropriately
System has no provisions to give warning in case of crediting
clearing cheques to NRE accounts, while approving/passing the transactions in supervisory menu
System has no provisions to give warning in case of collecting
cheque to NRE
II. SECURITY BREACH

Bank dacoity/robbery during the business hours Fishing-cheating the credit card customers over the internet to obtain their credit card number and password Fraudulent encashment of credit cards Looting the bank staff, outside the bank, during cash transit Robbery/burglary in the bank, when the branch/currency chest is closed Unauthorised transfer of funds via hacking the system
III. CAPACITY RISKS

Extent to which the branch does not have the resources and capability, depending upon the local conditions, to manage the power cuts, due to which the system/branch/ATM work is halted NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
IV. SYSTEM SUITABILITY

Asking for irrelevant private information RCCs role of advising and teaching the bank staff System has no provisions to execute standing instructions and charge for same without manual intervention System is not completely online There is no standard procedure to provide add ins in the software at the branch level
V. SYSTEM FAILURE
Fraudulent withdrawal through the ATM Frequency with which ATMs are out of order Instances when the components are purchased from the unapproved vendors Instances where the offices are not having valid AMC for all the hardwares, from the authorised vendors Sanctioned facility to persons whose name appear in the defaulters list circulated by CIBIL/RBI/ECGC
VI. OUTSOURCING RISKS

Failure of the approved lawyers/valuers to give correct opinion/value Frequency with which the fax/telephones are out of order
IDBI BANK
Frequency with which the leased line, ISDN etc are down
Lack of methods to measure or monitor the downtime at the functional units Lack of penalty clauses in the agreement with the vendors for the downtime in connectivity
VII. PHYSICAL SECURITY VIII. MONEY LAUNDERING
EXTERNAL ENVIRONMENT RISKS

I. COMPLIANCE
Accounts where KYC guidelines were not followed Information on litigation against borrower not obtained Supply bills facility sanctioned for purchasee of bills covering labour charges
II. FINACIAL REPORTING

IDBI BANK
III. TAX IV. LEGAL

Claims arising from the discrimination in promotion or selection policies Instances where the branch/office is using unauthorised software Possible losses due to compensation claims on termination issues
V. NATURAL DISASTER
Claims for the damages caused on duty Expenditure on treatment or recovery of others who met with accidents inside the bank premises or elsewhere, during the course of banking with us Expenditure on treatment or recovery of employees who met with accidents on duty Expenses on repairs or replacements of property due to accidents or natural disaster Medical expenses reimbursed to the employee on account of the policy on general health

(APPENDIX III)
IDBI BANK
INTERNAL
I. UNAUTHORIZED ACTIVITY 1. Transactions not reported- intentionally
Non reporting of excess/ad hoc granted Reporting office suppressed material information/did not report irregularities in the ERI return or provided misleading information
2. Types of transactions which are unauthorized

Bills purchased/discounted for non-constituents who were not assessed for regular limits Supply bill facility sanctioned for purchase of bills covering payment of labour charges Information on litigation against borrower not obtained Accounts where KYC guidelines were not followed Sanctioned facility to persons/entities whose names appear in the defaulters list or to persons known to be dubious integrity Credit limits sanctioned in contravention of the loan policy of the bank prevailing at the time of sanction
3. Mismarking of position- intentional

Enhancement to regularize over dues/excess/ad hocs
IDBI BANK
Exposure enhanced when account was showing signs of sickness/borrowers financials were not good Frequent cheque purchase allowed without fixing limits Details of over dues/excess/irregularity not provided in the appraisal note
II. THEFT AND FRAUD 1. Fraud

Fraudulent withdrawal from the customers account-SB/CD/CC Fraudulent withdrawal through the ATM Fraudulently vouching the same bills on more than one occasion Fraudulent debits to the nominal accounts like P&L, interest accrued, suspense, sundry creditors etc. Granting of loan against deposit receipts already held as security
2. Theft/Extortion/Embezzlement/Robbery Pilferage and encashment of cheques lodged for clearing Fraudulent encashment of cheques received for collection Theft of articles/assets owned by the bank Theft of articles/assets/jewellary/securities pledged to the bank
3. Misappropriation of assets
IDBI BANK
Cashiers or thrift collectors misappropriating the cash deposited by the customers Misappropriation of cash in currency chest
4. Malicious destruction of assets

Accommodation of friends/relatives with intension of malafide practices Sanctioning authority has exceeded its discretions/ has abused its power with malafide intension
5. Forgery
Loans against forged deposit receipts or encashing such receipts
6. Cheque Kiting
Discounting the bills/cheques for accommodation
Discounting bills/cheques despite repeated bills/cheque returns
7. Smuggling 8. Account takeover

Account was taken over from where its status was over due/ substandard/ doubtful Impersonated accounts deliberately opened
9. Tax non compliance/evasion-willful

Deliberately not deducting the TDS as per the existing regulations
10. Bribes/kickbacks
Accepting bribes for sanctioning loans or rendering other services
IDBI BANK
EXTERNAL
I. THEFT AND FRAUD 1. Theft/Robbery
Robbery in the bank when the branch/currency chest is closed Theft from the vault during the business hours Bank decoity during the business hours Looting the banks staff outside the bank during cash transit Theft due to unauthorized access to vault room or lockers
2. Forgery
Availed advances against forged supply bills Availed advances against forged title deeds or fake invoices/salary ceerticates Fraudulent encashment of bankers cheque/demand draft/TC Fraudulent encashment of credit cards Advances availed against spurious jewels Stolen/lost credit cards misused by third party
3. Cheque Kiting
Purchase of cheques drawn by sisters concern or drawn for no consideration
other than to get temporary credits
II. SYSTEMS SECURITY 1. Hacking damage

Fraudulent withdrawal through the ATM NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Unauthorized transfer of funds via hacking the system Phishing- cheating the credit card customer over the internet to obtain the credit card number and password
2. Theft of information
Possibility of theft of information related to the customer/otherwise and possible losses thereof
IDBI BANK
EMPLOYEMENT PRACTICE AND WORKPLACE SAFETY

I. EMPLOYEE RELATIONS 1. Compensation, benefit, termination issues
Possible losses due to compensation claims on termination issues
2. Organized labor activity

Losses on account of strikes/lockouts
II. SAFE ENVIRONMENT 1. General liability

Expenditure on treatment or recovery of the employees who met with accidents on duty Expenditure on treatment or recovery of others who met with accidents, inside the bank premises or elsewhere during the course of banking/dealing with us
2. Employee health and safety rules events

Medical expenses reimbursed to the employees on account of the policies on general health and safety
3. Workers compensation
Claims for the damages caused on duty
IDBI BANK
CLIENTS, PRODUCTS AND BUSINES PRACTICES

I. SUITABILTY, DISCLOSURE and FIDUCIORY 1. Fiduciary breaches/guideline violations 2. Suitability/disclosure issues 3. Retail consumer disclosure violation 4. Breach of privacy 5. Aggressive sales 6. Account general 7. Misuse of confidential information 8. Lender liability
Sanctioning inadequate amount Delayed appraisal and disbursal Harass applicants to submit unwanted papers/documents/information Unnecessarily asking the applicants to come repeatedly to the bank and not giving the comprehensive list of required documents in the first meeting itself
II. IMPROPER BUSINESS OR MARKET PRACTICES 1. Anti-trust 2. Improper trade/market practices 3. Market manipulation 4. Insider trading or firms account 5. Unlicensed activity 6. Money laundering
IDBI BANK
III. PRODUCT FLAWS 1. Product defects 2. Model errors

Rating model is not able to control the qualitative risk appropriately Severity of competition Risks due to innovative marketing techniques of the competitors
IV. SELECTION, SPONSORSHIP AND EXPOSURE 1. Failure to investigate client per guidelines
Presanction appraisal was perfunctory/ad hoc/not done at all Inter-firm comparison not made SSI/registration certificate not obtained while sanctioning credit facilities to SSI Asset and Liability statements furnished by borrowers were not subject to scrutiny No undertaking obtained from borrowing Company to the effect that no consideration was paid by it to its guarantor/directors for guarantees extended Managerial capacity not assessed properly Limits sanctioned/enhanced on the basis of ambitious projections Limits sanctioned/renewed without obtaining projection for the ensuing year
IDBI BANK
Agency agreement with the principal for units engaged in distribution of products not verified. Technical feasibility/financial viability of the project not done. Peer group analysis not done Dependants one/two buyers not analysed properly. Trend analysis for financials not done Repayment capacity not assessed by analyzing DSCR/cash flow/ funds flow statement Balance sheet from sister concerns on a common date not obtained for ascertaining inter-locking of funds. Non-obtention of audited balance sheet QIS/financial statements not scrutinized Age-wise breakups of receivables not indicated in the book debtstatement/book debt-statement not certified by chartered accountants on quarterly basis Credit opinion reports (COR) not obtained from other banks/financial institutions before sanctioning limits/takeover Market Intelligence/information is insufficient/absent Failure to properly assess the technical feasibility of the project Failure to properly assess the economical feasibility of the project Failure to judge the managerial capability of the applicants NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
2. Exceeding client exposure limits

Limits released outside the consortium Prescribed margin of 30 %( internal policies) not maintained while sanctioning loans under Liquirent scheme DP not calculated after netting of the sundry creditors/obsolete receivables Non-adherence to scheme sanction terms Account was allowed to be operated without drawing power/adequate stock of prime security
V. ADVISORY ACTIVITIES 1. Disputes over performance of advisory activities
IDBI BANK
DAMAGE TO PHYSICAL ASSETS

I. DISASTERS AND OTHER EVENTS 1. Natural disaster losses
Expenses on repairs or replacement of property due to accident or natural disaster/calamity
2. Human losses from external sources (terrorism, vandalism)

Human losses from external sources
IDBI BANK
BUSINESS DISRUPTION AND SYSTEM FAILURES

I. SYSTEMS 1. Hardware
Instances where the branches/offices are not having valid AMC for all the hard wares, from the authorized vendors Instances when the components are purchased from the unapproved vendors
2. Software
System has no provisions to give warning in case of crediting clearing cheques to NRE accounts while approving /passing the transactions in the supervisory menu Systems has no provisions to give in case of crediting collection cheques to NRE accounts Frequency with which the ATMs are out of order Problems faced at the RCC/CPPD in troubleshooting branch/software errors RCCs role of advising and teaching the branch staff There is no standard procedure to provide add ins I n the software at branch level, depending on the requirements and initiatives of the branch System has no provisions to execute standing instructions and charge for same without manual intervention System does not record the frequency of cheque returns in the accounts and does not charge for the same on a cumulative basis so that all the charges NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
applicable to that account which could not be charged at an earlier date, due to insufficient balance, can be recovered as and when there is the required balance System does not charge for the stop payments System allows desk officers to pass transactions in minors account even after the minor attains majority, without the approval of the senior/ branch managers. System is not completely online-if it were so it would be possible to throw options lapses
Iob online does not show the latest guidelines/regulations in a user friendly
available
for
various
processes
as
per
the
latest
guidelines/regulations and there shall be general reductions in the staff
way (it simply shows the past circulars and the branch has to go thru all the circulars and arrive at a decision- whereas it should be so modified that decision making is computerized as far as possible, and thereby save the errors and time at branch level)
3. Telecommunications
Frequency with which the leased line, ISDN etc are down Frequency with which the fax/telephones are out of order
4. Utility outage/disruptions
Extent to which the branch does not have the resources and capability,
depending on the local conditions, to manage the power cuts, due to which the system/branch/ATM work is disrupted
IDBI BANK
EXECUTION DELIVERY AND PROCESS MANAGEMENT

I. TRANSACTION CAPTURE, EXECUTION AND MAINTAINACE 1. Miscommunication
Cover period for book debts not indicated in the sanction terms Sanction advice not sent or sent with inadequate details Exchange of credit information not done on a regular basis in accounts under consortium/multiple banking arrangements Not communicating the proper details to the credit card customers due to which some transactions are not put thru and the customer face embarrassment
2. Data entry, maintenance or loading error

Non-charging of interest at monthly rests Collection of cheques credited to wrong accounts Branch staffs do not feed the cheque books issued into the system Clearing cheques wrongly entered
3. Missed deadline or responsibility

Exceptional reports not scrutinized and signed by the branch managers on the daily basis NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Credit proposal receipt-register not maintained/updated Delayed review of limits Unit-inspection not done properly/timely Consortium meetings not held regularly despite being leader Rating exercise not carried out at branch level CWD-TEN-register not maintained and the transactions not reported ATM cash not tallied on daily basis with the branch records Cash related failures-to maintain cash remittance register, to immediately record the cash movement, to not allow unauthorized persons inside the cash cabin, to maintain proper records of transfer of funds between the cashiers, to keep the cashiers cabin locked at all times, following guidelines of dual key strictly etc. Failure to keep proper custody of cheque books &DD/BC and maintain proper stock registers Failure to observe the guidelines on issuing cash receipts, example-cashier does not write amount received in words, or supervisors signature not obtained on the counterfoil etc Cheques received for clearing/collection are not branded with Banks special crossing stamps immediately on receipt. Job rotation is not effected periodically to ensure that no member is allowed to do the same job exclusively for a long time KYS concept not followed NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Transactions involving disproportionate amounts in staff accounts are not verified by the deputy Manager to be satisfied about the genuineness of such transactions Premises keys are parted away to clerical/sub staff/ outsiders for carrying out sweeping, repairing work etc in the absence of the supervisors. Interest calculation in Deposit and Advances are not checked manually (at random) by the supervisory staff. The manager does not go through the previous days vouchers every day to ensure that no unauthorized transactions are put through. Accounts closed and with zero balance are not closed immediately deleted from the master Failure to follow up and pass AWB vouchers and checks and reconciles AWB supplementary on daily basis Sanction failed to stipulate appropriate terms/conditions usually necessary for such credit facility Terms and conditions stipulated in the sanctions were not complied with Failure to file suit within the time limit and allowing the documents to become time-barred Failure to close the locker accounts whenever there is any change in the constituents.
4. Model/System Misoperation
No practice to compile credit reports on drawees
5. Accounting error/entity attribution error

IDBI BANK
6. Other task Misperformance

Guarantees not invoked despite the account being irregular for a long time Delayed submission of QIS statement Issue of cheque books without taking into account the frequency of cheque returns, non maintenance of minimum balance, or without verifying the signature of the applicants, or to a third party whose signature is not attested by the account holder, or without proper receipt/ acknowledgement Purdanashin ladies account- where such accounts opened for illiterate persons, or CD account opened without RO approval, or transactions allowed without attestations from her husband/guardian Blind persons accounts opened without following the checklists A to E Illiterate persons accounts-where CD or joint accounts opened for them without any reasons, or cheque books issued, or third party withdrawals permitted Revenue leakage in case of- issue of cheque book, duplicate pass book, statement of accounts, cheque returns, stop payment instructions, standing instructions etc Common errors during the closure/transfer of saving accounts-like-signature of all the accounts holders not obtained, all unused cheque leaves not surrendered, managers approval or consent of all the departments not obtained, accounts transferred to wrong branch etc LCs opened when earlier LCs had devolved Frequent excesses despite internal norm not to exceed 3 minutes
IDBI BANK
Repeated ad hocs soon after sanction/Frequent excesses even after enhancement
7. Delivery Failure
Non-routing of sales proceeds through the account End-use of funds not ascertained/verified/diversion of funds Standing instructions not complied on time Loss due to cash payments against credit cards-without verifying the hot list bulletins
8. Collateral Management Failure

Power of attorney not obtained and registered with the drawees In case of advance against shares- required margin not kept/valuation of securities not done at prescribed intervals, or no undertaking to sell shares in case market value falls 25% below the value accepted at the time of sanction Delayed renewal of insurance/inadequate insurance EC not obtained/ EC for broken period not obtained Formalities relating to creation of charge for securing limits not complete Valuation of property not done at prescribed periodicity Erosion/depletion of securities due to wrongful act on the part of the bank office who took fraudulent title deeds/documents
9. Reference Data Maintenance II. MONITORING AND REPORTING

IDBI BANK
1. Failed mandatory reporting obligation

Delayed reporting of excess/bunching of excess reports Monthly statements on credit facilities granted under MDP (CAFI), TODs granted under MDP (CAF3) Cheques/bills purchased/discounted under MDP (CAF4) not submitted regularly to RO Certificate of compliance to the terms of sanction not submitted Continuous Surveillance Statements (CSS) not submitted regularly
2. Inaccurate External Report (Loss incurred) III. CUSTOMER INTAKE AND DOCUMENTATION 1. Client permissions/disclaimers missing
Undertaking for disclosure of name in the event of loan default not obtained
2. Legal documents missing/incomplete

Revival letters/balance confirmations not obtained and so documents are time-barred Joint documentation not held/done in consortium accounts. (In some cases the bank was the leader) Failure to obtain legal opinion from the approved lawyers Failure to obtain valuation report from the approved valuers
IV. CUSTOMER/CLIENT ACCOUNT MANAGEMENT 1. Unapproved access given to accounts

IDBI BANK
Specimen signature cards, account opening forms, ledgers/registers are not held in proper custody at all times whereby unauthorized persons gain access to them Allowing the auditors/CO inspectors to access system through menus other than these specified and relevant for them. Not following guidelines on monitoring and maintenance of user-ids and passwords(not deleting the user-ids of the persons transferred, suspended, retired etc, or not deactivating the user-ids of persons on long leave, allowing access to menus that are not relevant as per the roles, divulging passwords etc) Accounts opened/closed without branch managers approval
2. Incorrect client records (loss incurred)

Mandate to operate the account is not recorded timely Losses when the changes made in the constituents are not recorded timely
3. Negligent loss or damage of client assets

Wrong accounts debited/credited Payments of cheques which are not properly drawn or not of apparent tenor Cheques/withdrawals of higher values, say above Rs 20000, paid without examining them through ultra-violet lamp Instances where the mandate, though recorded, was not followed Instances where the transactions were executed-ignoring the stop payment instruction
IDBI BANK
While making payments against withdrawal slips, the usual precautions are ignored-like-payments to third parties not beyond 1000/withdrawals accompanied by the pass book
V. TRADE COUNTERPARTIES 1. Non-client counterparty misperformance

Failure of the approved lawyers/valuers to give correct opinion/value
2. Misc. non-client counterparty disputes VI. VENDORS & SUPPLIERS 1. Outsourcing

Access by authorized vendors (For maintenance and trouble shooting purpose like HCL,Wipro etc) is not recorded chronologically Our officials do not always accompany the outside vendors during their visits and/or unauthorized vendors are allowed access to the systems
2. Vendor disputes
Lack of penalty clauses in the agreement within the vendors for the downtime in connectivity (beyond an accepted limit) Lack of methods/procedures to measure or monitor the downtime at the functional units.
IDBI BANK
IDENTIFICATION OF AREAS OF OPERATIONAL RISK IN EXIM BANK AND PREPARATION OF FRAMEWORK FOR MEASUREMENT OF THE SAME
By:Vaibhav Bansal
Guided By MR. UTPAL GOKHALE DGM (MIS/RMG) PH. NO. :- 022-22160360

IDBI BANK
Project work undertaken at :- EXIM BANK

Report submitted in partial fulfillment of the reuirements for the award of Post-Graduate Diploma in Banking and Finance By National Institute of Bank Management, Pune 2008-09
EXECUTIVE SUMMARY
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, and reduce errors in transaction processing, and so on. There are basically three approaches to measure operational risks namely Basic Indicator Approach (BIA), The Standardised Approach (TSA) and Advanced Measurement Approach (AMA). The first two approaches are based on gross income of the bank whereas the last one is based on the historical operational loss data. In this project our main focus is on AMA approach. Under AMA approach Basel recognise eight different Business Lines and seven Event Types. Hence in order to calculate the capital charges for operational risk under AMA approach, an organisation has to collect data of operational losses as per the Basel guidelines. NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
The following are the eight recommended Business Lines. 1. Corporate finance 2. Trading and sales 3. Retail banking 4. Commercial banking 5. Payment and settlement 6. Agency services 7. Asset management 8. Retail brokerage
The following are the seven recommended Event types 1. Internal Fraud 2. External Fraud 3. Employment Practices and Workplace safety 4. Clients, Products and Business Practices 5. Damage to Physical Assets 6. Business Disruption and Systems Failure 7. Execution, Delivery and Process management There are basically four main steps in the Management of Operational Risk namely- Identification, measurement, Monitoring and controlling. Hence after a bank has identified and collected its past loss data as per the Basel guidelines it needs to measure the adequate amount of capital required to hedge its losses. Under the AMA approach there are three methods by which the operational risk VaR can be measured- Loss Distribution Method (LDA), Scenario Analysis and the Extreme Value Theory (EVT). In this project we have measured the operational risk VaR using the Loss Distribution Method. The VaR of the bank is the summation of the individual VaRs (56) under each business line and event type. NATIONAL INSTITUTE OF BANK MANAGEMENT
IDBI BANK
Under the LDA method we combine two distributions i.e the Loss frequency distribution and the loss severity distribution. The loss frequency distribution describes the number of loss events over a fixed interval of time. The loss severity distribution describes the size of the loss once it occurs. Various researches has shown that frequency follows the Poisson Distribution and severity follows the Beta-general Distribution. For calculating VaR, using the above mentioned two distributions, we have taken help of the @ Risk software. An effective process of monitoring is essential for adequately managing operational risk. Regular monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational risk. Promptly detecting and addressing these deficiencies can substantially reduce the potential frequency and/or severity of a loss event.
There are various issues regarding management of operational risk :
Unlike market and credit risk, operational risk is largely internal to financial institutions. Because institutions are understandably reluctant to advertise their mistakes, it is more difficult to collect data on operational losses.
Market and credit risk can be conceptually separated into exposures and risk factors. Exposures of market and credit risk can be easily measured and controlled whereas for operational risk it is very difficult.
Very large operational losses, which can threaten the stability of an institution, are relatively rare. This leads to a very small number of observations in the tails.
IDBI BANK
IDBI BANK

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IDBI BANK

OPERATIONAL RISK MODEL

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

Past major operational losses

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

OPERATIONAL RISK MODEL

bank to meet these losses.

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

Basic Indicator Approach

The Standardized Approach

OPERATIONAL RISK MODEL

Advance Measurement Approach

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

Business Line Identification

operational risk and the regulatory framework;

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

forgery NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

compensation, employee health and safety

improper trade, product defects, fiduciary breaches, account churning

errors, failed mandatory reporting, negligent loss of client assets.

OPERATIONAL RISK MODEL

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

I. IDENTIFICATION OF OPERATIONAL RISK

be analyzed, e.g. import bills, letter of credit, bank guarantee.

OPERATIONAL RISK MODEL

II. MEASUREMENT OF OPERATIONAL RISK

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

CALCULATION OF OPERATIONAL RISK VAR

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

III. MONITORING OF OPERATIONAL RISK

OPERATIONAL RISK MODEL

IV. CONTROLLING OPERATIONAL RISK

Internal Control Methods

NATIONAL INSTITUTE OF BANK MANAGEMENT

IDBI BANK 2. External Control Methods

OPERATIONAL RISK MODEL

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

OPERATIONAL RISK MODEL

The following example is for one of the simulated frequency (77)

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

CONCLUSION AND RECOMMENDATIONS

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

NATIONAL INSTITUTE OF BANK MANAGEMENT

OPERATIONAL RISK MODEL

SUGGESTIONS FOR FUTURE RESEARCH

NATIONAL INSTITUTE OF BANK MANAGEMENT