Relationship between Operational Risk Management, Size, and Ownership of Indian Banks

Managerial Finance, Vol. 42 (10) 2016

Posted: 23 Mar 2016 Last revised: 12 Sep 2016

See all articles by Sirus Sharifi

Sirus Sharifi

School of Management, IIT Bombay

Arunima Haldar

S.P. Jain Institute of Management and Research

S.V.D. Nageswara Rao

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM)

Date Written: March 21, 2016

Abstract

This paper attempts to analyze the relationship between Operational Risk Management (ORM), Size, and ownership of Indian Banks. This is important in the context of financial crisis experienced by developed countries due to lax regulation. ORM practices of Indian banks are proxied by excess capital (over the required minimum capital for operational risk). Size of a bank is measured as deposits plus advances. Our sample includes 61 Indian banks during the period from 2010 to 2013. We empirically examine the impact of bank size on excess capital using panel data regression model. The results suggest that size of Indian banks is inversely related to excess capital held by them for managing operational risk. The inverse relationship implies that smaller banks hold higher excess capital over the required minimum as per Basel norms. There is no significant relationship between ownership (public, private, and foreign) and excess capital held by banks for managing operational risk.

The study has implications for Indian banks given the high level of losses due to bad loans, and the implementation of Basel III norms by the central bank, i.e. Reserve Bank of India (RBI). The study has implications for Indian financial system as a large percentage (about 33%) of household savings are deployed in deposits with commercial banks and other financial institutions. The bank failure(s) can have disastrous consequences for the Indian economy, as the capacity of the Indian financial system to withstand such shocks is highly doubtful. There is very little evidence on operational risk management practices of Indian banks, and its relationship with size and ownership. The study assumes significance in the context of significant changes in the institutional and regulatory framework.

Keywords: Operational Risk, Excess Capital, Capital requirement, Risk Management, Indian Banks, Size, Ownership

Suggested Citation

Sharifi, Sirus and Haldar, Arunima and Nageswara Rao, S. V. D., Relationship between Operational Risk Management, Size, and Ownership of Indian Banks (March 21, 2016). Managerial Finance, Vol. 42 (10) 2016 , Available at SSRN: https://ssrn.com/abstract=2753472

Sirus Sharifi (Contact Author)

School of Management, IIT Bombay ( email )

IIT Campus,
Powai
Mumbai, MA Mumbai 400076
India

Arunima Haldar

S.P. Jain Institute of Management and Research ( email )

Munshi Nagar, Dadabhai Road
Andheri West
Mumbai, Maharashtra 119579
India

S. V. D. Nageswara Rao

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM) ( email )

Powai
Mumbai 400076
India
91-22-25767789 (Phone)
91-22-25722872 (Fax)

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