Indian Banks

The US crisis were a consequence of sub- prime mortgages, real estate bubble, complicated financial instruments and reckless, less prudent regulatory practices. The crisis caused a great financial turmoil in the entire world and caused bankruptcy of big financial institutions like Lehman Brothers and several others were bailed out. The crisis had some effect on Indian economy as well. It affected several sectors like exports, foreign inflow, stock market, current account deficit and caused unemployment. Though India was well guarded when compared with the rest of the western world in terms of its less exposure to sub- prime mortgages, but the paper intends to determine and prove empirically that Indian banks were not completely unaffected by US crisis by gauging its asset Quality in pre-crisis, crisis and post-crisis period.

Purpose
The purpose of this paper is to analyse 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.

Design/methodology/approach
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. The authors empirically examine the impact of bank size on excess capital using panel data regression model.

Findings
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.

Practical implications
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.

Social implications
The study has implications for Indian financial system as a large percentage (about 33 per cent) 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.

Originality/value
There is very little evidence on ORM 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:
Indian banks, Risk management, Size, Operational risk, Capital requirements, Excess capital