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OPERATIONAL RISK MANAGEMENT IN INDIAN BANKS IN THE CONTEXT OF BASEL II: A SURVEY OF THE STATE OF PREPAREDNESS AND CHALLENGES IN DEVELOPING THE FRAMEWORK

Usha Janakiramani

Reserve Bank of India, India.

ABSTRACT

This paper assesses in detail the status of operational risk management in the Indian banking system in the context of Basel II. The expected coverage of banking assets and the approach adopted for operational risk capital computation is compared broadly with the position of the banking system in Asia, Africa and the Middle East. A survey conducted on twenty two Indian banks indicates insufficient internal data, difficulties in collection of external loss data and modelling complexities as significant impediments in the implementation of operational risk management framework in banks in India. The survey underscores the need to devote more time and resources if banks desire to implement the advanced approach under Basel II.

Key Words: operational risk; India; Asia; Africa; Middle East; risk management; Basel II; regulatory capital; banking assets; banks; loss data; internal audit; Gross Income; compliance

JEL Classification: N20, G21