Operations in Banking & Financial Services

The Changing Banking Paradigm External drivers compel banks to leverage the developments in Information Technology and continuously innovate  Regulatory change and consolidation  Competitive forces  Changing Consumer Preference  Technological developments  Basel II  IAS Slide 3

Operational Risk Operational risk can arise from failure to comply with policies, laws and regulations, from fraud or forgery, or from a breakdown in the availability or integrity of services, systems or information. » Event risk (Year 2000, Euro, Basel 2, IAS) » Payments/settlement risk » Technology/systems exposure » Fraud/compliance risk » Natural disaster » Change management

Sources of Operational Risk

Differences between Three Lines of Business

Risk In Banking Sector Slide 3 Financial Risks Liquidity Risk Operational Risk Regulatory Risk Human Factor Risk Market Risk Equity Risk Interest Rate Risk Currency Risk Commodity Risk Trading Risk Gap Risk Credit Risk Portfolio Concentration Risk Transaction Risk Counterparty Risk Issuer Risk

Understanding Market Risk It is the risk that the value of tangible and intangible of a financial institution will be adversely affected by movements in market rates or prices such as  Interest rates,  Equity prices,  Foreign exchange rates  Credit spreads  Commodity prices Resulting in a loss to earnings and capital. Slide 3

Waste In Banking »Waste No.1: Over-Processing: Adding more value to a service or product than customers want or will pay for »Waste No. 2: Transportation: Unnecessary movement of materials, products or information »Waste No. 3: Motion: Needless movement of people »Waste No. 4: Inventory: Any work-in-process that is in excess of what is required to produce for the customer Slide 3

Waste In Banking… »Waste No. 5: Waiting: Any delay between when one process step/activity ends and the next step/activity begins »Waste No. 6: Defects: Any aspect of the service that does not conform to customer needs »Waste No. 7: Overproduction: Production of service outputs or products beyond what is needed for immediate use Slide 3

Example…Pain Areas » The account opening process had many inter-linked & sequential processes. » One of the most critical ones was the “Dispatch of PIN” to use the ATM services. » Many customers did not receive the PIN at all resulting in customer complaints, hence belying their expectation of a hassle-free banking. » Losing Customer Base Slide 3

CRISIL VaR Model Slide 3 Variance-covariance Matrix Variance-covariance Multiple Portfolios Multiple Portfolios Yields Duration Yields Duration Incremental VaR Incremental VaR Stop Loss Stop Loss Stop Loss Stop Loss Portfolio Optimization Portfolio Optimization VaR

What Needs to be done  Incorporates best-business practices  Straight Through Processing  Workflows to automate processes  Process Centralization  Single window service  Control through relevant and timely MIS Slide 3

Efficiency – cost effective automation Efficiency has become necessary evil and no longer an competitive tool for Banks:  Eliminates manual intervention  Enables process integration (workflow, document imaging)  More Automation  Reducing TAT  Reduction In Errors Slide 3

Effectiveness  Measure, Monitor & Manage – Value at Risk  Establish good operational processes  Deploy Best practices framework  Streamlining the processes  Innovation Slide 3

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