Report 19 PDF

OPERATIONAL RISK MEASUREMENT
FOR THE INDIAN BANKING SECTOR:

ALTERNATIVE MEASURES
by
Romar Correa & Swati Raju
University of Mumbai (Department of Economics)
200809
1
INTRODUCTION
Banks, as major financial intermediaries, possess an inherent
advantage in assessing the riskiness of potential borrowers.
At the same time, the substantial credit, market and
operational risks they face in their operations can have a
significant impact on their earnings. Thus, risk management
which is synonymous with bank management is the core
activity for any bank. The ability of a bank to be successful/
survive under adverse economic conditions is related to the
quality of its risk, its management processes, and to its capital
adequacy. Capital adequacy not only helps prevent individual
bank failures but also helps create a sound and safe banking
system. While regulation exists in several industries, active
prudential regulation through the imposition of minimum
regulatory capital requirements (MRCR) is special to the
financial sector.
The discussion on the optimal level of capital requirements
or the minimum regulatory capital requirements has been
continuing since the 1970s. Till then, the optimal level of
capital that a bank should maintain was considered to be an
internal decision of the bank as there was no explicit
relationship expressed between the level of capital adequacy
and the level of risk faced by a bank. Further, the safety and
soundness of the banking system was promoted through a
control on the level of competition through restrictions on
entry and expansion of bank branches. A shift, however, in
banking to a deregulated, competitive and internationally
active and inter-dependent system saw regulators expressing
a felt need for active prudential regulation in terms of
development of uniform capital adequacy ratios for
internationally active banks. Common minimum regulatory
capital, apart from providing a safe and sound banking system,
was also expected to ensure a level playing field among banks
from different countries. The Basel I Accord of July 1988
was the first formal documentation of active prudential
regulation and established an explicit link between the level
of bank risk and its capital adequacy. The Accord prescribed

a minimum level of regulatory capital for internationally active
banks which required banks to hold a minimum regulatory
capital of 8% or greater of the sum of risk-weighted bank
assets (the Cooke Ratio). Further, it defined the concept of
regulatory capital and its division into Tier I (core) and Tier
II (supplementary) capital and also specified the risk weights
for the different assets. The 1996 Amendment of the Basel I
Accord addressed the issue of market risk and the regulatory
capital requirement for market risk was incorporated in the
capital adequacy framework through the introduction of a
Tier III in supplementary capital.
It is pertinent to note here that the definition of regulatory
capital is open to refinements as can be observed from the
changes introduced in the minimum required capital
requirement under Basel II which introduced an additional
capital requirement for operational risk and made
modifications to credit risk.
The Basel II Accord is based on three mutually reinforcing
pillars Pillar 1 Minimum Capital Requirements; Pillar 2
Supervisory Review, and Pillar 3 Market Discipline. The idea
is that the enforcement of minimum capital requirements
along with an effective and strong supervisory process and
disclosure of risk and market discipline can ensure a sound
financial system.
Pillar I Minimum Capital Requirements

The Basel II Accord introduced substantial changes under
Pillar I to the regulatory capital requirements as regards credit
risk and introduced an additional capital charge for operational
risk. The total regulatory capital requirement is an addition
of minimum capital requirement under credit risk, market
risk, and operational risk. Banks under Basel II can choose
from among any three of the following approaches for credit
374 Operational Risk Measurement for the Indian Banking Sector: Alternative Measures
risk the Standardized Approach and between two
sophisticated Internal Ratings-Based Approaches
Foundation and Advanced.
The Standardized Approach is the simplest and defines fixed
risk weights for all credit exposures. The substantial difference
from Basel I is that exposures to the same class of risk can be
assigned different risk weights depending on the assets
external credit rating. Banks could alternatively adopt either
of the more sophisticated Internal Ratings-Based Approaches
where the risk weights assigned are a function of the
probability of default of the borrower, loss given default,
exposure at default and effective maturity. In the Foundation
Internal Rating-Based Approach, the bank combines the
internal estimates for probability of default with fixed
parameters set by the regulator for the other three parameters,
while in the Advanced Internal Ratings Based Approach all
the four parameters of concern may be provided by the bank.
Vital to the Internal Ratings Based Approach is a validation
of the internal process by the supervisor/regulator.
The other substantial change introduced under Basel II was
the introduction of a capital charge for operational risk. Banks
can choose from any of three approaches Basic Indicators
Approach, the Standardized Approach and the Advanced
Management Approach whilst determining the capital
charge for operational risk. Each of the three approaches is
increasingly complex and sophisticated. (A detailed
discussion on operational risk is in the next section)
The overall approach under Basel II, thus, has been to give
banks the choice to adopt approaches with different levels of
sophistication with the more advanced approaches resulting
in a lower level of minimum regulatory capital requirement
as compared to the simpler approaches. Since regulators were
not willing to accept a reduction in average capital
requirements, a trade-off between the approach adopted by a
bank and the level of capital requirement was acceptable to
regulators as banks that adopted the more sophisticated
approaches would have the advantage of better risk
measurement and management systems. Thus, under Basel
II banks could have differing capital requirements dependent
on the approach selected.
Pillar 2 Supervisory Review Process

The focus under this segment is on the role of processes in
bank risk management. It draws attention to the role of the
national regulator in bringing about improvements in banks
risk management techniques and procedures, provisioning
policy, and their capital management processes. The Basel
Committee on Banking Supervision has specified the
following four key principles for supervisory review:
(i)
Banks should have a process for assessing and

maintaining overall capital adequacy with respect to
their risk profile.
(ii) Supervisors should review banks internal capital
adequacy assessments and strategies, taking proper
actions if they are unsatisfied with those processes.
(iii) Supervisors should expect banks to operate above Pillar
1 minimum regulatory capital requirements and should
have the ability to require banks to hold additional
capital; and
(iv) Supervisors should look for early intervention to prevent
a bank from falling below the minimum regulatory
capital requirement and take remedial action if the bank
is under-capitalized.
Pillar 3 Market Discipline

This facet of the Accord focuses on strengthening market
discipline. It concerns the pressure put on bank managements
by financial markets to provide a sound banking system. The
focus under this segment is on qualitative and quantitative
disclosure requirements with an aim to increase the
transparency of a banks risk profile.
Section II of the paper contains the conceptual framework of
the pricing and measurement of operational risk, wherein
Section II.A focuses on the approaches proposed by the Basel
II Accord, while Section II.B discusses the alternative
approaches to operational risk capital measurement. Section
III discusses the Basel II Accord and its relevance to India
while the computational results of operational risk capital
charge under different approaches and its impact on Tier I
capital of banks and the sensitivity analysis of gross income
of a bank to the gross income from its business lines is
contained in Section IV. Section IV.A presents the results for
the Basel II Approaches while Sections IV.B and IV.C contain
the results of the Alternative Approaches and sensitivity
analysis respectively. Section V concludes the paper.
II Operational Risk: Concept and Measurement

Management of credit and market risks has traditionally been
at the centre of bank risk management. Operational risk must
be distinguished from credit risk and market risk. For one
thing, there is no equivalent to the concept of risk exposure.
That is to say, Operational Risk does not correspond in a
simple fashion to any financial indicator. Secondly, the
distribution of Operational Risk is more fat-tailed than that
of credit risk. In addition, Operational Risk is endogenous
relative to credit and market risk. In other words, the scope
for reduction of risk are greater in the case of Operational
Risk. Operational Risk is founded on the premise that a bank,
Chapter 1: Introduction
independent of outside factors, will fail to meet one or more

operational targets in a given year. Operational Risk and its
management has garnered substantial attention since the mid1990s as a consequence of banking crises resulting from
human error, fraud and/or missing controls (e.g. Barings
Bank, Daiwa Bank and Allied Irish) and due to the intent of
the Basel Committee on Banking Supervision since 1999 to
introduce a new regulatory capital charge for Operational Risk
in addition to the minimum regulatory capital requirement
for credit and market risk. Further, technology and increased
product complexity has led to a greater focus on the
management of Operational Risk rather than its mere
measurement.
It is appropriate to begin with a compendium of definitions
and approaches along with their limitations (Bonsn, Escobar
and Flores, 2007). The Commonwealth Bank of Australia
(1999) defines Operational Risk as all risks which would
generate volatility in a banks reserves, expenses and the value
of its business. Others would confine the measure to
unpredictability in its cost structures and exclude its revenue
structure. The proposed checklist for the European Union is
as follows (Oesterreichische Nationalbank, 2006): Interest
income and non-interest income include interest receivable
and similar income, income payable and similar changes,
income from shares and other variable/fixed-yield securities,
commissions and fees receivable, commissions and fees
payable, net profit and net loss on financial operators and
other operating income. The following data is not to be used
in computing the indicator: Realized profits/losses from the
sale of non-trading items, income from extraordinary or
irregular items and income derived from insurance. Care is
taken to ensure that the indicator is calculated before the
deduction of provisions for operating expenses. The latter
include fees paid for outsourcing services provided by third
parties which are not a parent or a subsidiary of the bank or a
subsidiary of a parent which is also the parent of the bank. If
revaluation of trading book items is part of the profit-andloss statement, revaluation must be included in the calculation
of the indicator. A limitation of these concepts is that indicators
of interest and non interest income only reflect the volume of
business in each line but not the level of Operational Risk.
The risk adequacy of the capital requirement calculated on
the basis of these indicators is inadequate as bank-specific
loss data is not used. Consequently, it is not possible to effect
a control of Operational Risk tailored to their causes and
targeted risk management. In addition, the potential
diversification effects between business lines is not factored
by aggregating the amounts of capital. According to the Basel
Committee on Banking Supervision (BCBS), the financial
375
impact of a loss event includes all out-of-pocket costs and

excludes opportunity costs and foregone revenues.
The Basel Committee on Banking Supervision has defined
operational risk as the risk of loss resulting from inadequate
or failed internal processes, people and systems or from
external events. This definition includes legal risk, but
excludes strategic and reputational risk (Basel Committee,
2004). Operational risk, thus, is the risk arising from
operational loss and operational losses in turn emerge from
operational errors. In other words, operational risk is
concerned with the risk to a banks performance due to the
management of the bank as opposed to the financing of the
bank. Consequently, when operational risk is not addressed
systematically it can result in inconsistent performance and
earnings surprises for the stakeholders. Thus, operational risk
exposures can have an impact on banks revenues and net
worth.
Operational risk, thus, generates operational losses and the
losses generated are a cost to the bank. Hence, the pricing
and the consequent measurement of the operational risk
capital charge has to be adequate to cover for these losses.
Therefore, to price operational risk appropriately, a bank
would need a measure of expected loss which is based on its
history of operational losses. This would require the
development of an internal as well as external database on
the sources and types of operational loss exposure in which
every single operational loss event is recorded from which
the mean and standard deviation of losses for the relevant
time period can be computed. However, the creation of such
a comprehensive database is fraught with several problems,
namely, identifying the range of business activities across
which operational loss events might be classified and
allocation of a loss event to a particular area of activity.
Besides, the database can only provide ex-post guidelines on
the potential sources of operational risk events but not exante signals. Further, at times, bank managements could write
off small operational losses against revenue which raises
issues regarding the credibility of the operational loss
database. The problem of credible databases can be redressed
through the creation of an independent external database
which can be shared among banks. Another matter concerns
the appropriate time frame over which data needs to be
collected for a study of operational loss exposures. Apart from
the issues related to data collection, there are statistical issues
such as the nature of the underlying distribution of loss
exposures. The distribution of loss exposures most likely
would be non-normal and skewed as there would be a large
number of small losses and infrequent and decreasing
numbers of large operational loss events.
Correlations between different types of operational loss events
could pose another statistical problem and one needs to
investigate whether these correlations are stable. Among the
problems here are the assumptions to be made about the
correlation of operational loss events. The Basel II Accord
assumes that all operational risk losses occur simultaneously.
The simple summation of high percentile value at risks implies
the simultaneous occurrence of a set of worst-case scenarios.
The issue here is that it is hard to compute the degree of
correlation between various risk types and/or banks because
of the absence of historical data. Both top down and bottom
up approaches, elaborated upon below, rely on historical data.
The latter are based on loss events in individual processes
whereas the former operate at the level of the bank moving
down business lines. Top-down models are likely to superior
at estimating capital requirements. According to the factor
approach, an attempt is made to identify important
determinants of Operational Risk (OR) either at the level of
the banks or at the level of individual business lines. A formula
like
m
OR = t i Fi +
i =1
is used. The Fis are the risk factors. The approach covers risk
indicators, CAPM-like models, and predictive models. In the
risk indicators methodology, regression analysis is used to
identify risk factors like the volume of operations, credit
ratings, and employee turnover. CAPM-based models are used
to connect the volatility of returns to OR variables. With
predictive models, discriminant analysis is used to single out
the elements that lead to OR losses.
Correlation, if any, between operational, market, and credit
risk must be taken into consideration as it will have an impact
on a banks capital requirements. For instance, it can lower
bank capital requirements. A failure to take into consideration
such correlations might result in a bank being over-capitalised.
The Accord specifies three distinct approaches to compute
capital requirements for Operational Risk based on increasing
risk sensitivity and allows banks to adopt different approaches
to different operations. Banks, however, will not be allowed
to revert to a simpler approach from a sophisticated approach
(except under particular circumstances). The idea is to ensure
that banks do not cherry pick among approaches to reduce
their capital charges. Further, each approach has certain
qualifying qualitative and quantitative standards (King, 2001;
Saita, 2007; Tripe, 2000).
II.A Operational Risk Capital Charge: Basel II

Approaches
The three approaches for computing operational risk capital
charge are (i) the Basic Indicator Approach (BIA), (ii) the
Standardized Approach (SA) and (iii) the Advanced
Measurement Approach (AMA), each of which is detailed
below. The identification and measurement of operational risk
can be viewed as following either the top down or the bottom
up mechanism depending on the method used to calculate
the risk charge. In the top down approach, financial data is
extracted from the balance sheet and Profit & Loss statement.
This method may not result in the proper capturing of risks
nor does it help in risk mitigation. This approach corresponds
with the Basic Indicator and the Standardized Approaches of
the Basel II Accord. The third approach of the Accord, the
Advanced Measurement Approach, is consistent with the
bottom up approach in which the regulatory capital
requirement will be defined by the estimate generated by the
internal operational risk measurement system. No eligibility
priors are needed for using the Basic Indicators Approach
because that approach is the default position designed for
small local banks. According to the standardized approach,
the business activities of a financial institution are divided
into standardized business lines and assigned relevant
indicators, net interest income and net non-interest income.
In business line mapping, banks must enunciate principles
and provide documentary evidence for mapping net income
from their own current activities into the standardized
framework. The principles include :
1. The mutually exclusive and exhaustive nature of the
mapping from activities into business lines and 2. Costs
generated in one business line and imputed to a different
business line, may be reallocated to the business line to which
they pertain. For instance, a formulation based on internal
transfer costs between the two activities may be used.
Internationally active banks or those exposed to significant
Operational Risk are expected to use more elaborate
approaches than the Basic Indicators Approach. Lars
Svensson notes the Basel Paradox here, that internationally
active banks might not meet the eligibility criteria to use
sophisticated approaches (Mussa, 2007)
(i) The Basic Indicator Approach (BIA)
The BIA is the simplest of the three approaches to calculating
operational risk capital charges. This approach uses a single
indicator, gross income, as a proxy for a banks overall
operational risk exposure. Minimum capital requirements
under BIA is a percentage (equal to fifteen percent) of the
average of positive gross income (GI) over the preceding three
377
years. Years with negative gross income are excluded. Gross

income is computed as net interest income plus net noninterest income, gross of any provisions and operation
expenses,
broad indicator which serves as a proxy for the scale of

business operations and the operational risk exposure within
each of these business lines. A detailed mapping of the
activities under each business line is provided in Annexure I.
K BIA = GI1,...n * n
Table 1. Standardized Approach Business Units

and Business Lines
where
Business Units
KBIA capital charge under the Basic Indicators Approach
Investment Banking
GI
annual gross income of a bank in a given year
the number of previous three years in which gross

income (GI) is positive.
The advantage of this approach lies in its simplicity and ease

of implementation. The BIA can be applied universally and
allows for easy comparison across banks. However, while
this approach is suitable for small banks, internationally active
banks with substantial operational risk exposure would need
to adopt a more sophisticated risk management and
measurement approach within the overall framework.
(ii) The Standardized Approach (SA)
This approach is a refinement over the Basic Indicators
Approach and can reflect better the differing risk profiles
across banks as reflected by their broad business activities.
Under the Standardized Approach, a banks operational risk
capital charge is sensitive to the risk arising from the various
business lines.
Under this approach, a banks activities are divided into a
number of standardized business units and business lines.
The SA can, hence, better reflect the differing risk profiles
across banks as reflected by their broad business activities.
However, similar to the BIA, the capital charge for the
different business lines is standardized by the supervisor. The
business lines proposed under the SA reflect an industry
initiative to collect internal loss data in a consistent manner.
A broad financial indicator has been specified for each
business line and the indicator would reflect the size/volume
of a banks activity. The indicator can serve as a rough proxy
for the amount of operational risk within each of these
business lines. The operational risk capital charge within each
of these business lines is calculated by multiplying a banks
broad financial indicator by a beta factor. The beta provides
a rough proxy for the relationship between the Operational
Risk loss experience for the industry for a given business
line and the financial indicator representing a given banks
activity in that particular business line. Table 1 below presents
the eight businesses into which a banks activities can be
decomposed. Within each business line, gross income is the
Banking
Others
Business Lines
Beta Factors
Corporate Finance
18%
Trading & Sales
18%
Commercial Banking
15%
Retail Banking
12%
Payment and Settlement
18%
Retail Brokerage
12%
Asset Management
12%
Agency Services
15%
For instance, the operational risk capital charge for the

business line of corporate finance under investment banking
would be calculated as follows:
Kcorporate finance = corporate finance * Gross income
where
Kcorporate finance capital requirement under corporate finance
business line
corporate finance Beta factor for the corporate finance
business line.
It is relevant to observe that each business line has its assigned
beta factor and a respective financial indicator. Gross income
here refers to the gross income of a bank for that particular
business line and does not refer to the gross income of the
whole bank. Ideally, the beta factor for each business line
should be calibrated as per its loss experience and the goal of
the Basel Committee is to re-calibrate the SA when credible
risksensitive data (loss experience information) is available.
Such a mapping will enable each bank to map its structure
into the regulatory framework. Since most banks are in the
process of developing an internal loss database or may not
choose to incur the investment required to develop an internal
loss database for all business lines (especially for those
business lines that present a less material operational risk),
in the interim the SA could provide the required framework
other than the BIA to calculate their regulatory capital charge.
Alternatively, the SA can provide a basis on which a bank
can move to more sophisticated approaches like the Advanced
Management Approach that would help develop better risk
management techniques within banks.
The Basel Committee on Banking Supervision has set
qualifying criteria that a bank must satisfy before it can adopt
the Standardized Approach (items 660-663 of BCBS Report,
June 2006). The total capital charge is computed as a three
year average of the simple summation of the regulatory capital
charges across each of the business lines in each year. For
any given year, the negative capital charges (resulting from
negative gross income) for a business line may offset positive
capital charges in other business lines without limit. However,
if the aggregate capital charge across all business lines is
negative for a year, then the input for the numerator for that
year would be zero. The total capital charge may be expressed
as:
K = max jY j , 0 max
i =1
j =1
3
The treatment of negative values here is not different: In each

year, a negative capital requirement in one business line
resulting from negative gross yield may be imputed to the
whole. When, however, in a given year, the aggregate capital
charge accruing to all business lines is negative, the element
in the numerator for the year is zero.
A criticism that has been made in this context is that risk
management in terms of risk control is not sufficient because
the capital requirement is not determined by the actual
Operational Risk but by the level of net interest income and
net non interest income. The assumption is that, in general,
higher income can only result from accepting higher
Operational Risk. However, improved performance can also
result from superior risk management techniques.
(iii) Advanced Management Approach (AMA)
Banks may be allowed by national supervisors to adopt the

Alternative Standardized Approach (ASA) in which retail
banking and commercial banking operational risk exposures
can be calculated by applying betas to a percentage m of
outstanding loans rather than gross income. Capital charges
for retail and commercial banking are calculated differently.
Instead of using gross income as the indicator of exposure,
the value of loans and advances is used. Gross income is
substituted by a number that amounts to 0.035 times the value
of loans and advances. Thus,
computed separately for retail and commercial banking. K is

the capital charge against retail banking, the beta assigned to
it is 0.12 and L is the total outstanding loans and advances
(retail banking, non risk-weighted and gross of provisions)
averaged over the previous year. A bank would be allowed at
the discretion of the supervisor to adopt the ASA only when
it is able to convince the supervisor that the ASA would
provide a better basis for the calculation of regulatory capital.
A bank would not be allowed to revert to the Standardised
Approach from the ASA without obtaining the prior sanction
of the supervisor (BCBS Report 2001, 2006; Saita, 2007).
This approach identifies potential risk areas for each line of

business based on historical data and the frequency of their
occurrence and size of loss. The AMA provides discretion to
individual banks on the use of internal loss data while the
method to calculate the required capital charge is uniform to
all banks and established by the supervisor. Further, banks
while adopting this approach will need to satisfy several
quantitative and qualitative criteria (item 664-674, BCBS,
June 2006) which would ensure the integrity of the
measurement approach, data quality, and internal
measurement processes. As the AMA is the most sophisticated
in the spectrum of approaches available to measure
operational risk capital, the Basel Committee believes that
the adoption of this approach will incentivize banks to develop
a credible internal loss database. The Committee recognizes
that the industry is currently at a nascent stage in developing
the database necessary for the implementation of the AMA
and, consequently, some re-calibration would be required at
a later date. Thus, under the AMA, the regulatory capital
requirement will equal the risk measure generated by the
banks internal Operational Risk measurement system and
its adoption is subject to regulator approval
An illustrative specification from the European Union

Directive referred to is as follows:
Under the AMA the operational risk capital charge is to be

determined through the following procedures:
K = 0.035L
Corporate finance
Trading and sales
Payments and settlement
Commercial Banking
Agency services
Retail brokerage
Retail banking
1
2
6
4
7
3
5
Asset management
(i)
18%
15%
12%
A banks activities are categorized into a number of

business lines and a broad set of operational loss types
is defined and applied across business lines.
(ii) Within each business line/loss type combination, the
supervisor specifies an exposure indicator (EI) which
is a proxy for the size of each business lines operational
risk exposure.
(iii) In addition to the EI, banks measure based on their
internal loss data a parameter that would represent the
probability of loss event (PE) and a parameter that would

represent the loss given that event (LGE), is calculated.
The product of the EI*PE*LGE is used to calculate the
expected loss (EL) for each business line.
(iv) The supervisor would supply a factor the gamma term
for each business line which would translate the
expected loss into a capital charge. The overall capital
charge for a particular bank is the simple sum of all the
resulting products for the different business lines.
(v) Finally, to facilitate supervisory validation, banks would
provide the supervisor with the individual components
of the expected loss calculation, namely the EI, PE and
LGE, based on which the supervisor would calculate
the expected loss (EL) and then adjust for the
unexpected loss through the gamma term so as to
achieve the desired level of safety and soundness.
The business lines under the AMA would be similar to those
under the SA and the operational risk measure under the AMA
must guarantee standards which are comparable with credit
risk under the Internal Ratings Based Approach. Further, the
regulatory capital requirement should be the sum of expected
and unexpected losses unless the bank can show that the
expected losses have been already captured and accounted
for by its internal business processes. The risk from the
different business lines are additive with no diversification
benefit. However, the bank may be allowed to use internallydetermined correlations after regulatory approval by the
supervisor that the system of determining the correlations is
satisfactory. Thus, crucial to the success of the Advanced
Measurement Approach is accurate risk mapping which would
help identify key risk indicators which, in turn, can provide
anticipatory signals and enable better monitoring and control
action through building of internal and external loss databases.
The Basel II Accord, further, includes guidelines for
constructing internal loss databases or for avoiding double
counting when operational losses are already included under
regulatory capital for credit risk (e.g. collateral management
failures). A bank would further monitor for changes in risk
control and accordingly adjust operational risk estimates.
Further, under the AMA a bank is permitted to consider riskmitigation benefits which cannot be greater than 20% of the
total AMA operational risk capital requirement. The
possibility of loss data being hidden by operational
management can be supplemented by having an appropriate
organizational structure such as independent operational risk
management, and internal loss databases can be compared
with available external databases and scenario analysis to
measure high severity losses. Scenario Analysis contributes
by suggesting what might happen, even if it (the loss event)
never happened before (Saita, 2007, p.125).
379
The strategy under AMA can, thus, be summarized as: (i)

Map potential risks (ii) Measure risk (iii) Implement risk
mitigation measures and (iv) Predict and forecast risks.
Alternatively, operational risk estimates should be derived
by a proper combination of (i) internal data (ii) relevant
external data (iii) scenario analysis and (iv) business
environment and internal control systems. (BCBS, 2004,
2006; Bhatia, 2002; Saita, 2007).
As banks move from the BIA to the AMA, their capital charges
are lowered. The regulatory capital requirement will be
calculated on the basis of the banks own Operational Risk
model. One of the objectives of the Basel II Accord is to
align regulatory capital with the economic capital determined
by the internal models of banks. Economic capital is the
amount of capital that a bank must hold to protect itself, at
chosen confidence intervals, from insolvency due to
unexpected losses over a period of time. Under AMA, banks
must quantify Operational Risk capital requirements for seven
types of risk and eight business lines, giving a matrix with
fifty-six elements. Ignoring correlation, these estimates are
reduced to a summary statistic of the Operational Risk of the
bank.
II.B Operational Risk Capital Charge: Alternative

Approaches
Operational risk emanates not just from the activity of bank
lending (which forms the core of credit risk) but from several
other activities undertaken by a bank. Consequently,
operational risk costs must be built into fees and commissions
for activities such as deposit processing, cheque issuance and
all other activities that can generate operational errors/losses.
The alternative approaches to the pricing of operational risk
in banks focus on the volatility of non-interest expense
account by looking at two ratios: (i) Cost to Asset Ratio and
(ii) Cost to Income Ratio. Further, the use of ratios insulates
the operational risk capital charge from the growth observed
in bank balance sheets. The operational risk capital charge
under these approaches is linked to the volatility in the cost
to asset ratio and the cost to income ratio. Tripe (2000) has
suggested that the operational risk capital charge for a bank
can be computed using a multiple of the standard deviation
(say three standard deviations) of the cost to asset ratio relative
to average total assets and to total income for the cost to
income ratio. He writes this multiple having been selected
for convenience rather than to reflect any particular theoretical
rationale, it is not considered inconsistent with likely practical
approaches (p.11). The rationale for employing multiple
standard deviations can be attributed to the non-normal,
skewed, and fat tailed distribution of the loss exposures.
Hence, multiple standard deviations would cover a smaller
proportion of the possible outcomes than that under a normal
distribution. A fall-out of this would be that banks would
possibly be under capitalized as compared to the actual risk
exposure.
(i) Cost to Asset Ratio
The cost to asset ratio can be defined as the ratio of operating
(non-interest) costs to average total assets. The operational
risk capital charge is linked to volatility in the cost to income
ratio. The ratio of cost to average assets of a bank reflects a
banks business mix. For instance, a bank with a focus on
corporate lending or placements in the inter-bank market would
have a lower cost to asset ratio as compared to a bank with a
greater focus on retail lending. However, a problem with this
ratio is the complications for cross-border comparisons (which
is very relevant for internationally active banks). Banks in
different countries can have different forms of constructing
their balance sheets and this can have an impact on the cost
to asset ratio more than the cost to income ratio. Further, it is
important to note that if banks are undertaking substantial
efforts to reduce costs, then the variations in the cost to asset
ratio will be around a decreasing mean rather than around a
stationary mean making comparisons difficult. Also, the cost
to asset ratio does not capture the non-interest income which
is a significant pointer to the operational risks in a bank. Further,
banks at times may adjust operating losses (small losses)
against revenues. Hence pricing operational risk by studying
the volatility in the cost to income ratio would be an alternative
to the cost to asset ratio.
(ii) Cost to Income Ratio
The cost to income ratio is also known as the Efficiency
Ratio or Expense to Income Ratio. The ratio is used by bank
managements and market analysts to assess bank
performance. The components of the ratio are cost and
income and, hence, the measure is indirectly related to bank
profitability. A reduction in costs for a given level of income
will reflect increased profits and vice versa. Increased profits,
in turn, will result in improved return on equity and share
prices of the bank which is of great interest to investors.
Further, most bank costs have been reducing in response to
margin squeezes, thus lowering both costs and income. Hence,
volatility in a banks cost to income ratio might be a better
measure of volatility in a banks cost performance.
The cost to income ratio is the ratio of non-interest (operating)
costs excluding bad and doubtful debt to the net interest
income plus non-interest income of the bank. Non-interest
costs are perceived as those costs which are most amenable
to management decisions and considered to be that part of a
banks costs which can be controlled. A focus on non-interest

costs would ensure that fluctuations in the level of interest
rates do not affect the volatility seen in this ratio. The use of
the net interest income term in the denominator will reduce
the volatility that could arise from fluctuations in the general
level of interest rates.
The rationale for the exclusion of bad and doubtful debt can
be attributed to the following: (i) Bad and doubtful debt
largely reflects bad credit decisions made in the past rather
than current performance. (ii) The cost to income ratio would
be adversely affected by major write-offs, if any, undertaken
at points of time in the future. (iii) Such assets can distort the
ratio as well as reflect high levels of operating costs and low
levels of income.
Since the cost to income ratio is affected by changes in both
costs as well as incomes, the ratio needs to be interpreted
with caution. An increase in the ratio on account of falling
income needs to be studied so as to determine whether the
fall in income is because of the banks inability to generate
income, thereby indicating inefficiency or is attributable to a
change in competitive conditions which reduce margins across
the board or a change in overall economic conditions which
restrict opportunities to undertake profitable business from
which a bank can earns fees.
The ratio is also sensitive to individual bank structure in terms
of the strategy adopted for deposit mobilisation, spread of
bank branch networks and business mix. Another factor that
can have an impact on the cost to income ratio is banks holding
excess capital or banks that are over capitalized. Banks
holding excess capital are in a position to undertake greater
wholesale lending or investment at low cost thus increasing
their gross income with the same level of operating costs
resulting in a lower cost to income ratio. Tripe (1998) has
detailed, through several illustrations, the impact of differing
bank structures on the cost to income ratio.
(iii) Range
Range between the maximum and minimum cost ratios can
be looked at as an alternative to standard deviation for
measuring the operational risk capital requirement. Such an
estimate can be adopted when observations are sufficiently
large and is based on a methodology like back simulation.
However, an estimate based on range would be larger than
that under standard deviation as the range extends on both
sides of the mean (Tripe, 1998, 2000).
III The Basel II Accord and India

The Reserve Bank of India (RBI) has adopted a consultative
approach as regards the implementation of Basel II. A Steering
Committee comprising of senior officials from fourteen banks

(private, public, and foreign) has been constituted alongside
a representation of the Indian Banks Association. Keeping
in view the RBI's goal to be consistent and harmonious with
international standards, it has been decided that at a minimum,
all banks in India will adopt the Standardized Approach for
credit risk and the Basic Indicator Approach for operational
risk with effect from March 31, 2007. After adequate skills
are developed, both in banks and at supervisory levels, some
banks may be allowed to migrate to the Internal Ratings Based
Approach after obtaining the specific approval of the Reserve
Bank of India. Further, the Reserve Bank of India will review
the capital requirements produced by the Basic Indicator
Approach for general credibility and, in the event that
credibility is lacking, appropriate supervisory action under
Pillar 2 will be considered. Banks will be encouraged to move
along the spectrum of available approaches as they develop
more sophisticated operational risk measurement systems and
practices (Reserve Bank of India, 2005). While the RBI has
mandated the BIA approach, banks are aware that they must
progress toward the AMA approach. One problem that has
been recognised is that low frequency, high impact data, by
definition, must be collated. Therefore, a data exchange by
the Indian Banks Association has been proposed along the
lines of the Global Operational Loss Database (GOLD) set
up by the British Bankers Association. In India, business
continuity planning (BCP) is a part of Operational Risk
(Reserve Bank of India, 2008A). The context is the increased
leverage of technology. In that case, disaster recovery is an
important component of the BCP programme directed towards
the recovery of technology. An effective BCP must factor in
the possibility of disasters covering an entire region and the
resulting attrition of staff. Thus, the BCP methodology
includes the IT continuity template and formulating recovery
time objectives (RTO) based on Business Impact Analysis.
The model must be robust enough to contend with the most
stressful situations. The recovery point objectives (RPO) for
data loss in the case of each critical business will have to
identified along with strategies to deal with them.
381
IV Pricing Operational Risk: Measurement for

Indian Banks
This section presents the estimates of operational risk capital
measurement for Indian banks and its consequent impact on
Tier I capital under a broad spectrum of approaches, namely,
the Basic Indicators Approach, the Standardized Approach,
the Cost to Asset Ratio and the Cost to Income Ratio. The
study estimates the operational risk capital charge at an
individual bank level as well as bank group-wise depending
on the availability of data. When the estimates have been
presented at the individual bank level, it covers 30 banks
including the 27 public sector banks (19 nationalized Banks
and 8 banks of the State Bank group) and the 3 leading new
private sector banks viz. ICICI Bank, HDFC Bank and UTI/
Axis Bank. The period of the study varies as per the Approach
and the availability of data. The time period of the study spans
2005-2008 for three of the four approaches - the Basic
Indicators Approach, the cost to asset ratio and the cost to
income ratio, while it spans the period 2006-2007 for the
Standardized Approach. The data has been sourced from
various issues of the Reserve Bank of Indias Basic Statistical
Returns of Scheduled Commercial Banks in India and
Statistical Tables Relating to Banks in India and Report on
the Trend and Progress of Banking in India.
IV.A Basel II Approaches

(i) The Basic Indicators Approach
This approach is to be adopted by all banks in India from
March 2007. This approach, as detailed above, would require
banks to keep aside a percentage ? (equal to 15%) of positive
gross annual income over the past three years excluding any
year where gross income is negative as operational risk capital
charge. Table 2 presents the additional capital charge
requirement for operational risk under the Basel II Accord
for the major bank groups.
Table 2. Operational Risk Capital Charge and Impact on Tier I Capital

Bank Group-wise (Basic Indicators Approach)
Year
Gross Income
(Rs. Crore)
Annual Capital
Required
Capital Charge
(Rs. Crore)
Networth
(Rs. Crore)
Current Tier I
(%)
Estimated Tier I
(%)
Public Sector Banks

2002
48095
7214
57454
7.8
2003
58611
8792
65582
8.3
2004
71822
10773
79225
8.2
2005
75802
11370
8926
85946
7.4
6.6
2006
79276
11891
10312
115044
8.8
8.1
Table contd...
Table contd...
2007
85909
12886
11345
135626
8.3
7.6
2008
97039
14556
12049
174853
7.4
6.9
2009
13111
Nationalised Banks
2002
29888
4483
37395
7.1
2003
36952
5543
42450
7.9
2004
45343
6801
51475
8.1
2005
46298
6945
5609
61181
7.6
6.9
2006
46829
7024
6430
71012
9.0
8.2
2007
53945
8092
6924
84385
8.5
7.8
2008
60310
9047
7354
104325
7.5
7.0
2009
8054
State Bank Group

2002
18207
2731
20059
9.5
2003
21660
3249
23133
9.3
2004
26480
3972
27750
8.5
2005
28690
4304
3317
32764
7.9
7.1
2006
30787
4618
3842
37660
8.5
7.6
2007
30278
4542
4298
42942
7.7
6.9
2008
34437
5166
4488
61706
7.2
6.7
2009
4775
Old Private Sector Banks

2002
4451
668
5411
10.4
2003
4952
743
6295
10.6
2004
5569
835
7291
10.9
2005
4852
728
749
7926
9.0
8.1
2006
5346
802
769
9671
9.3
8.5
2007
5987
898
788
10737
11.2
10.3
2008
6838
1026
809
15315
14.1
13.4
10514
7.5
2009
909
New Private Sector Banks

2002
4058
609
2003
8205
1231
13404
8.2
2004
10163
1524
14846
7.0
2005
11507
1726
1121
18981
9.9
9.4
2006
16838
2526
1494
24314
8.8
8.3
2007
23035
3455
1925
33075
8.1
7.7
2008
32665
4899
2569
49332
10.3
9.8
2009
It is important to mention here that even while banks in India

are to introduce the operational risk capital charge from March
2007, we have estimated this capital charge from 2005. Apart
from giving a historical perspective to the impact of the
operational risk capital charge, the exercise will also provide
a useful continuation to an early study of ICRA in this area.
ICRA in its estimates had suggested that in 2005 scheduled
3627
commercial banks would need Rs.120 billion as additional

capital requirements for operational risk. Of this, a substantial
amount would be needed by public sector banks comprising
the nationalized banks and the State Bank group followed by
the new private sector banks and the old private sector banks.
While the pattern of capital requirements remains the same
at the end of March 2007, the focus here is on the period
since March 2007 when Indian banks would start

implementing the Operational Risk capital charge under BIA.
Table 2 details the additional capital requirement on account
of the Operational Risk capital charges for the Indian banking
sector excluding foreign banks in India and estimates indicate
that the requirements on account of operational risk capital
charges would be of the order of Rs.14,058 crores at the end
of March 2007 and Rs.15,427 crores in March 2008. The
requirement is estimated to be Rs.17,647 crores for March
2009. Furthermore, the requirement at the end of March 2009
is about 1.63 times greater than the requirement at the end of
March 2005 which was approximately Rs.10,796 crores. A
substantial proportion nearly 80.70% (at Rs.11,345 crores)
of the overall additional capital requirements on account of
Operational Risk capital charge would form the requirement
of the public sector banks at the end of March 2007. While
the public sector banks have seen an increase in the absolute
amount of capital requirements, the percentage as a proportion
of the overall capital requirements for public sector banks
has since declined and is estimated to be around 74.30% at
Rs.13,111 crores in 2009 of the overall additional capital
requirement on account of the Operational Risk capital charge.
Compare this with the new private sector bank group whose
additional capital requirements for Operational Risk, though
substantially lower than the public sector banks, witnessed
an increase both in percentage terms as well as in the absolute
amount of capital required since March 2007. At end March
2007, the capital requirements of new private sector banks
was estimated to be Rs.1925 crores, which was 13.69% of
the overall requirement for the banking sector (excluding the
foreign banks) and the percentage share is estimated to be

around 20.55% (Rs.3627 crores) at the end of March 2009.
The bank group of the old private sector banks has seen an
increase in absolute amount of capital requirements from
Rs.788 crores at the end of March 2007 to Rs.909 crores at
the end of March 2009. The percentage share of this group
however remains stable in the range of 5.15 5.61% over
the period March 2007-09. The impact of this additional
capital requirement has had the expected impact on lowering
Tier I capital across all bank groups. On an average for 2007
and 2008, the impact of lowering the Tier I capital has been
the highest for the old private sector banks at around 0.45%
followed by the public sector banks at 0.6% and the lowest
for the new private sector banks at 0.45%. The Operational
Risk capital requirement for each of the individual 30 banks
on an average for 2007-09 is encapsulated in Table 3 while a
detailed analysis is in Annexure III. Table 3 highlights the
fact that the Operational Risk capital charge for 23 of the 30
banks under consideration would, on an average for 200708, be below Rs.500 crores. Five banks would require an
operational risk capital charge in the range of Rs.500Rs.1000
crores, while the State Bank of India at Rs.2203 crores and
ICICI Bank at Rs.1423 crores would need an additional capital
requirement of above Rs.1000 crores. A graphical presentation
of the comparative requirements of Operational Risk capital
charges of each individual public sector bank vis--vis the
overall requirement of the public sector banks and of each of
the three leading private sector banks vis--vis the overall
requirement for the new private sector banks for the period
2005-2009 is presented in Annexures VI and VII respectively.
Table 3. Operational Risk Capital Requirement of Banks: Average 2007-09 Basic Indicators Approach
(Rs. Crore)
Below 250
250-500
BoM (184)
ALLA (315)
BoB (694)
ICICI (1423)
DENA (175)
ANDHRA (261)
BoI (643)
SBI (2203)
PSB (129)
CENTRAL (456)
CANARA (759)
UNITED (213)
CORP (267)
PNB (925)
VIJAYA (198)
INDIAN (330)
HDFC (594)
SBBJ (198)
IOB (414)
SBH (240)
ORIENTAL (327)
SB-IND (117)
SYND (377)
SBM (146)
UCO (300)
SBP (209)
UNION (466)
SBS (91)
AXIS (306)
SBT (197)
Figures in parentheses represent the Operational Risk capital charge.
383
500-1000
Above 1000
Considering that a substantial burden of the additional capital
requirement on account of Operational Risk capital charges
lies on the public sector banks, it would be interesting to study
and compare the impact of the Operational Risk capital
charges on the regulatory Tier I capital. Tables 4, 4A and 4B
summarize the impact on Tier I capital of the additional capital
charges for Operational Risk for nationalized banks, the State
Bank group and the three major new private sector banks
respectively for 2005-08. As can be gleaned from Table 2,
the introduction of the additional capital charges for
Operational Risk has lowered the Tier I capital of banks. As
of end March 2005, if the operational risk capital charge was
assumed to be active, then all others remaining the same, the
estimates from Table 4A indicate that nearly 9 of the 19
nationalized banks would have had a Tier I capital below 6%

while two banks from the State Bank group the State Bank
of Indore and State Bank of Travancore (Table 4B) - would
have a Tier I capital of less than 6%. The Reserve Bank of
India on February 15, 2005, issued guidelines to all Scheduled
Commercial Banks indicating the approach to be adopted
for the implementation of the Basel II Accord in Indian banks.
Subsequently, several nationalized and private banks boosted
their Tier I capital through raising equity in 2005 and 2006
and the Tier I capital of the following banks showed
substantial improvement, namely Allahabad Bank, Andhra
Bank, Bank of Baroda, Dena Bank, Oriental Bank of
Commerce, Punjab and Sind Bank, Punjab National Bank,
Syndicate Bank and Union Bank of India.
Table 4A. Impact of Operational Risk Capital Charge on Tier I Capital

Basic Indicators Approach Nationalized Banks
Tier I Capital
Year
Below 5%
Between 5-6%
Between 6-7%
Between 7-9%
Above 9%
2005
ORIENTAL
ALLA
BoI
ANDHRA
CORP
PSB
CENTRAL DENA
BoM
BoB
UNITED
IOB
CANARA
INDIAN
SYND
VIJAYA
PNB
UCO
UNION
2006
DENA
BoI
ALLA
SYND
BoM
CANARA
ANDHRA
BoB
UCO
CENTRAL
IOB
CORP
UNION
UNITED
INDIAN
VIJAYA
ORIENTAL
PSB
PNB
2007
2008
BoI
CANARA
ALLA
ANHDRA
BoM
UNITED
BoB
CORP
CENTRAL
VIJAYA
IOB
INDIAN
DENA
PSB
ORIENTAL
SYND
PNB
UCO
UNION
BoM
CENTRAL
CANARA
ALLA
CORP
UCO
VIJAYA
DENA
ANDHRA
INDIAN
SYND
BoB
UNION
BoI
UNITED
IOB
PSB
PNB
ORIENTAL
In addition, as indicated by the spread of banks at the end of

March 2007, when banks were to adopt the additional
regulatory capital requirement for Operational Risk under the
Basic Indicators Approach, regulatory Tier I capital adequacy
would be below 6% for 6 of the 19 nationalized banks while
nearly 10 of the 19 nationalized banks would have
comfortable levels of Tier I capital (greater than 7%). A
worrying scenario in the nationalized banks in 2008 is
385
observed for the Bank of Maharashtra and UCO Bank whose

Tier I capital would be below 5% and two other banks
Central Bank of India and Vijaya Bank would have a Tier I
capital in the range of 5-6%.
Annexure VIII contains a graphical presentation of the
Operational Risk capital charge and the impact on Tier I
capital at an individual bank level for nationalized banks
Table 4B. Impact of Operational Risk Capital Charge on Tier I Capital

Basic Indicators Approach - State Bank Group
Tier I Capital
Year
Below 5%
2005
Between 5-6%
Between 6-7%
Between 7-9%
Above 9%
SBP
SB-IND
SBH
SBI
SBT
SBM
SBBJ
SBS
2006
SB-IND
SBI
SBM
SBBJ
SBT
SBH
SBP
SBS
2007
SBM
SB-IND
SBT
SBI
SBBJ
SBH
SBP
SBS
2008
SBM
SBBJ
SBI
SBH
SBS
SB-IND
SBP
SBT
Table 4C. Impact of Operational Risk Capital Charge on Tier I Capital
Basic Indicators Approach Axis Bank, HDFC Bank and ICICI Bank
Tier I Capital
Year
Below 5%
Between 5-6%
Between 6-7%
2005
Between 7-9%
Above 9%
AXIS
HDFC
ICICI
2006
AXIS
HDFC
ICICI
2007
AXIS
HDFC
ICICI
2008
AXIS
HDFC
ICICI
Table 4B presents a similar spread for the State Bank of India
and its associate banks. The State Bank of India and some of
its associate banks like the State Bank of Saurashtra, the State
Bank of Bikaner and Jaipur, State Bank of Hyderabad and
the State Bank of Patiala, have shown comfortable levels of
capital adequacy under Tier I capital in 2007. At the end of
March 2008, though, only two banks in the State Bank group
viz. the State Bank of India and the State Bank of Saurashtra
show comfortable levels of Tier I capital greater than 7%
while 5 of the associate banks have Tier I levels in the range
of 6%-7%. The State Bank of Mysore is the lone associate
bank of the State Bank group to have a Tier I capital of less
than 6% after the implementation of the Operational Risk
capital charge in 2007.
Table 4C gives the similar spread for the 3 major new private
sector banks considered in this paper. With the exception of
Axis Bank in 2007, all banks have a Tier I capital greater
than 9% after accounting for the capital requirement under
Operational Risk.
(ii) The Standardized Approach
We attempt to provide an estimate for Operational Risk capital
charge under the Standardized Approach (SA) (though it is
not to be adopted and is the second in the spectrum of
approaches suggested by the Basel II Accord). This approach
is a refinement of the Basic Indicators Approach and under
this approach a banks business is divided into eight business
lines and different percentages ? are applied to each business
lines gross income so as to arrive the Operational Risk capital
charge. Operational Risk under the SA is sensitive to the
decomposition of income from different business lines.
Data constraints limit the computation of the Operational Risk
capital charge under this approach to 2007 and 2008 for banks
group-wise, namely, nationalized banks, the State Bank group
and private sector (old and new) banks. Under the SA, a
banks business lines can be broadly classified into 3 major
lines Investment Banking, Banking and Others. Each of
these 3 lines at Level 1 are, in turn, decomposed into the
following (for details on Activity groups corresponding to
each business line see Annexure II).
Investment Banking (i) Corporate Finance (ii) Trading
&Sales
Banking (i) Retail Banking (ii) Commercial Banking (iii)
Payment & Settlement and (iv) Agency Services
Others (i) Asset Management (ii) Retail Brokerage and
(iii) Insurance.
For most banks in India, a one-to-one correspondence with

these business lines in terms of data availability is difficult.
For instance, income from payment and settlement and agency
services is included under Commission, Brokerage and
Exchange, an item under Other Income in a banks Profit &
Loss account. Further, most banks undertake asset
management and insurance as joint ventures and the income
from this activity could be reflected to an extent under the
item Income from Investments under Interest Earned in a
banks Profit and Loss account. Consequently, the estimation
of Operational Risk capital charge has been restricted to Level
1 and the following heads of activity have been considered,
viz. (i) corporate finance (ii) trading and sales under
investment banking; (iii) Retail Banking and (iv) Commercial
Banking under Banking. It is appropriate, here, to discuss
the correspondence between the income from the different
activity groups of a bank and available data. Data on income
from corporate finance is the income a bank obtains from
investments and other income, while income from trading
and sales is the profit a bank makes from the sale of land,
sale of investment assets and sale of foreign exchange, income
from commission and brokerage and net repo income of the
bank. Net repo income is the difference between interest
earned on balances with the RBI and other inter-bank funds
and the interest expended on borrowings from the RBI and
other inter- bank funds. Some computations had to be
undertaken to derive the income from retail and commercial
banking and is obtained as under:
Income from Retail Banking = credit outstanding against each
occupation for individuals * the weighted average of lending
rate for each of the occupations
Credit outstanding under commercial banking = Total credit
outstanding for each occupation credit outstanding against
individuals
Income from commercial banking = credit outstanding under
commercial banking activity * by the weighted average of
lending rate for each of the occupations
The Operational Risk capital charge is then obtained by
applying the relevant Beta to the gross income from a
particular business line. Table 5 presents the Operational Risk
capital charge and its impact on Tier I capital at the level of
the bank group viz. nationalized banks, the State Bank group
and private sector (old and new) banks under the Standardized
Approach).
Table 5. Operational Risk Capital Charge and Impact on Tier I Capital
Bank Group Wise (Standardized Approach)
Year
Annual
Capital
Capital
Charge
Networth Current Estimated

(Rs. Crore) Tier I
Requirement (Rs. Crore)
Tier I
(Rs.Crore)
Nationalised Banks
2004
11273
51475
8.1
2005
13144
61181
7.6
2006
15292
71012
9.0
2007
16261
13236
84385
8.5
7.2
2008
Na
14899
104325
7.5
6.4
State Bank Group

2004
6524
27750
8.5
2005
7302
32764
7.9
2006
7857
37660
8.5
2007
8241
7228
42942
7.7
6.4
2008
Na
7800
61706
7.2
6.3
387
the State Bank group on an average would need around

Rs.7500 crores and the requirement for the private sector
banks would be lower at around Rs.6000 on an average over
2007-08. Further, the estimated decline in the Tier I capital
for all the bank groups studied is much greater than under
the Basic Indicators Approach (Table2). Also, the extent of
the impact is almost similar across the bank groups the
estimated Tier I capital after taking into consideration the
Operational Risk capital charge is lower by 1% to 1.3% in
2007 and 2008.
IV.B Alternative Approaches

The alternative approaches, as discussed in Section II.B
above, refer to the computation of the Operational Risk capital
charges using the cost to asset and the cost to income ratios.
Both these measures focus on the volatility of non-interest
expenses. While the literature suggests the using of quarterly
data, for comparison with the Basel II Approaches, the
analysis has been done using annual data.
Tables 6A, 6B and 6C show the spread of banks across
different ranges of Tier I capital, when the cost to asset ratio
is used to compute the Operational Risk capital charge
(Detailed results are in Annexure IV).
Private Sector Banks

2004
4332
22137
7.0
2005
5280
26907
9.9
2006
6880
33985
8.8
2007
8473
5497
43812
8.1
7.1
2008
Na
6877
64647
10.3
9.2
The results of Table 5 indicate the additional capital

requirement that has to be set aside by the different bank
groups under the Standardized Approach would be higher
than that estimated under the Basic Indicators Approach
(Table 2). The pattern of capital requirements though remains
similar to that under the Basic Indicators Approach, wherein
the public sector banks would require a larger amount of
additional capital requirements, with the nationalized banks
required to set aside on an average nearly Rs.14,000 crores,
Table 6A underscores the severe impact of Tier I capital on

the nationalized banks using the cost to asset ratio as a measure
of the Operational Risk capital charge compared to that under
the Basic Indicators Approach (see Table 4A). In 2005, the
number of banks that had a Tier I capital below 6%, if we
assumed the Operational Risk capital charge were applicable,
remained the same at 9 banks as under the BIA the
composition had reversed under the cost to asset ratio measure
7 banks had Tier I capital below 5%, while 2 banks were in
the 5%-6% range. Likewise, the performance for the later
years also continued to reflect the severity.

Cost to Asset Ratio - Nationalized Banks
Tier I Capital
Year
2005
Below 5%
Between 5-6%
Between 6-7%
Between 7-9%
Above 9%
ALLA
BoM
BoI
ANDHRA
CORP
CENTRAL
UCO
CANARA
BoB
UNITED
DENA
INDIAN
PNB
ORIENTAL
IOB
VIJAYA
PSB
SYND
UNION
Table contd...
Table contd...
2006
DENA
PSB
BoI
BoM
CENTRAL
SYND
UNION
CANARA
UCO
ALLA
INDIAN
IOB
PNB
UNITED
ANDHRA
BOB
CORP
ORIENTAL
VIJAYA
2007
CENTRAL
DENA
PSB
SYND
BoI
BoM
UCO
UNION
VIJAYA
CANARA
UNITED
ALLA
ANDHRA
BoB
IOB
ORIENTAL
CORP
INDIAN
2008
BoM
CENTRAL
VIJAYA
PSB
SYND
UCO
UNION
UNITED
ALLA
CANARA
DENA
ANDHRA
BoB
BoI
CORP
IOB
ORIENTAL
PNB
PNB
Some banks continued to be poor performers as regards

Tier I capital (below 6%) using the cost to asset ratio viz
Bank of Maharashtra, Central Bank of India, Dena Bank,
Syndicate Bank, UCO Bank and Vijaya Bank. The surprise as
indifferent performer under the cost to asset ratio has been
Punjab and Sind Bank which has shown Tier I capital below
6%, while United Bank of India and Vijaya Bank showed a
continuous decline in Tier I levels since 2005 to 2008.
However, as compared to the State Bank group and the 3
leading new private banks, a substantial number of nationalized
banks maintained a Tier I capital greater than 9% as can be
seen from Tables 6B and 6C. Besides, the performance of
some nationalized banks such as Andhra Bank, Allahabad Bank,
Bank of Baroda, Corporation Bank, Oriental Bank of
Commerce under the cost to asset approach for operational
risk capital charge is similar to their performance under the
Basic Indicators Approach.
The impact of the cost to asset ratio as a measure of
determining Operational Risk capital charges on the
regulatory Tier I capital for State Bank of India and its
INDIAN
associates is in Table 6B and the impact has been extreme

like that for the nationalized banks. There is no bank from
the State Bank group that has a Tier I capital of above 9%
while the State Bank of India, except for 2007, has had a
relatively comfortable position on Tier I in the range of 7%9%. The impact of the Operational Risk capital charge on
Tier I capital for the associate banks in this group has been
mixed. The associate banks that have scored badly on Tier I
capital in this group (as compared to under BIA) have been
the State Bank of Patiala whose Tier I capital has been
declining since 2005 and the State Bank of Bikaner and Jaipur,
while the State Bank of Mysore has worsened (as compared
to the BIA) and its Tier I has consistently being below 5%
under the cost to asset ratio measure.
The performance of the 3 major new private sector banks
vis--vis Tier I capital is in Table 6C. The performance of
HDFC Bank has been stable and its Tier I capital like under
the BIA has been in the range of 7-9% while mixed
performance is observed for Axis Bank and ICICI Bank.
Table 6B. Impact of Operational Risk Capital Charge on Tier I Capital Cost to Asset Ratio State Bank Group
Tier I Capital
Year
Below 5%
2005
SBM
Between 5-6%
SBT
SBBJ
SBH
SBI-IND
Between 6-7%
Between 7-9%
Above 9%
SBI
SBP
SBS
Table contd...
389
Table contd...
2006
SBM
SBBJ
SB-IND
SBI
SBT
SBP
SBH
SBS
2007
SBBJ
SBP
SBI
SBM
SBH
SB-IND
SBS
SBT
2008
SBBJ
SBH
SBM
SB-IND
SBP
SBS
SBI
SBT
Cost to Asset Ratio Axis Bank, HDFC Bank and ICICI Bank
Tier I Capital
Year
Below 5%
Between 5-6%
Between 6-7%
2005
Between 7-9%
ICICI
Above 9%
AXIS
HDFC
2006
AXIS
HDFC
ICICI
HDFC
ICICI
2007
AXIS
2008
AXIS
HDFC
The second alternative approach adopted to estimate the

operational risk capital charge is the cost to income ratio.
Tables 7A, 7B and 7C highlight the impact on the Tier I capital
ICICI
of nationalised banks, the State Bank and its associate banks

and the three leading private sector banks. (Detailed Results
are in Annexure V).

Cost to Income Ratio Nationalised Banks
Tier I Capital
Year
Below 5%
Between 5-6%
Between 6-7%
Between 7-9%
Above 9%
2005
ALLA
CENTRAL
DENA
ORIENTAL
PSB
SYND
UCO
BoI
BoM
IOB
UNION
VIJAYA
ANDHRA
CANARA
INDIAN
BoB
PNB
CORP
UNITED
2006
CENTRAL
DENA
PSB
UCO
BoI
SYND
CANARA
PSB
UNION
VIJAYA
ALLA
INDIAN
IOB
ORIENTAL
PNB
UNITED
VIJAYA
ANHDRA
BoB
CORP
Table contd...
Table contd...
2007
BoM
BoI
CENTRAL
SYND
CANARA
ALLA
ANDHRA
PSB
BoB
CORP
DENA
UNION
IOB
INDIAN
UCO
VIJAYA
ORIENTAL
PNB
UNITED
2008
BoM
SYND
BoI
ALLA
CENTRAL
UNITED
CANARA
ANDHRA
UCO
VIJAYA
DENA
BoB
IOB
CORP
PSB
INDIAN
UNION
PNB
ORIENTAL
The distribution of nationalised banks (Table 7A) for Tier I

regulatory capital maintained is similar to that under the cost
to asset ratio more so in the range below 5% and above 7%
of Tier I capital, while some changes are observed for the
middle range of 5-7% of Tier I. While Central Bank of India
continues to score poorly under the cost to income measure,
its Tier I capital is the lowest in the range of 1.30 to 3.57%.
The other banks that have not fared well continue to be Dena
Bank, Bank of Maharashtra, UCO Bank, Syndicate Bank.
Table 7B highlights the performance of the State Bank group

where the performance is substantially varied from that under
the cost to asset approach as well as the BIA. The State Bank
of Indias Tier I capital (between 6-7%) under the cost to
income approach is lower as compared to the other
approaches, while that of the State Bank of Bikaner and Jaipur
matches its Tier I capital with that under the BIA markedly
different from that under the cost to asset approach. The State
Bank of Mysore also fares better as compared to the other
two approaches.
Table 7B. Impact of Operational Risk Capital Charge on Tier I Capital

Cost to Income Ratio State Bank Group
Tier I Capital
Year
Below 5%
Between 5-6%
2005
SB-IND
SBH
SBT
Between 6-7%
Between 7-9%
SBI
SBBJ
SBM
SBP
SBS
2006
SBT
SB-IND
SBI
SBM
SBBJ
SBH
SBS
SBP
2007
SBI
SBBJ
SBH
SB-IND
SBS
SBM
SBP
SBT
2008
SBI
SBH
SBBJ
SB-IND
SBM
SBP
SBT
Above 9%
Table 7C contains the results for the three major new private
sector banks and it can be observed that under the cost to
income approach as compared to the other two approaches
391
BIA and cost to assets, HDFC Bank shows a Tier I capital

below 7% in 2006 and 2007. ICICI Bank continues to have a
Tier I capital greater than 9%.

Cost to Income Ratio (Axis Bank, HDFC Bank and ICICI Bank)
Tier I Capital
Year
Below 5%
Between 5-6%
2005
Between 6-7%
ICICI
Between 7-9%
Above 9%
AXIS
HDFC
ICICI
2006
AXIS
HDFC
ICICI
2007
AXIS
HDFC
ICICI
2008
AXIS
HDFC
Thus, a comparison of the estimates of the impact of the

additional operational risk capital charges on the Tier I capital
of individual banks across the different approaches and bank
groups indicates that some banks would continue to be
comfortable and maintain high levels of Tier I capital (above
7%) after the imposition of the additional capital requirements
especially for end March 2007 and 2008, namely, Andhra
Bank, Bank of Baroda, Corporation Bank, Oriental Bank of
Commerce, Punjab National Bank, State Bank of India
(except under the cost to income approach). Canara Bank
continued to maintain a Tier I capital between 6%-7% under
all approaches, while the estimates for Bank of Maharashtra,
Central Bank of India , UCO Bank and State Bank of Mysore
show a Tier I capital below 6% under all the three approaches.
Among the three new private sector banks considered, Axis
Bank showed improved levels of Tier I capital under all the
three approaches in 2008 as compared to 2007 and the Tier I
capital of HDFC Bank is higher than 7% except for the cost
to income approach where it was between 6-7%. Likewise
ICICI Bank has been well capitalized and has had a Tier I
capital greater than 7% except for 2007 under the cost to
asset approach when its Tier I was between 6-7%. Annexure
IX presents a graphical comparison at the individual bank
level for the broad spectrum of 30 banks covering the
nationalized banks, State Bank of India and its associate banks
and three new private sector banks of the impact of the
Operational Risk capital charge on the Tier I capital under
the Basic Indicators Approach, the cost to asset ratio, and the
cost to income ratio.
IV.C Sensitivity Analysis

This section estimates the sensitivity of a banks gross income
to gross income from a particular business line at Level 1 of
ICICI
the classification of business activity for a bank as specified

under the Standardized Approach. In other words it is the
amount of change in gross earnings given a unit change in
the earnings from a single business line with all else held
constant. Sensitivity analysis, thus, helps identify the business
line/activity to which a banks income is most sensitive.
Sensitivity analysis, thus, is the partial derivative of the
earnings function with respect to a factor. It can be defined
as:
E/X = f/x
where E gross income of a bank
particular business line.
X income from a
Sensitivity analysis has been performed using the standard

elasticity approach by calculating the average elasticity of
the change in a banks gross income to a change in income
from a particular business line. While panel data analysis is
better suited to derive the sensitivity coefficients, the lack of
a sufficient number of data points restricts the use of the panel
data technique to ensure the reliability of our estimates.
Besides, the sensitivity analysis could be estimated at the level
of the bank group rather than at an individual bank level, as
data on income from retail and commercial banking which
was computed under the Standardized Approach, was
available at the level of bank group. Table 8 presents the
results of the sensitivity analysis for activities under Level 1
of the Standardized Approach (restricted in this study to just
income from corporate finance, trading & sales, retail banking
and commercial banking, since availability of data with a
one to one correspondence for the 8 business lines specified
under the SA is difficult) and within trading & sales income
sensitivity to income from foreign exchange transactions and
commission & brokerage.
Table 8. Sensitivity Analysis for 2005-2007: Bank Group-wise
Bank Group
Corporate Finance
Trading &
Retail Banking
Sales
Nationalised
Commercial
Foreign
Comm. &
Banking
Exchange
Brokerage
0.6390
0.2446
0.3137
2.3912
0.2884
-0.6337
State Bank
0.2562
-0.1642
0.1834
0.0229
0.7039
0.4092
Private
0.1795
0.6910
0.6789
-4.4634
0.5526
0.4993
The results of the sensitivity analysis present a mixed scenario

for the three bank groups considered nationalized banks,
State Bank group and private sector banks (old and new). All
the three bank groups show the existence of a positive
relationship between the gross income of a bank and the
income from corporate finance. Nationalized banks show a
very high degree of elasticity with reference to corporate
income. A percentage change in corporate income increases
gross income by almost 2.3%, while for the State Bank group
and the private banks (old and new) this coefficient is
comparatively smaller and a percentage increase in income
from corporate finance brings about a 0.25% and 0.18%
increase in gross income respectively. The sensitivity of gross
income to income from trading and sales is the highest for
the private bank group indicating that a 1% increase in income
from trading and sales would have an impact of increasing
gross income by about 0.69%, while for the nationalized banks
it was comparatively lower at 0.28%. The State Bank and its
associate banks surprisingly have a negative coefficient but
this could be explained by the fall in the income from trading
& sales since 2005 for the State Bank group from a high of
Rs.12858 crores in 2004 to Rs.10392 crores in 2005 and a
further decline to Rs.9911 crores in 2007. This fall in income
from trading and sales can be attributed to a fall in the profit
from the sale of investments and a decline in net repo income.
The estimate for net repo income would also include income
from the inter-bank funds market. The sensitivity of income
from retail banking is the highest for the private bank group
at 0.68% followed by the State Bank group where a 1%
increase in income from retail banking brings about only about
less than a quarter percent increase in gross income. The high
negative coefficient for the nationalized banks for retail
banking income seems unexpected and may perhaps be
attributed to the high proportion of credit outstanding to
agriculture, large credit outstanding of less than Rs.2 lakhs
and other social objectives such as priority sector lending
where recovery is slow. These factors may also explain the
substantial difference in the sensitivity coefficients observed
between the State Bank group and the private sector banks.
The sensitivity of the gross income to income from
commercial banking is the highest for the nationalized banks
at 0.64, whereas the sensitivity is much lower for the State
Bank group at 0.02, while the private banks are described by

a negative coefficient on sensitivity to income from
commercial banking. The private sector banks have seen a
decline in income from commercial banking since 2005 and
income from commercial banking in 2007 was almost half at
Rs.5935 crores as compared to 2006. Within trading and sales,
we have further looked at sensitivity of gross income to two
major sources of income for a bank, namely foreign exchange
transactions and commissions and brokerage. All the three
bank groups studied showed a positive sensitivity to income
from both these business activities. The sensitivity for both
these business activities for the private sector banks was in
the range of 0.49 to 0.55 implying thereby that a one percent
increase in income from these activities would reflect in about
half a percent increase in gross income of the banks. The
State Bank of India and its associate banks showed a high
sensitivity of nearly 0.70 for foreign exchange transactions
and 0.40 on commission and brokerage, while the nationalized
banks had the lowest sensitivity coefficients. The gross
income for all the bank groups is sensitive to income from
foreign exchange transactions, but this sensitivity at 0.77%
is the highest for the private banks followed by the State Bank
group and the nationalized banks. A similar pattern is observed
on the sensitivity of gross income to income from commission
and brokerage.
V. Conclusion
Operational Risk, thus, generates potential losses and this
potential loss can be viewed as a cost to the bank. While
Operational Risk exists and needs to be priced appropriately,
there is a view among practitioners and analysts (Webb, 1999)
that the focus should be on the elimination of Operational
Risk rather than a focus on its measurement. However, in
practice, the costs involved in the elimination of Operational
Risk could be substantially higher than the probability of a
loss event actually occurring. Also, it may not be feasible to
foresee all the potential future loss events. Most of the banks
in India are operating at capital adequacy ratios higher that
the prescribed Basel II requirements. Still, overall capital
requirements are expected to go up on account of Operational
Risk (Reserve Bank of India, 2008B). The paper focuses on
the measurement of the Operational Risk capital charges that

banks in India have to incorporate from 31st March 2007
and the impact of this additional capital requirements on the
regulatory Tier I capital of banks. The paper estimates
Operational Risk capital charges and its Tier I impact at the
level of the bank group and for individual banks according
to the availability of data. At the level of individual banks,
the paper covers 30 banks 19 nationalized banks, 8 banks
of the State Bank group and 3 leading new private sector
banks Axis Bank, HDFC Bank and ICICI Bank over the
period since 2005. We compute Operational Risk capital
charges using two of the Basel II Approaches, namely, the
Basic Indicators Approach (at the bank group as well as
individual bank level) and the Standardized Approach (at the
level of bank groups) and alternate approaches using the cost
to income and cost to asset ratios. The additional capital
requirements on account of the Operational Risk capital
charges for the Indian banking sector excluding foreign banks
in India would be to the tune of about Rs.14,058 crores at the
end of March 2007 and Rs.15,427 crores in March 2008.
This requirement is estimated to be Rs.17,647 crores for
March 2009 under the Basic Indicators Approach. Of this
requirement, approximately 80% would be needed by the
public sector banks. The empirical estimates reveal the
introduction of the Operational Risk capital charges that will
have the expected impact of lowering the Tier I capital, but
this decline would be marginal under the Basic Indicators
Approach. Also, in 2007 and 2008 nearly 10 of the 19
nationalized banks will have a Tier I capital above 7%. The
State Bank group, though, would show a fewer number of
associate banks with a Tier I capital higher than 7% in 2008
as compared to 2007. While the State Bank of India would
continue to be in the range of 7%-9% of Tier I capital in both
2007 and 2008, the only associate bank in the same range
would be the State Bank of Saurashtra. All the three private
sector banks would have a Tier I capital higher than 7% after
the introduction of the additional capital requirement for
Operational Risk. Compared to the Basic Indicators
Approach, under the Standardized Approach, the nationalized
banks would be required to set aside, on an average, nearly
Rs.14,000 crores and the State Bank group, on an average,
would need around Rs.7500 crores and the requirement for
the private sector banks would be lower at around Rs. 6000,
on an average, over 2007-08. Further, Tier I capital would be
lower for all bank groups under the Standardized Approach
as compared to the Basic Indicators Approach. The alternate
approaches which use the cost to income and cost to assets
393
ratio for determining the Operational Risk capital charges

show a markedly different picture for Tier I capital. Under
the BIA, there were no banks in the Tier I range below 5% in
2007 and in 2008 only two nationalized banks i.e. Bank of
Maharashtra and UCO Bank were in this category - whereas
there are at least 3 nationalized banks and 2-3 associate banks
of the State Bank group with a Tier I capital lower than 5%
under the alternate approaches.
A comparison of the estimates of the impact of the additional
Operational Risk capital charges on the Tier I capital of
individual banks across the different approaches indicates that
some banks would continue to be good performers and
maintain a high level of Tier I capital (above 7%) viz. Andhra
Bank, Bank of Baroda, Corporation Bank, Oriental Bank of
Commerce, Punjab National Bank, State Bank of India
(except under the cost to income approach). Canara Bank
would maintain a Tier I capital between 6%-7% under all
approaches while the estimates for Bank of Maharashtra,
Central Bank of India, UCO Bank and State Bank of Mysore
show a Tier I capital below 6% under all the three approaches.
Among the three new private sector banks considered, Axis
Bank showed improved levels of Tier I capital under all the
three approaches in 2008 as compared to 2007, while HDFC
Bank and ICICI Bank continue to be well-capitalized. The
low Tier I levels of some of the nationalized banks (not taking
into account the Operational Risk capital charge) has resulted
in the government agreeing to infuse capital in UCO Bank,
Central Bank of India and Vijaya Bank to the tune of Rs.38
billion through investment in shares in February and for
United Bank of India to the tune of Rs.800 crores in two
tranches until March 2010. Apart from the measurement of
Operational Risk capital charges and their impact on Tier I,
the paper has computed some preliminary estimates of the
sensitivity of gross income of a bank to the income from
different business lines. Sensitivity analysis will, thus, help
identify the potential sources of Operational Risk for a bank.
Finally, the best approach to the appropriate pricing of
Operational Risk would be the Advanced Management
Approach which requires a bank to review its history of
operational loss events and create a database wherein every
loss event, the frequency of its occurrence, and the size of
the loss is recorded. Such an approach could result in
developing key risk indicators that could signal the occurrence
of a loss event and banks would have the discretion to use
their own internal loss data and be encouraged to develop
sophisticated risk measurement and risk management
techniques.
References
Basel Committee on Banking Supervision (2001) Operational
Risk (Supportive Document to the New Basel Capital
Accord)
International Convergence of Capital Measurements and
Capital Standards: A Revised Framework
(Comprehensive Version) (2006)
Bhatia, M., (2002) New Basel Accord: Operational Risk
Management - Emerging Frontiers for the Profession,
Information System Control Journal, vol. 1
Bonsn, Enrique, Toms Escobar and Franscisco Flores,
(2007) Issues in Operational Risk, Financial Markets,
Institutions and Instruments, 16, 4, pp.167-200
Gupta, V. and K. Srinivasan (2005) Basel II Accord: Impact
on Indian Banks, ICRA Rating Feature
King, J.L., (2001) Operational Risk: Measurement and
Modelling, John Wiley and Sons, New York.
Mussa, Imad A., (2007) Operational Risk Management,
Basingstoke, Hampshire: Palgrave Macmillan
Oesterreichische Nationalbank, (2006) Guidelines in
Operational Risk Management, Vienna
Reserve Bank of India (2005) Draft Guidelines for

Implementation of New Capital Adequacy Framework,
Reserve Bank of India, Mumbai
Reports on Currency and Finance 2003-08 Volume lV,
Mumbai: Reserve Bank of India (2008A)
Reports on Currency and Finance 2003-08 Volume V,
Mumbai: Reserve Bank of India (2008B)
Basic Statistical Returns of Scheduled Commercial Banks
(various issues)
Report on Trends and Progress in Banking in India (various
issues)
Statistical Tables Relating to Banks in India (various issues)
Saita, F., (2007) Value at Risk and Bank Capital Management:
Risk-Adjusted Performance, Capital Management and
Capital Allocation Decision Making, Academic Press,
London.
Sundmacher M., (2004) Operational Risk Measurement in
Banks: Arbitrage, Adjustments and Alternatives http://
papers.ssrn.com (Working Paper Series)
Tripe D., (1998) Cost to Income Ratios in Australasian
Banking, Centre for Banking Studies, Massey University
Pricing Operational Risk, Centre for Banking Studies, Massey
University (2000)
ANNEXURE I
LIST OF ABBREVIATIONS
PSB
Punjab and Sind Bank
Abbreviation
Bank Name
PNB
Punjab National Bank
ALLA
Allahabad Bank
SYND
Syndicate Bank
ANDHRA
Andhra Bank
UCO
UCO Bank
BoB
Bank of Baroda
UNION
Union Bank
BoI
Bank of India
UNITED
United Bank of India
BoM
Bank of Maharashtra
VIJAYA
Vijaya Bank
CANARA
Canara Bank
SBI
State Bank of India
SBBJ
State Bank of Bikaner and Jaipur
CENTRAL
Central Bank of India
SBH
State Bank of Hyderabad
CORP
Corporation Bank
SB-IND
State Bank of Indore
DENA
Dena Bank
SBM
State Bank of Mysore
INDIAN
Indian Bank
SBP
State Bank of Patiala
IOB
Indian Overseas Bank
SBS
State Bank of Saurashtra
ORIENTAL
Oriental Bank of Commerce
SBT
State Bank of Travancore
ANNEXURE II
Mapping of Business Lines under Standardized Approach
Business Unit
Investment Banking
Level 1
Corporate Finance
Level 2
Activity Groups
Corporate Finance
Mergers & Acquisitions, Underwriting,
Municipal/Government Finance
Privatisations, Securitisation, Research, Debt
Merchant Banking
(Government, High Yield), Equity,
Advisory Services
Syndications, IPO, Secondary Private

Placements
Trading & Sales
Retail Banking
Banking
Commercial Banking
Sales
Fixed Income, Equity, Foreign Exchanges,
Market Making
Commodities, Credit, Funding, Own Position
Proprietary Positions
Securities, Lending and Repos, Brokerage, Debt,
Treasury
Prime Brokerage
Retail Banking
Retail Lending and Deposits, Banking Services,

Trust and Estates
Private Banking
Private Lending and Deposits, Banking Services,

Trust and Estates, Investment Advice
Card Services
Merchant/Commercial/Corporate Cards, Private

Labels and Retail
Commercial Banking
Project Finance, Real Estate, Export Finance,

Trade Finance, Factoring, Leasing, Lends,
Guarantees, Bills of Exchange
Payment & Settlement External Clients
Payments & Collections, Funds Transfer, Clearing

& Settlement
Agency Services
Custody
Escrow, Depository Receipts, Securities Lending

(Customers) Corporate Actions
Corporate Agency
Issuer and Paying Agents
Corporate Trust
Asset Management
Others
Retail Brokerage
Discretionary Fund Management
Pooled, Segregated, Retail, Institutional, Closed,

Open, Private Equity
Non-Discretionary Fund
Pooled, Segregated, Retail, Institutional, Closed,
Management
Open
Retail Brokerage
Execution and Full Service
Life Insurance and Benefit Plans

Insurance
Property and Casualty Insurance

Health Insurance
Reinsurance
Brokerage & Advisory
Source: Consultative Document on Operational Risk, BCBS, 2001
ANNEXURE III
Basic Indicators Approach
Bank-wise Operational Risk Capital Charge and Impact on Tier I Capital
(Nationalized Banks, State Bank Group & Axis Bank, HDFC Bank & ICICI Bank)
Year
Gross Income
Annual Capital
Capital Charge
Networth
Current Tier
Estimated Tier I
(Rs. Crore)
Required (Rs. Crore)
(Rs. Crore)
(Rs. Crore)
I (%)
Capital (%)
2002
1116
167
1002
6.22
2003
1433
215
1190
6.35
2004
1836
275
1552
6.26
2005
2004
301
219
2328
6.46
5.85
2006
2059
309
264
3639
9.53
8.84
2007
2127
319
295
4477
8.10
7.57
2008
2637
396
310
5221
7.75
7.29
Allahabad Bank
2009
341
Andhra Bank
2002
880
132
884
8.80
2003
1357
204
1116
8.19
2004
1588
238
1453
8.17
2005
1822
273
1837
8.03
7.19
191
2006
1561
234
238
2894
12.20
11.20
2007
1864
280
249
3156
9.98
9.19
2008
2001
300
262
3249
8.54
7.85
2009
271
Bank of Baroda
2002
2873
431
3827
7.56
2003
3366
505
4387
8.10
2004
4291
644
5131
8.47
2005
4284
643
5628
8.21
7.44
10.14
527
2006
4301
645
597
7845
10.98
2007
4959
744
644
8650
8.74
8.09
2008
5962
894
677
11044
7.63
7.16
2009
761
Bank of India
2002
2943
441
2845
6.37
2003
3678
552
3541
7.56
2004
3994
599
4010
7.47
2005
3393
509
531
4465
7.05
6.21
2006
3816
572
553
4984
6.75
6.00
2007
5003
750
560
5895
6.54
5.92
2008
6346
952
611
10589
7.70
7.26
2009
758
Table contd...
Table contd...
Bank of Maharashtra
2002
895
134
698
6.56
2003
1037
156
981
5.88
2004
1236
185
1436
7.03
2005
1267
190
158
1543
7.10
6.37
2006
1023
153
177
1573
7.47
6.63
2007
1359
204
176
1742
6.03
5.42
2008
1509
226
182
1782
5.13
4.60
2009
195
Canara Bank
2002
3250
488
3472
8.07
2003
3745
562
4149
7.85
2004
4755
713
5252
7.81
2005
4694
704
588
6109
7.29
2006
4898
735
660
7132
7.81
7.09
2007
5478
822
717
10354
7.17
6.67
2008
5751
863
754
10500
7.01
6.51
2009
6.59
806

2002
2135
320
1997
5.20
2003
2451
368
2424
5.66
2004
3086
463
2974
6.23
2005
3294
494
384
3265
6.08
5.37
2006
2911
437
442
3442
7.19
6.27
2007
2950
443
465
3790
6.32
5.55
2008
3014
452
458
5943
5.42
5.00
2009
444
Corporation Bank
2002
1008
151
2046
16.80
2003
1325
199
2370
17.30
2004
1481
222
2768
16.52
2005
1695
254
191
3054
13.55
12.70
2006
1700
255
225
3374
12.41
11.58
2007
1944
292
244
3765
11.30
10.57
2008
2144
322
267
4228
9.64
9.03
2009
289
Dena Bank
2002
795
119
977
4.36
2003
1005
151
999
5.31
2004
1209
181
1055
5.19
2005
997
150
150
1104
6.63
5.73
2006
1162
174
161
1339
5.96
5.25
2007
1248
187
168
1497
6.06
5.38
2008
1337
201
170
1801
6.75
6.11
2009
187
Annexure III
399
Indian Bank
2002
1033
155
4185
0.85
2003
1345
202
5130
7.51
2004
1864
280
5538
7.66
2005
1873
281
212
5936
7.60
7.33
2006
1974
296
254
2492
10.29
9.24
2007
2605
391
286
3841
12.28
11.37
2008
3060
459
323
5211
11.41
10.70
2009
382

2002
1501
225
1133
6.17
2003
1742
261
1460
5.83
2004
2340
351
2081
6.74
2005
2654
398
279
2575
7.10
6.33
2006
2608
391
337
3178
8.54
7.63
2007
2948
442
380
3991
8.20
7.42
2008
3487
523
411
4857
7.86
7.20
1621
8.89
2009
452

2002
1446
217
2003
1746
262
2110
10.72
2004
2178
327
2677
9.87
2005
2029
304
269
3327
5.42
4.98
2006
2158
324
298
5171
10.37
9.77
2007
2294
344
318
5601
10.05
9.48
2008
2299
345
324
5776
9.34
8.82
2009
338
Punjab & Sind Bank

2002
545
82
502
6.37
2003
693
104
489
6.11
2004
749
112
467
6.38
2005
829
124
440
5.26
4.07
99
2006
751
113
114
1222
10.05
9.12
2007
995
149
116
1406
9.58
8.79
2008
1103
165
129
2093
8.04
7.55
2009
142

2002
3273
491
3381
6.34
2003
4374
656
4033
7.11
2004
5492
824
5012
7.01
2005
5683
852
657
8161
8.87
8.16
2006
5941
891
777
9376
10.06
9.23
2007
6556
983
856
10435
8.93
8.20
2008
7532
1130
909
12318
8.52
7.89
2009
1001
Table contd...
Table contd...
Syndicate Bank
2002
1383
207
1683
8.47
2003
1705
256
1614
7.69
2004
2205
331
1905
6.75
2005
2284
343
265
2199
6.10
5.37
2006
2442
366
310
2834
7.40
6.59
2007
2768
415
347
3623
6.24
5.64
2008
2962
444
375
4291
6.62
6.04
2009
409
UCO Bank
2002
1313
197
2762
4.89
2003
1491
224
1214
5.19
2004
1819
273
1783
6.08
2005
1925
289
231
2069
5.75
5.11
2006
1940
291
262
2462
6.09
5.44
2007
2138
321
284
2662
5.78
5.16
2008
2260
339
300
2926
5.05
4.53
2009
317
Union Bank of India

2002
1836
275
2107
6.16
2003
2323
348
2607
6.86
2004
2567
385
3087
6.47
2005
2831
425
336
3614
6.07
5.51
2006
2869
430
386
4558
7.32
6.70
2007
3477
522
413
5190
7.79
7.17
2008
4173
626
459
7348
7.45
6.98
2009
526

2002
996
149
1964
8.84
2003
1147
172
1962
12.63
2004
1286
193
1960
15.04
2005
1393
209
1957
14.15
12.91
171
2006
1457
219
191
1828
10.01
8.96
2007
1498
225
207
2415
7.72
7.06
2008
1370
206
217
2661
6.74
6.19
2009
216
Vijaya Bank
2002
674
101
781
8.86
2003
990
149
962
7.42
2004
1364
205
1336
8.37
2005
1338
201
151
1590
7.59
6.87
2006
1257
189
185
1670
9.26
8.24
2007
1347
202
198
1897
7.07
6.33
2008
1362
204
197
2460
5.73
5.27
2009
198
Annexure III
401
State Bank of India

2002
13255
1988
15224
9.22
2003
15718
2358
17203
8.81
2004
18798
2820
20231
8.34
2005
8515
1277
24072
8.04
2389
7.24
2006
8994
1349
2152
27644
9.36
8.63
2007
21823
3273
1815
31298
8.01
7.55
2008
25716
3857
1967
49032
8.48
8.14
2009
2827
State Bank of Bikaner & Jaipur

2002
791
119
752
9.22
2003
891
134
903
8.81
2004
1208
181
1149
8.34
2005
1352
203
145
1298
8.04
7.14
2006
1241
186
173
1406
9.36
8.21
2007
1432
215
190
1654
8.01
7.09
2008
1411
212
201
1713
6.95
6.13
2009
204

2002
1014
152
998
9.86
2003
1209
181
1251
9.84
2004
1548
232
1574
8.42
2005
1384
208
189
1765
7.58
6.77
2006
1553
233
207
2114
8.95
8.07
2007
1811
272
224
2541
8.25
7.52
2008
1790
269
2009
237
2694
7.24
6.60
258
1317
7.01
5.64

2002
567
85
413
8.15
2003
669
100
584
9.40
2004
814
122
791
8.31
2005
680
102
103
904
6.67
5.91
2006
787
118
108
1018
7.55
6.75
2007
800
120
114
1177
6.74
6.09
2008
883
132
113
1317
7.01
6.41
2009
124

2002
548
82
352
6.70
2003
680
102
431
7.23
2004
794
119
582
7.18
2005
931
140
101
756
7.12
6.17
2006
948
142
120
935
7.44
6.48
2007
1034
155
134
1141
6.62
5.84
2008
1184
178
146
1378
6.54
5.85
2009
158
Table contd...
Table contd...
2002
921
138
1142
9.97
2003
1135
170
1412
10.39
2004
1452
218
1731
9.87
2005
1332
200
175
2045
11.05
10.10
2006
1344
202
196
2235
9.96
9.09
2007
1447
217
206
2488
8.36
7.67
2008
1486
223
206
2459
6.74
6.17
2009
214

2002
453
68
568
12.11
2003
534
80
625
11.66
2004
710
107
767
10.99
2005
641
96
85
794
8.68
7.75
2006
584
88
94
977
9.02
8.15
2007
575
86
97
1043
8.17
7.41
2008
571
86
90
1145
8.06
7.43
2009
87

2002
655
98
618
7.79
2003
822
123
731
6.80
2004
1153
173
925
6.23
2005
1305
196
132
1130
6.17
5.45
2006
1307
196
164
1332
7.24
6.35
2007
1356
203
188
1599
7.55
6.66
2008
1446
217
198
1718
6.94
6.14
2009
205
Axis Bank
2002
616
92
694
6.42
2003
733
110
1040
6.44
2004
1106
166
1138
6.44
2005
1147
172
123
2422
8.87
8.42
2006
1808
271
149
2886
7.26
6.88
2007
2577
387
203
3403
6.42
6.04
2008
4381
657
277
8769
10.17
9.85
2009
438
HDFC Bank
2002
962
144
2132
10.81
2003
1304
196
2608
9.49
2004
1818
273
2694
8.03
2005
2428
364
204
4520
9.60
9.17
2006
3669
550
278
5299
8.55
8.10
2007
5226
784
396
6433
8.57
8.04
2008
7511
1127
566
11497
10.30
9.79
2009
820
Annexure III
403
ICICI Bank
2002
1168
175
6618
7.47
2003
4583
687
7289
7.05
2004
4944
742
8360
6.09
2005
6255
938
535
12900
7.59
7.28
2006
8890
1334
789
22556
9.20
8.88
2007
12565
1885
1004
24663
7.42
7.12
2008
16115
2417
1386
46821
11.32
10.99
2009
Note: Net worth of a bank is computed as per the Reserve

Bank of Indias definition which is as follows: Net worth
would comprise of Paid-up capital plus Free Reserves
including Share Premium but excluding Revaluation
Reserves, plus Investment Fluctuation Reserve and credit
balance in Profit & Loss account, less debit balance in Profit
and Loss account, Accumulated Losses and Intangible Assets.
No general or specific provisions should be included in
computation of net worth. Infusion of capital through equity
shares, either through domestic issues or overseas floats after
1879
the published balance sheet date, may also be taken into

account for determining the ceiling on exposure to capital
market.
(i)
Gross Income = Net Interest Income + Non-Interest

Income
(ii) Impact on Tier I capital = capital charge/networth
(iii) Estimated Tier I = (1-impact on Tier I capital)* current
Tier I
These definitions are adopted in all relevant calculations.
ANNEXURE IV
Cost-Asset Ratio
Bank-Wise Operational Risk Capital Charge and Impact on Tier I Capital
Year
Cost-Asset
Ratio (%)
Average
PSB (%)
Three
standard
deviations (%)
Total
Assets
(Rs. Crore)
Capital
Charge
(Rs. Crore)
Networth
(Rs. Crore)
Current
Tier I (%)
Estimated
Tier I
Capital (%)
2005
2.37
2.09
2.53
45145
1142
2006
1.87
2.05
1.36
55292
754
2328
6.46
3.29
3639
9.53
7.56
2007
1.52
1.77
0.88
67664
598
2008
1.4
1.54
0.72
82940
595
4477
8.10
7.02
5221
7.75
6.87
2005
2.53
2.09
1.13
3273
37
1837
8.03
7.87
2006
2.11
2.05
1.06
4067
43
2894
12.20
12.02
2007
1.96
1.77
1.02
47541
487
3156
9.98
8.44
2008
1.67
1.54
0.50
56592
286
3249
8.54
7.79
2005
2.09
2.09
0.27
94664
256
5628
8.21
7.84
2006
2.1
2.05
0.22
113393
248
7845
10.98
10.63
2007
1.78
1.77
0.11
143146
155
8650
8.74
8.58
2008
1.63
1.54
0.22
179600
394
11044
7.63
7.36
2005
2.03
2.09
0.39
94978
373
4465
7.05
6.46
2006
1.88
2.05
0.50
112274
559
4984
6.75
5.99
2007
1.84
1.77
0.41
141637
581
5895
6.54
5.90
2008
1.48
1.54
0.41
178830
734
10589
7.70
7.17
2005
2.19
2.09
1.09
32885
358
1543
7.10
5.45
2006
2.11
2.05
1.03
31215
321
1573
7.47
5.95
2007
1.91
1.77
0.39
39009
151
1742
6.03
5.51
2008
1.74
1.54
0.53
48151
257
1782
5.13
4.39
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
2005
1.91
2.09
0.78
110305
865
6109
7.29
6.26
2006
1.77
2.05
0.95
132822
1263
7132
7.81
6.43
2007
1.55
1.77
0.85
165961
1405
10354
7.17
6.20
2008
1.55
1.54
0.76
180529
1364
10500
7.01
6.10

2005
2.46
2.09
1.30
68596
892
3265
6.08
4.42
2006
2.3
2.05
1.09
74681
811
3442
7.19
5.50
2007
1.81
1.77
0.95
93008
885
3790
6.32
4.84
2008
1.41
1.54
0.60
123956
748
5943
5.42
4.74
Annexure IV
405
Corporation Bank
2005
1.97
2.09
1.13
33924
383
3054
13.55
11.85
2006
1.84
2.05
0.72
40507
293
3374
12.41
11.33
2007
1.52
1.77
0.74
52721
389
3765
11.30
10.13
2008
1.34
1.54
0.81
66598
541
4228
9.64
8.41
2005
2.56
2.09
1.17
24029
282
1104
6.63
4.93
2006
2.11
2.05
1.01
26545
268
1339
5.96
4.77
2007
1.94
1.77
1.07
31451
336
1497
6.06
4.70
2008
1.68
1.54
0.48
38642
187
1801
6.75
6.05
2005
2.08
2.09
1.09
43861
479
5936
7.60
6.99
2006
2.27
2.05
1.16
47635
552
2492
10.29
8.01
2007
2.22
1.77
1.06
56149
597
3841
12.28
10.37
2008
1.99
1.54
1.43
70508
1007
5211
11.41
9.20
Dena Bank
Indian Bank

2005
2.28
2.09
0.44
50815
225
2575
7.10
6.48
2006
2.13
2.05
0.46
59358
274
3178
8.54
7.80
2007
1.69
1.77
0.47
82257
386
3991
8.20
7.41
2008
1.46
1.54
0.29
101860
300
4857
7.86
7.38

2005
1.47
2.09
1.32
54069
711
3327
5.42
4.26
2006
1.64
2.05
0.87
58937
513
5171
10.37
9.34
2007
1.35
1.77
0.89
73936
659
5601
10.05
8.87
2008
1.19
1.54
0.74
90705
673
5776
9.34
8.25
3.63
2.09
5.15
15718
810
440
5.26
-4.42
Punjab & Sind Bank

2005
2006
2.54
2.05
5.10
19043
971
1222
10.05
2.06
2007
2.38
1.77
3.66
21963
805
1406
9.58
4.10
2008
1.81
1.54
1.76
30949
543
2093
8.04
5.95
2.09
1.15
126241
1447
8161
8.87
7.30

2005
2.6
2006
2.08
2.05
1.11
145267
1610
9376
10.06
8.33
2007
2.05
1.77
1.24
162423
2007
10435
8.93
7.21
2008
1.77
1.54
0.77
199020
1535
12318
8.52
7.46
2005
2.43
2.09
2.14
52109
1114
2199
6.10
3.01
2006
2.35
2.05
1.15
61077
704
2834
7.40
5.56
2007
1.55
1.77
1.07
89277
954
3623
6.24
4.60
2008
1.4
1.54
0.84
107132
903
4291
6.62
5.23
2005
1.99
2.09
0.59
1085
2069
5.75
5.73
2006
1.9
2.05
0.46
1177
2462
6.09
6.08
2007
1.59
1.77
0.54
1193
2662
5.78
5.77
2008
1.45
1.54
0.53
1306
2926
5.05
5.04
Syndicate Bank
UCO Bank
Table contd...
Table contd...
Union Bank
2005
1.74
2.09
1.19
72413
859
3614
6.07
4.63
2006
1.57
2.05
1.46
89126
1304
4558
7.32
5.23
2007
1.44
1.77
1.44
102678
1480
5190
7.79
5.57
2008
1.28
1.54
1.35
124073
1679
7348
7.45
5.75

2005
2.42
2.09
1.16
29098
336
1957
14.15
11.72
2006
2.45
2.05
1.38
33248
458
1828
10.01
7.50
2007
1.84
1.77
1.11
42310
470
2415
7.72
6.22
2008
1.66
1.54
0.90
54311
488
2661
6.74
5.50
2005
1.84
2.09
1.55
2934
45
1590
7.59
7.37
2006
1.98
2.05
0.63
3153
20
1670
9.26
9.15
2007
1.54
1.77
0.74
42357
312
1897
7.07
5.91
2008
1.25
1.54
0.80
56184
449
2460
5.73
4.68
2005
2.19
2.09
0.39
459883
1778
24072
8.04
7.45
2006
2.37
2.05
0.72
494029
3569
27644
9.36
8.15
2007
2.09
1.77
0.98
566565
5570
31298
8.01
6.58
2008
1.75
1.54
1.06
721526
7636
49032
8.48
7.16
Vijaya Bank
State Bank of India

2005
2.66
2.09
1.58
23430
370
1298
8.04
5.75
2006
2.76
2.05
2.12
27514
583
1406
9.36
5.48
2007
2.18
1.77
2.12
34507
731
1654
8.01
4.47
2008
1.82
1.54
1.84
41154
756
1713
6.95
3.88

2005
1.92
2.09
1.53
34922
534
1765
7.58
5.29
2006
2.01
2.05
1.06
40630
432
2114
8.95
7.12
2007
1.65
1.77
0.45
49052
220
2541
8.25
7.53
2008
1.3
1.54
0.58
61620
355
2694
7.24
6.29

2005
1.94
2.09
0.37
16898
62
904
6.67
6.21
2006
1.92
2.05
0.43
20711
90
1018
7.55
6.88
2007
1.67
1.77
0.47
24527
116
1177
6.74
6.08
2008
1.47
1.54
0.38
29275
111
1317
7.01
6.42

2005
2.89
2.09
2.40
16553
397
756
7.12
3.38
2006
2.63
2.05
2.33
19337
451
935
7.44
3.85
2007
2.09
1.77
2.20
26843
591
1141
6.62
3.19
2008
1.87
1.54
1.57
33070
519
1378
6.54
4.08

2005
1.52
2.09
1.86
31503
586
2045
11.05
7.88
2006
1.48
2.05
2.06
41233
849
2235
9.96
6.18
2007
1.39
1.77
1.89
47461
897
2488
8.36
5.35
2008
1.2
1.54
1.62
59060
958
2459
6.74
4.11
Annexure IV
2005
1.69
2.09
0.98
15053
148
794
8.68
7.06
2006
1.87
2.05
1.03
16530
171
977
9.02
7.45
2007
1.73
1.77
0.93
18847
176
1043
8.17
6.79
2008
1.84
1.54
0.75
21358
160
1145
8.06
6.94

2005
1.74
2.09
1.23
28875
354
1130
6.17
4.24
2006
1.98
2.05
1.03
31862
329
1332
7.24
5.45
2007
1.7
1.77
0.77
37993
293
1599
7.55
6.17
2008
1.56
1.54
0.21
44111
95
1718
6.94
6.56
NEW PRIVATE SECTOR BANKS

Axis Bank
2005
1.54
2.18
1.59
37744
377
2422
8.87
7.49
2006
1.64
2.41
1.94
49731
497
2886
7.26
6.01
2007
1.66
2.33
2.09
73257
733
3403
6.42
5.04
2008
1.97
1.97
1.77
109578
1096
8769
10.17
8.90
2005
2.11
2.18
0.81
51429
417
4520
9.60
8.71
2006
2.3
2.41
0.75
73506
553
5299
8.55
7.66
2007
2.65
2.33
0.73
91236
669
6433
8.57
7.68
2008
2.81
1.97
1.92
133177
2558
11497
10.30
8.01
2005
1.97
2.18
0.74
167659
1233
12900
7.59
6.86
2006
1.99
2.41
1.07
251389
2701
22556
9.20
8.10
2007
1.94
2.33
1.29
344658
4463
24663
7.42
6.08
2008
2.04
1.97
1.22
399795
4897
46821
11.32
10.14
HDFC Bank
ICICI Bank
407
ANNEXURE V
Cost-Income Ratio
Bank-Wise Operational Risk Capital Charge and Impact on Tier I Capital
Year
Cost-income
Ratio (%)
Average
PSB (%)
Three
standard
deviations
(decimal)
Gross
Income
(Rs. Crore)
Capital
Charge
(Rs. Crore)
Networth
(Rs. Crore)
Current
Tier I (%)
Estimated
Tier I
Capital (%)
2005
53.39
48.46
0.37
2004
735
2328
6.46
4.42
2006
50.30
51.94
0.19
2059
382
3639
9.53
8.53
2007
48.30
51.08
0.13
2127
266
4477
8.10
7.62
2008
43.90
48.32
0.12
2637
306
5221
7.75
7.30
2005
45.50
48.46
0.14
1822
259
1837
8.03
6.90
2006
54.96
51.94
0.12
1561
187
2894
12.20
11.41
2007
50.05
51.08
0.09
1864
172
3156
9.98
9.44
2008
47.18
48.32
0.07
2001
144
3249
8.54
8.16
2005
46.27
48.46
0.08
4284
347
5628
8.21
7.70
2006
55.45
51.94
0.11
4301
473
7845
10.98
10.32
2007
51.30
51.08
0.09
4959
436
8650
8.74
8.30
2008
49.21
48.32
0.08
5962
459
11044
7.63
7.31
2005
56.94
48.46
0.20
3393
689
4465
7.05
5.96
2006
55.42
51.94
0.20
3816
750
4984
6.75
5.73
2007
52.13
51.08
0.20
5003
980
5895
6.54
5.45
2008
41.68
48.32
0.16
6346
1019
10589
7.70
6.96
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
2005
56.83
48.46
0.18
1267
226
1543
7.10
6.06
2006
64.42
51.94
0.32
1023
326
1573
7.47
5.92
2007
54.89
51.08
0.33
1359
447
1742
6.03
4.48
2008
55.40
48.32
0.31
1509
475
1782
5.13
3.76
2005
44.93
48.46
0.14
4694
677
6109
7.29
6.48
2006
47.92
51.94
0.16
4898
782
7132
7.81
6.95
2007
46.82
51.08
0.15
5478
794
10354
7.17
6.62
2008
48.53
48.32
0.12
5751
715
10500
7.01
6.53
Canara Bank

2005
14.57
48.46
0.78
3294
2569
3265
6.08
1.30
2006
22.32
51.94
0.96
2911
2799
3442
7.19
1.34
2007
57.08
51.08
0.96
2950
2842
3790
6.32
1.58
2008
57.93
48.32
0.67
3014
2028
5943
5.42
3.57
Annexure V
409
Corporation Bank
2005
39.35
48.46
0.37
1695
630
3054
13.55
10.75
2006
43.94
51.94
0.29
1700
495
3374
12.41
10.59
2007
41.36
51.08
0.33
1944
641
3765
11.30
9.38
2008
41.60
48.32
0.30
2144
649
4228
9.64
8.16
Dena Bank
2005
61.79
48.46
0.30
997
296
1104
6.63
4.85
2006
48.28
51.94
0.30
1162
354
1339
5.96
4.38
2007
49.04
51.08
0.30
1248
370
1497
6.06
4.56
2008
48.62
48.32
0.09
1337
119
1801
6.75
6.30
2005
48.80
48.46
0.29
1873
546
5936
7.60
6.90
2006
54.71
51.94
0.26
1974
507
2492
10.29
8.20
2007
47.87
51.08
0.09
2605
235
3841
12.28
11.53
2008
45.75
48.32
0.11
3060
322
5211
11.41
10.71
Indian Bank

2005
43.65
48.46
0.16
2654
415
2575
7.10
5.95
2006
48.39
51.94
0.13
2608
345
3178
8.54
7.61
2007
47.08
51.08
0.15
2948
449
3991
8.20
7.28
2008
42.59
48.32
0.17
3487
580
4857
7.86
6.92

2005
39.23
48.46
0.51
2029
1032
3327
5.42
3.74
2006
44.76
51.94
0.41
2158
893
5171
10.37
8.58
2007
43.50
51.08
0.30
2294
678
5601
10.05
8.83
2008
46.98
48.32
0.22
2299
513
5776
9.34
8.51
Punjab & Sind Bank

2005
68.88
48.46
0.89
829
735
440
5.26
-3.53
2006
64.31
51.94
0.90
751
674
1222
10.05
4.51
2007
52.56
51.08
0.51
995
505
1406
9.58
6.14
2008
50.86
48.32
0.27
1103
298
2093
8.04
6.90

2005
57.68
48.46
0.20
5683
1165
8161
8.87
7.60
2006
50.88
51.94
0.20
5941
1197
9376
10.06
8.78
2007
50.73
51.08
0.20
6556
1292
10435
8.93
7.82
2008
46.81
48.32
0.04
7532
299
12318
8.52
8.31
2005
55.34
48.46
0.37
2284
854
2199
6.10
3.73
2006
58.76
51.94
0.25
2442
620
2834
7.40
5.78
2007
50.07
51.08
0.21
2768
572
3623
6.24
5.25
2008
50.47
48.32
0.15
2962
454
4291
6.62
5.92
2005
56.36
48.46
0.26
1925
504
2069
5.75
4.35
2006
60.67
51.94
0.26
1940
497
2462
6.09
4.86
2007
55.80
51.08
0.27
2138
576
2662
5.78
4.53
2008
57.79
48.32
0.29
2260
658
2926
5.05
3.91
Syndicate Bank
UCO Bank
Table contd...
Table contd...
Union Bank
2005
44.40
48.46
0.15
2831
435
3614
6.07
5.34
2006
48.87
51.94
0.12
2869
357
4558
7.32
6.75
2007
42.45
51.08
0.21
3477
739
5190
7.79
6.68
2008
38.17
48.32
0.29
4173
1210
7348
7.45
6.22

2005
50.54
48.46
0.17
1393
232
1957
14.15
12.47
2006
55.87
51.94
0.18
1457
260
1828
10.01
8.59
2007
51.94
51.08
0.10
1498
144
2415
7.72
7.26
2008
65.91
48.32
0.38
1370
525
2661
6.74
5.41
2005
40.21
48.46
0.30
1338
396
1590
7.59
5.70
2006
49.64
51.94
0.26
1257
325
1670
9.26
7.46
2007
48.33
51.08
0.19
1347
257
1897
7.07
6.11
2008
51.47
48.32
0.10
1362
138
2460
5.73
5.41
2005
26.72
48.46
0.47
8515
4000
24072
8.04
6.70
2006
28.34
51.94
0.69
8994
6169
27644
9.36
7.27
2007
54.18
51.08
0.68
21823
14923
31298
8.01
4.19
2008
49.03
48.32
0.51
25716
12992
49032
8.48
6.23
Vijaya Bank
State Bank of India

2005
46.01
48.46
0.07
1352
93
1298
8.04
7.46
2006
61.24
51.94
0.21
1241
257
1406
9.36
7.65
2007
52.58
51.08
0.21
1432
296
1654
8.01
6.58
2008
53.15
48.32
0.22
1411
317
1713
6.95
5.66

2005
48.48
48.46
0.34
1384
465
1765
7.58
5.58
2006
52.54
51.94
0.23
1553
351
2114
8.95
7.47
2007
44.62
51.08
0.14
1811
249
2541
8.25
7.44
2008
44.64
48.32
0.16
1790
283
2694
7.24
6.48

2005
48.24
48.46
0.34
680
230
904
6.67
4.97
2006
50.44
51.94
0.23
787
178
1018
7.55
6.23
2007
51.25
51.08
0.03
800
26
1177
6.74
6.59
2008
48.81
48.32
0.03
883
30
1317
7.01
6.85

2005
51.45
48.46
0.07
931
67
756
7.12
6.49
2006
53.69
51.94
0.08
948
75
935
7.44
6.84
2007
54.35
51.08
0.10
1034
105
1141
6.62
6.01
2008
52.11
48.32
0.11
1184
133
1378
6.54
5.91

2005
35.96
48.46
0.50
1332
671
2045
11.05
7.43
2006
45.54
51.94
0.42
1344
571
2235
9.96
7.42
2007
45.54
51.08
0.32
1447
463
2488
8.36
6.80
2008
47.58
48.32
0.18
1486
268
2459
6.74
6.01
Annexure V
2005
39.63
48.46
0.27
641
175
794
8.68
6.77
2006
52.74
51.94
0.27
584
156
977
9.02
7.58
2007
56.70
51.08
0.22
575
128
1043
8.17
7.17
2008
69.00
48.32
0.45
571
260
1145
8.06
6.23

2005
38.54
48.46
0.26
1305
342
1130
6.17
4.30
2006
48.36
51.94
0.26
1307
336
1332
7.24
5.41
2007
47.57
51.08
0.24
1356
320
1599
7.55
6.04
2008
47.51
48.32
0.11
1446
156
1718
6.94
6.31
NEW PRIVATE SECTOR BANKS

Axis Bank
2005
50.65
48.46
0.21
1147
241
2422
8.87
7.99
2006
45.02
51.94
0.30
1808
544
2886
7.26
5.89
2007
47.15
51.08
0.25
2577
634
3403
6.42
5.22
2008
49.19
48.32
0.24
4381
1073
8769
10.17
8.93
2005
44.69
48.46
0.19
2428
455
4520
9.60
8.63
2006
46.09
51.94
0.27
3669
988
5299
8.55
6.96
2007
46.33
51.08
0.29
5226
1515
6433
8.57
6.55
2008
49.87
48.32
0.23
7511
1740
11497
10.30
8.74
2005
52.74
48.46
0.10
6255
623
12900
7.59
7.22
2006
56.25
51.94
0.10
8890
881
22556
9.20
8.84
2007
53.25
51.08
0.03
12565
409
24663
7.42
7.30
2008
50.60
48.32
0.04
16115
571
46821
11.32
11.18
HDFC Bank
ICICI Bank
411
ANNEXURE VI
Graphical presentation of the Operational Risk Capital Charge
under the Basic Indicators Approach for Public Sector Banks
(2005-2009)

(2005-2009)
Operational Risk Capital Charge: Comparative Performance

for Public Sector Banks in 2005
Operational Risk Capital Charge: Comparative Performance of

Public Sector Banks in 2007
12000
12000
11345
9000
9000
Rs. Crore
Rs. Crore
8926
6000
6000
3000
3000
2389
1815
158
588
644 560
657
384
191 150 212
279 269
99
265 231 336

171 151

(2005-2009)
717
176
465
286380318
244
168
116
413
347
284
207198
190
Alla FSB
hab
a
An d
dhr
a
Bo
B
Bo
Bo I
Ma
Cs h
nar
a
Co Centr
rpo al
ratio
n
De
n
Ind a
ian
IoB
O
Pu rienta
n&
l
Sin
d
PN
B
Sy
n
UC
O
Un
io
Un n
ite
Vija d
ya
SB
_B SBI
ik_
J
SB ai
_H
SB yd
_
SB Ind
_M
y
SB s
_
SB Pat
_S
SB au
_Tr
av
295 249
145 189 103101 175 85 132
224
206 97
188
114 134
Alla FSB
hab
a
An d
dhr
a
Bo
B
Bo
Bo I
Ma
Cs h
nar
a
C
e
Co
rpo ntral
ratio
n
De
n
Ind a
ian
IoB
O
Pu rienta
n&
l
Sin
d
PN
B
Sy
n
UC
O
Un
ion
Un
ite
Vija d
ya
SB
S
_B BI
ik_
SB Jai
_H
SB yd
_
SB Ind
_M
y
SB s
_P
SB at
_S
a
u
SB
_Tr
av
527 531
191 219
856

(2005-2009)


12000
12000
12049
10312
9000
Rs. Crore
6000
3000
6000
3000
2152
1967
777
660
553
442
386
254337298
310 262
225
177
191185
161
114
173
207
196
108 120
94 164
677611
310 262
182
754
458
323411324
267
170
129
909
375
300
459
217197
237
201 113146 206 90 198
FSB
Allahabad
Andhra
BoB
BoI
BoMah
Csnara
Central
Corporation
Dena
Indian
IoB
Oriental
Pun & Sind
PNB
Syn
UCO
Union
United
Vijaya
SBI
SB_Bik_Jai
SB_Hyd
SB_Ind
SB_Mys
SB_Pat
SB_Sau
SB_Trav
597
264 238
Alla FSB
hab
a
An d
dhr
a
Bo
B
B
Bo oI
Ma
Cs h
nar
a
Co Centr
rpo al
ratio
n
De
n
Ind a
ian
IoB
O
Pu rienta
n&
l
Sin
d
PN
B
Sy
n
UC
O
Un
ion
Un
ite
Vija d
ya
SB
_B SBI
ik_
SB Jai
_H
SB yd
_
SB Ind
_M
y
SB s
_
SB Pat
_S
SB au
_Tr
av
Rs. Crore
9000
Annexure VI

(2005-2009)
Operational Risk Capital Charge: Comparative Performance of Public
Sector Banks in 2009
15000
13111
12000
Rs. Crore
9000
6000
2827
3000
761 758
195
806
1001
526
452
444 289
409
338
216
317
187 382
198
142
204
258
158 214 87 205
124
Alla FSB
hab
a
An d
dhr
a
Bo
B
B
Bo oI
Ma
Cs h
nar
a
Co Centr
rpo al
rati
on
De
n
Ind a
ian
IoB
O
Pu rienta
n&
l
Sin
d
PN
B
Sy
n
UC
O
Un
ion
Un
ite
Vija d
ya
SB
_B SBI
ik_
SB Jai
_H
SB yd
_
SB Ind
_M
y
SB s
_
SB Pat
_S
SB au
_Tr
av
341 271
413
ANNEXURE VII
Graphical presentation of the operational Risk Capital Charge
under the Basic Indicators Approach for New Private Sector
Banks (2005-2009)
Rs. Crore
2500
Com parative Pe rform ance of Operational Ris k Capital Charge in 2005
1925
1500
1004
1000
500
1121
1200
Rs. Crore
2000
Com parative Pe rform ance of Ope rational Ris k Capital Charge

in 2007
203
396
0
PVT
1000
Ax is
HDFC
ICICI
800
535
600
400
123
200
204
0
PVT
Axis
HDFC
ICICI
Graphical presentation of the operational Risk Capital Charge

under the Basic Indicators Approach for New Private Sector
Banks (2005-2009)
Com parative Pe rform ance of Operatinal Risk Capital Charge in

2009
Com parative Perform ance of Operational Risk Capital Charge in 2006
1494
1500
789
1000
500
149
278
0
PVT
Rs. Crore
2500
2000
Axis
HDFC
ICICI
Com parative Pe rform ance of Ope rational Ris k Capital Charge

in 2007
1925
1500
1004
1000
500
203
396
0
PVT
Ax is
HDFC
ICICI
Rs. Crore
Rs. Crore
2000
4000
3500
3000
2500
2000
1500
1000
500
0
3627
1879
438
PVT
Axis
820
HDFC
ICICI
ANNEXURE VIII
Operational Risk Capital Charge (BIA) Bank of Baroda
700
Rs. Crore
Graphical presentation of the operational risk capital charge

that individual nationalized banks have to keep aside on account
of operational risk and its impact on their Tier I capital for
2005 to 2009 under the Basic Indicators Approach
500
300
100
-100
Operational Risk Capital Charge (BIA) Allahabad Bank
2005
2006
Rs. Crore
295
264
219
100
Impact on tier I Capital (BIA) Bank of India
10
2006
2007
2008
Capital Charge
Year
Percent
2005
9.53
6.46
8.84
8.1
7.75
7.57
7.29
6.75
7.7
6.54
7.26
6.21
6.00
5.92
2005
2006
2007
Year
Current Tier I
2
2008
Estimated Tier I Capital
Operational Risk Capital Charge (BIA) Bank of India

2006
2007
Year
Current Tier I
2008
Im pact on Tier I Capital (BIA) Andhra Bank
800
758
600
400
531
553
560
611
200
0
15
12.2
Percent
7.05
5.85
2005
6
4
0
Rs. Crore
Percent
Impact on Tier I Capital (BIA) Allahabad Bank
10
2008
Capital Charge
310
300
12
10
8
6
4
2
0
2007
Year
400
200
677
644
597
527
8.03
2005
9.98
11.20
9.19
7.19
2006
8.54
2007
2008
Year
2009
Capital Charge
7.85
0
2006
Year
2007
Current Tier I
Percent
Im pact on Tier I Capital (BIA) Bank of Baroda

12
10
8
6
4
2
0
10.98
8.21
2005
8.09
2006
Year
300
200
100
195
158
177
2005
2006
176
182
2007
2008
8.74
10.14
7.44
Operational Risk Capital Charge (BIA) Bank of Maharashtra
2008
Rs. Crore
2005
2007
Current Tier I
7.63
7.16
2008
Year
2009
Capital Charge
Operational Risk Capital Charge (BIA) Corporation Bank
Impact on Tier I Capital (BIA) Bank of Maharashtra

7.47
6.03
400
6.63
6.37
5.13
4.60
5.42
Rs. Crore
7.1
300
200
0
2005
2006
2007
Year
2005
2008
Current Tier I
806
588
Percent
400
2008
2009
Capital Charge
Impact on Tier I Capital (BIA) Corporation Bank

15
754
717
660
2007
800
600
2006
Year
Operational Risk Capital Charge (BIA) Canara Bank
Rs. Crore
289
267
244
225
191
100
200
10
13.55
12.41
12.70
11.3
11.58
9.64
10.57
9.03
0
2005
2006
2007
2008
2009
Year
0
2005
Capital Charge
Impact on Tier I Capital (BIA) Canara Bank

7.29
7.81
7.09
6.59
6.67
6.51
100
187
150
161
2005
2006
2006
Year
2007
2008
Current Tier I
170
2007
2008
Impact on Tier I Capital (BIA) Dena Bank
Operational Risk Capital Charge (BIA) Central Bank of India
9
384
465
442
458
444
200
6.63
Percent
400
2009
Capital Charge
Year
600
Rs. Crore
168
0
2005
5.96
6.06
6
5.73
5.38
5.25
0
2005
2006
2007
2008
5.37
500
7.19
6.32
5.42
6.27
5.55
5.00
0
2005
2006
2007
Operational Risk Capital Charge (BIA) Indian Bank
Year
2007
Current Tier I
2008
Rs. Crore
6.08
2006
Current Tier I
Impact on Tier I Capital (BIA) Central Bank of India

9
Year
2005
2009
Capital Charge
Year
2008
7.01
2007
Year
Current Tier I
200
7.17
Rs. Crore
Percent
2006
Operational Risk Capital Charge (BIA) Dena Bank
10
Percent
Percent
400
382
300
200
100
212
254
286
323
0
2005
2006
2007
Year
2008
2009
Capital Charge
417
Annexure VIII
Operational Risk Capital Charge (BIA) Punjab & Sind Bank
150
12.28
10.29
7.6
11.37
10.70
9.24
7.33
100
2006
2007
Year
50
2005
2008
Current Tier I
452
400
380
411
337
279
12
10
8
0
2006
2007
2008
10.05
7.55
2009
2005
Percent
7.86
7.42
6.33
7.20
3
0
2005
2006
Year
2007
1200
1000
800
600
400
200
0
2008
Current Tier I
777
2005
2006
2007
10.05
269
Percent
Rs. Crore
200
2008
2009
Capital Charge
9.58
10
324
318
909
856
Im pact on Tier I Capital (BIA) Punjab National Bank

12
300
8.04
9.12
5.26
8.79
7.55
4.07
100
2
0
0
2005
2006
2007
Year
2008
2005
2009
Capital Charge
10.37
9.77
6
3
10.05
9.48
2008
Operational Risk Capital Charge (BIA) Syndicate Bank
9.34
5.42
2007
Current Tier I
500
8.82
4.98
409
400
Rs. Crore
2006
Year
Im pact on Tier I Capital (BIA) Oriental Bank of Com m erce

12
Percent
657
Year
338
298
2008
1001
Operational Risk Capital Charge (BIA) Oriental Bank of

Com m erce
400
2007
Current Tier I
Operational Risk Capital Charge (BIA) Punjab National Bank
8.2
7.63
2006
Year
Rs. Crore
7.1
8.79
4.07
Im pact on Tier I Capital (BIA) Indian Overseas Bank

8.54
2009
Capital Charge
9.58
9.12
Capital Charge
Year
2008
8.04
5.26
6
4
2
0
100
2005
2007
Year
Impact on Tier I Capital (BIA) Punjab & Sind Bank
Percent
Rs. Crore
500
300
2006
Operational Risk Capital Charge (BIA) Indian Overseas Bank
129
116
114
99
2005
200
142
11.41
Rs. Crore
Percent
Impact on Tier I Capital (BIA) Indian Bank

14
12
10
8
6
4
2
0
300
200
265
310
347
375
100
0
2005
2006
Year
2007
Current Tier I
2008
0
2005
2006
2007
Year
2008
2009
Capital Charge
Im pact on Tier I Capital (BIA) Syndicate Bank
7.4
6.24
6.1
Percent
6
4
Operational Risk Capital Charge (BIA) United Bank

250
6.62
6.59
6.04
5.37
5.64
216
200
Rs. Crore
150
100
171
50
0
0
2005
2006
Year
2007
Current Tier I
2005
2008
15
300
284
262
231
Percent
Rs. Crore
317
300
200
2005
2006
2007
2008
7.72
6.74
8.96
5.44
5.11
2006
Year
6.19
2007
Current Tier I
2008
Operational Risk Capital Charge (BIA) Vijaya Bank
5.16
4.53
200
Rs. Crore
Percent
198
150
100
185
198
197
151
50
0
2006
2007
Current Tier I
2005
2008
10
386
336
459
413
2006
2007
Year
2008
2009
Capital Charge
Impact on Tier I Capital (BIA) Vijaya Bank

9.26
7.59
7.07
526
Percent
Rs. Crore
10.01
12.91
2005
Operational Risk Capital Charge(BIA) Union Bank
8.24
6.87
5.73
6.33
5.27
2
0
2005
2006
2007
2008
2009
Capital Charge
Year
Im pact on Tier I Capital (BIA) Union Bank

10
Percent
10
250
5.05
Year
7.32
7.79
6.07
6
4
2009
Capital Charge
2009
Im pact on Tier I Capital (BIA) UCO Bank

5.75
6.09
5.78
2005
2008
14.15
Capital Charge
Year
600
500
400
300
200
100
0
2007
Year
7.06
7
6
5
4
3
2
1
0
2006
Impact on Tier I Capital (BIA) United Bank
Operatioal Risk Capital Charge (BIA) UCO Bank

400
100
217
207
191
6.70
5.51
7.17
7.45
6.98
2
0
2005
2006
Year
2007
Current Tier I
2008
2005
2006
Year
2007
Current Tier I
2008
ANNEXURE IX
Im pact on Tier I Capital Bank of Maharashtra
8
6
Percent
A graphical comparison of the impact of Operational Risk

Capital Charge on Tier I Capital on Public Sector Banks and
Major New Private Sector Banks (Bank Wise) under the
Basic Indicators Approach and the alternative measures of
Operational Risk
Im pact on Tier I Capital Allahabad Bank
Percent
10
9
8
7
6
5
4
3
2
1
0
0
2005
2006
Current Tier I
Year
BIA
2007
2008
Cost-Income Ratio
Cost-Asset Ratio
Im pact on Tier I Capital Canara Bank
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
8
6
Percent
Im pact on Tier I Capital Andhra Bank

4
12
10
Percent
8
6
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
0
2005
2006
Current Tier I
Year
BIA
2007
2008
Im pact on Tier I Capital Central Bank of India
Cost-Income Ratio
Cost-Asset Ratio
8
Im pact on Tier I Capital Bank of Baroda
Percent
12
10
Percent
6
4
0
2005
2006
Current Tier I
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
Year
2007
2008
BIA
Cost-Income Ratio
Cost-Asset Ratio
2008
Cost-Asset Ratio
Im pact on Tier I Capital Corporation Bank
14
Im pact on Tier I Capital Bank of India

8
12
10
Percent
Percent
8
6
4
2
0
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
2005
2006
Current Tier I
2007
Year
BIA
Cost-Income Ratio
2008
Cost-Asset Ratio
Im pact on Tier I Capital Dena Bank
Im pact on Tier I Capital Punjab & Sind Bank

12
10
8
Percent
6
Percent
4
2
0
-2
2006
2007
2008
-4
0
2005
2006
Current Tier I
Year
2007
BIA
Cost-Income Ratio
-6
2008
Current Tier I
Cost-Asset Ratio
Im pact on Tier I Capital Indian Bank
BIA
Cost-Income Ratio
Cost-Asset Ratio
Impact on Tier I Capital Punjab National Bank
12
10
10
8
Percent
Percent
Year
2005
8
6
6
4
4
2
0
2005
2006
Current Tier I
Year
BIA
2007
2008
Cost-Income Ratio
Cost-Asset Ratio
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
Impact on Tier I Capital Syndicate Bank
Im pact on Tier I Capital Indian Overseas Bank

8
8
6
Percent
Percent
6
4
4
2
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2005
2008
2006
Current Tier I
Cost-Asset Ratio
Im pact on Tier I Capital Oriental Bank of Com m erce
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
Impact on Tier I Capital UCO Bank

7
10
6
5
Percent
Percent
8
6
4
4
3
2
1
0
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
2005
2006
Current Tier I
Year
BIA
2007
2008
Cost-Income Ratio
Cost-Asset Ratio
Annexure IX
Impact on Tier I Capital United Bank of India
421
Impact on Tier I Capital State Bank of Hyderabad
16
10
14
12
Percent
Percent
10
8
6
2
0
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
2005
Current Tier I
Cost-Asset Ratio
Im pact on Tier I Capital Vijaya Bank
Cost-Income Ratio
2008
Cost-Asset Ratio
Percent
Percent
2007
BIA
Impact on Tier I Capital State Bank of Indore
4
2
2
0
2005
2006
Current Tier I
2007
Year
BIA
Cost-Income Ratio
2008
2005
Cost-Asset Ratio
2006
Current Tier I
Impact on Tier I Capital State Bank of India
Year
BIA
2007
2008
Cost-Income Ratio
Cost-Asset Ratio
Impact on Tier I Capital State Bank of Mysore

8
10
9
8
7
6
5
4
3
2
1
0
6
Percent
Percent
Year
10
4
2
0
2005
2006
Current Tier I
Year
BIA
2005
2007
Cost-Income Ratio
2006
Current Tier I
Cost-Asset Ratio
Impact on Tier I Capital State Bank of Bikaner & Jaipur
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
Impact on Tier I Capital State Bank of Patiala
10
12
10
8
Percent
Percent
2006
4
2
6
4
2
0
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
2005
2006
Current Tier I
Year
BIA
2007
2008
Cost-Income Ratio
Cost-Asset Ratio
Impact on Tier I Capital State Bank of Saurashtra
Impact on Tier I Capital HDFC Bank

10
Percent
10
Percent
6
4
2
4
2
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
2005
Cost-Asset Ratio
2006
Current Tier I
Year
BIA
2007
2008
Cost-Income Ratio
Cost-Asset Ratio
Impact on Tier I Capital ICICI Bank
Impact on Tier I Capital State Bank of Travancore
12
10
8
Percent
6
Percent
6
4
2
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
Impact on Tier I Capital Axis Bank

10
Percent
8
6
4
2
0
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio
2005
2006
Current Tier I
Year
BIA
2007
Cost-Income Ratio
2008
Cost-Asset Ratio

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OPERATIONAL RISK MEASUREMENT

FOR THE INDIAN BANKING SECTOR:

of bank risk and its capital adequacy. The Accord prescribed

Pillar I Minimum Capital Requirements

Pillar 2 Supervisory Review Process

Banks should have a process for assessing and

Pillar 3 Market Discipline

II Operational Risk: Concept and Measurement

independent of outside factors, will fail to meet one or more

impact of a loss event includes all out-of-pocket costs and

II.A Operational Risk Capital Charge: Basel II

years. Years with negative gross income are excluded. Gross

broad indicator which serves as a proxy for the scale of

Table 1. Standardized Approach Business Units

KBIA capital charge under the Basic Indicators Approach

annual gross income of a bank in a given year

the number of previous three years in which gross

The advantage of this approach lies in its simplicity and ease

Trading & Sales

Payment and Settlement

For instance, the operational risk capital charge for the

The treatment of negative values here is not different: In each

Banks may be allowed by national supervisors to adopt the

computed separately for retail and commercial banking. K is

This approach identifies potential risk areas for each line of

An illustrative specification from the European Union

Under the AMA the operational risk capital charge is to be

A banks activities are categorized into a number of

probability of loss event (PE) and a parameter that would

The strategy under AMA can, thus, be summarized as: (i)

II.B Operational Risk Capital Charge: Alternative

banks costs which can be controlled. A focus on non-interest

III The Basel II Accord and India

Committee comprising of senior officials from fourteen banks

IV Pricing Operational Risk: Measurement for

IV.A Basel II Approaches

Table 2. Operational Risk Capital Charge and Impact on Tier I Capital

Public Sector Banks

State Bank Group

Old Private Sector Banks

New Private Sector Banks

It is important to mention here that even while banks in India

commercial banks would need Rs.120 billion as additional

since March 2007 when Indian banks would start

foreign banks) and the percentage share is estimated to be

Figures in parentheses represent the Operational Risk capital charge.

nationalized banks would have had a Tier I capital below 6%

Table 4A. Impact of Operational Risk Capital Charge on Tier I Capital

In addition, as indicated by the spread of banks at the end of

observed for the Bank of Maharashtra and UCO Bank whose

Table 4B. Impact of Operational Risk Capital Charge on Tier I Capital

For most banks in India, a one-to-one correspondence with

Networth Current Estimated

Requirement (Rs. Crore)

State Bank Group

the State Bank group on an average would need around

IV.B Alternative Approaches

Private Sector Banks