A COMPREHENSIVE STUDY OF MARKETING STRATEGIES AND

OPERATIONAL RISK MANAGEMENT OF HDFC BANK

SUBMITTED TO: CDR RAJAN BHANDARI

SUBMITTED BY:

JASMEET KAUR BAGGA

ENROLLMENT NO:A1802008461

MBA (IB)

(2008-10)
Acknowledgement

If words are considered to be signs of gratitude then let these words

convey the very same. My sincere gratitude to Mr. NISHANT CHANDRA
Back up branch manager, HDFC BANK, Allahabad and giving necessary
directions on doing this project to the best of my abilities.I am highly
indebted to [Link] KUMAR GUPTA, Branch Manager, who provided
me with the necessary information and also for the support extended out
to me in the completion of this
report and his valuable suggestion and comments on bringing out this
report in the best way possible.I would also like to extend my sincere
gratitude to CDR RAJAN BHANDARI, the faculty member; who has
sincerely supported me with the valuable insights into the completion
of this project. I am grateful to all faculty members of Amity University, and
my friends who have helped me in the completion of this project
successfully.
CHAPTER 1: EXECUTIVE SUMMARY

From a modest beginning of Rs 7.1 cores in home loan approvals in its first year of operations to over Rs.
1,00,000 crores in cumulative home loan approvals in 28 years, HDFC has come a long way. As an
institution that introduced an unknown concept in the late 1970s, it has defined and spearheaded many of
the changes that have given shape to the housing industry through the years and has turned the dream of
owning a home into reality for over 2.7 million families across the country. The journey began as a
thought that took shape in the mind of HDFC’s founder Chairman, Mr. H.T. Parekh, who laid a solid
foundation. This thought grew to become a reality in the form of HDFC to enable Indian households
access housing in their prime earning days through institutional finance. At the time of its commencement,
HDFC was the first private sector housing finance institution in India. Since the early years, it clearly
defined the company’s core values - integrity, transparency and trust, ingraining it throughout the
organization and in all its activities. It focused on a future that it needed to make, rather than wait for it to
happen and went on to transform the concept of providing retail finance to middle class families in India
into a world class institution. Its success encouraged the creation of a number of housing finance
institutions in India.

HDFC offers a wide range of deposit products, a secure investment option, with attractive returns.
Deposits are accepted from Charitable Trusts, Religious Trusts, Educational Institutions, Employees'
Welfare Trusts and others as decided by the management.

The primary objective of the project is a comprehensive study of the marketing strategies and operational
risk management of HDFC Bank. The research is based on the information collected with the help of the
questionnaires filled by the existing customers of the bank. The questionnaire was based on the customer
satisfaction. The questionnaire was formulated with the aim of finding the level of satisfaction of the
customers with the bank. The survey was limited to the customers who visited the bank. An attempt was
made to judge on the basis of the response generated. The survey helped to draw a conclusion regarding
the satisfaction level of the customers and what measures could be undertaken inorder to enhance their
satisfaction level. In this project, SPSS and EXCEL FILE were used as research tools
Findings of the survey have been drawn out in form of graphs and tables and suggestions have been
offered there from.

Challenges which I faced while doing this project.

- Banking sector was quite similar in offering and products and because of that it was very difficult
to discriminate between our product and products of the competitors.
- The target customers were really busy people so at times it was very difficult to get their
feedback.
- Sensitivity of the industry was also a very frequent factor which was very important to measure
correctly.
- Every financial customer has his/her own needs and according to the requirements of the
customer product customization was not possible.
- The level of operational risks involved in the bank are quite high and it is extremely essential to
minimize the risks inorder to enhance customer response and satisfaction.
CHAPTER 2: COMPANY PROFILE

______________________________________

2.1: A BRIEF INSIGHT- THE BANKING SYSTEM IN INDIA

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable
in a modern society. It plays a pivotal role in the economic development of a country and forms the core
of the money market in an advanced country.

In India, though the money market is still characterized by the existence of both the organized and the
unorganized segments, institutions in the organized money market have grown significantly and are
playing an increasingly important role. The unorganized sector, comprising the money – lenders and
indigenous bankers, caters to the credit needs of a large number of persons especially in the countryside.
Amongst the institutions in the organized sector of the money market, commercial banks and cooperative
banks have been in existence for the past several decades. The Regional Rural banks came into
existence since the middle of seventies. Thus, with the phenomenal geographical expansion of the
commercial bank and the setting up of the Regional Rural banks during the recent past, the organized
sector of money market has penetrated into rural areas as well.

Besides the aforesaid which mainly serve as sources of short – term credit to industry, trade, commerce
and agriculture, a variety of specialized financial institutions have been set up in the country to cater to
the specific needs of industry, agriculture and foreign trade.

In the field of industrial finance , the Industrial Development Bank of India (IDBI) , set up in 1964 is the
apex bank which direct financing of big industrial projects , refinancing

Of term loans granted by other financial institutions including the commercial banks. There are two
prominent all-India institutions in this field , namely, the Industrial Finance Corporations of India Ltd(IFCI)
and the Industrial Credit and Investment corporation of India (ICICI). Besides the State Financial
Corporation (SFC) and State Industrial Development Corporations(SIDCs) have been set up to meet the
requirement of small and medium scale industries in the respectives States. Industrial Reconstruction
Bank of India (IRBI) was set up to bring back normalcy the industrial units which fall sick. Recently in
march 1997 it has been re-named as Industrial Investment Bank of India and has joined the rank of full
 fledged development financial institution. Small Industries Development Bank of India was set up in 1990
as a subsidiary of Industrial Development Bank of India to cater exclusively to the requirement of Small
Scale Sector in the country. All these institutions , engaged as they are in the task of development , are
now designated as Development Banks which are distinct from the traditional commercial banks.
Development bank has had its genesis in the post – independence period in India and has contributed
significantly to the industrial growth of the country during this period.

For financing agriculture and allied activities in the rural areas though co-operative credit societies and
central co-operatives banks have been participating since long , commercial banks there active
participation after the nationalization of major banks in 1969 . Long and medium – term credit to the
agriculturist is being provided by another specialized institution , namely the Land Development Banks
which have a two- tier structure – Primary Land Development Banks at the District level and State Land
Development Banks at the State level. National Bank Agriculture and Rural Development (NABARD) is
the full- fledged apex institution in the field of agriculture and rural development.

THE INDIAN BANKING SYSTEM

CENTRAL BANK & MONEYTARY AUTHORITY

RESERVE BANK OF INDIA

APEX BANKING INSTITUTION

Industrial Devlepmt NABARD Exim Bank IIBI National

Bank of India Housing

Bank

Small Industries Development Bank of India

 BANKING INSTITUTION

Commercial Banks Regional Rural Co-operative

Banks Banks

Public Sector Private Sector State Co-operative

Bank Banks Banks

Indian Foreign

State Bank Nationalised Central/District

Group Bank Co-operative Banks

Old Bank New Bank Local Area

Subsidiary Companies Banks

Primary Credit Societies.

State Bank Subsidiary

Of India Banks
 DEVELOPMENT BANKS

Industrial Development Banks Land Development Banks

State Level Land Development Banks

All India State Level

Primary Land Development Banks

IFCI ICICI SFC SIDCs

 WE UNDERSTAND YOUR WORLD

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an
'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as
part of the RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in
August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995.

HDFC is India's premier housing finance company which enjoys an impeccable track record in India
as well as in international markets. Since its inception in 1977, there has been a consistent and
healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio
covers well over a million dwelling units.

HDFC has developed significant expertise in retail mortgage loans to different market segments and
also has a large corporate client base for its housing related credit facilities. Its experience in the
financial markets has helped it in building a strong market reputation, large shareholder base and unique
consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.

HDFC Bank began operations in 1995 with a simple mission : to be a “ World Class Indian Bank.” We
realized that only a single minded focus on product quality and service excellence would help it get
there.
FOUNDER OF HDFC

Man with a Mission

An extract from the book 'A Tribute' If ever there was a man with a mission it was Hasmukhbhai Parekh,
our Founder and Chairman-Emeritus, who left this earthly abode on November 18, 1994.

Born in a traditional banking family in Surat, Gujarat, Mr. Parekh started

his financial career at Harkisandass Lukhmidass – a leading stock broking
firm. The firm closed down in the late seventies, but, long before that, he
went on to become a towering figure on the Indian financial scene.

In 1956 he began his lifelong financial affair with the economic world, as
General Manager of the newly-formed Industrial Credit and Investment
Corporation of India (ICICI). He rose to become Chairman and continued
so till his retirement in 1972.

At the age of 60, Hasmukhbhai started his second dynamic life, even more
illustrious than his first. His vision for mortgage finance for housing, gave birth to the Housing
Development Finance Corporation – it was a trend-setter for housing finance in the whole Asian
continent.

He was a true development banker. His building up HDFC without any government assistance, is itself a
brilliant chapter in financial history. His wisdom and warmth drew people from all walks of life to him, for
advice, guidance and inspiration.

A soft spoken man of few words, Mr. Parekh nevertheless held strong and definite views with a quiet
conviction. He was always concerned with building bridges, improving and encouraging communication
between people.
COMPANY PROFILE

STRONG NATIONAL NETWORK

HDFC

BANK

March 2006 March 2007 March 2008

Cities 228 316 327

Branches 535 684 761

ATMs 1323 1605 1977

 As of March 31, 2008, the Bank’s distribution network was at 76 branches and 1977 ATMs in 327
cities as against 684 branches and 1,605 ATMs in 320 cities as of March 31, 2007. Against the
regulatory approvals for new branches in hand, the Bank expects to further expand the branch
network by around 150 branches by June 30, 2008. During the year, the Bank stepped up retail
customer acquisition with deposit accounts increasing from 6.2 million to 8.7 million and total cards
issued (debit and credit cards) increasing from 7 million to 9.2 million. Whilst credit growth in the
banking system slowed down to about 22% for the year ended 2007-08, the Bank’s net advances
grew by 35.1% with retail advances growing by 38.6% and wholesale advances growing by 30%,
implying a higher market share in both segments. The transactional banking business also registered
healthy growth With cash management volumes increased by around 80% and trade services
volumes by around 40% over the previous year. Portfolio quality as of March 31, 2008 remained
healthy with gross nonperforming assets at 1.3% and net non-performing assets at 0.4% of total
customer assets. The Bank’s provisioning policies for specific loan loss provisions remained higher
than regulatory requirements.

TECHNOLOGY USED IN HDFC BANK

In the era of globalization each and every sector faced the stiff competition from their rivals. And
world also converted into the flat from the globe. After the policy of liberalization and RBI initiatives to
take the step for the private sector banks, more and more changes are taking the part into it. And there
are create competition between the private sector banks and public sector [Link] sector banks
are today used the latest technology for the different transaction of day to day banking life. As we
know that Information Technology plays the vital role in the each and every industries and gives the
optimum return from the limited resources.

Banks are service industries and today IT gives the innovative Technology application to Banking
industries. HDFC BANK is the leader in the industries and today IT and HDFC BANK together
combined they reached the sky. New technology changed the mind of the customers and changed the
queue concept from the history banking transaction. Today there are different channels are available
for the banking transactions.

We can see that the how technology gives the best results in the below diagram. There are drastically
changes seen in the use of
 Internet banking, in a year 2001 (2%) and in the year 2008 ( 25%). These type of technology gives the
freedom to retail customers.

Centralized Processing Units Derived Economies of Scale

Electronic Straight Through Processing Reduced Transaction Cost

Data Warehousing , CRM Improve cost efficiency, Cross sell

Innovative Technology Application Provide new or superior products

HDFC BANK is the very consistent player in the New private sector banks. New private sector banks to
withstand the competition from public sector banks came up with innovative products and superior service.
 2001

Branches 43%

ATM 40%

Phone Banking
14%
Internet 2%

Mobile 1%

2005

Branches 17%

ATM 45%

Phone Banking
12%
Internet 25%

Mobile 1%

( % customer initiated Transaction by Channel )

 BUSINESS MIX

Total Deposits Gross Advances Net Revenue

Retail Wholesale

 HDFC Bank is a consistent player in the private sector bank and have a well
balanced product and business mix in the Indian as well as overseas markets.
 Customer segments (retail & wholesale) account for 84% of Net revenues
(FY 2008)
 Higher retail revenues partly offset by higher operating and credit costs.

 Equally well positioned to grow both segments.

BUSINESS STRATEGY

HDFC BANK mission is to be “A World Class Indian Bank", benchmarking themselves against
international standards and best practices in terms of product offerings, technology, service levels, risk
management and audit & compliance. The objective is to build sound customer franchises across
distinct businesses so as to be a preferred provider of banking services for target retail and wholesale
customer segments, and to achieve a healthy growth in profitability, consistent with the Bank's risk
appetite. Bank is committed to do this while ensuring the highest levels of ethical standards,
professional integrity, corporate governance and regulatory compliance. Continue to develop new
product and technology is the main business strategy of the bank. Maintain good relation with the
customers is the main and prime objective of the bank.

HDFC BANK’s business strategy emphasizes the following :

 Increase market share in India’s expanding banking and financial services industry by
following a disciplined growth strategy focusing on quality and not on quantity and delivering
high quality customer service.
 Leverage our technology platform and open scaleable systems to deliver more products to
more customers and to control operating costs.

 Maintain current high standards for asset quality through disciplined credit risk management.

 Develop innovative products and services that attract targeted customers and address
inefficiencies in the Indian financial sector.

 Continue to develop products and services that reduce bank’s cost of funds.
 Focus on high earnings growth with low volatility.
A COMPREHENSIVE STUDY OF OPERATIONAL RISKS OF HDFC BANK

The Landscape of (Banking) Risks

Solvency Risk

Business Risk Transformation Risk Operational Risk

Market Risk Credit Risk Liquidity Risk

Reasons for the Increased Focus on Operational Risk

 Internal Market Pressures

 consolidation in global financial services industry
 stronger correlation between markets
 complexity of financial instruments
 increased use of technology
 => increased risk of “blowing up” the organization - and the entire financial system!
 Plenty of “landmark” cases here!
 Regulatory Initiatives
 Basel II & Solvency II è separate capital charge for operational risk!
 MiFID, Market Abuse Directive etc.
 Personal Accountability in Some Jurisdictions
 E.g. SOX
 External Events
 E.g. September 11, 2001
RISK DEFINETION
 Risk definition provides a high level description of a risk class for an organization and the scope
of risks and activities included within it.
 Risk categorization provides a more detailed breakdown of the risk definition and enables an
organization to understand and document the specific significant risks within its risk classes.

 Risk language details standard risk terms, vocabulary and abbreviations used across an
organization

 The following diagram attempts to categorise risks, but just as easily illustrates the complexity of risk
taxonomy and the potential for overlaps or multiple classifications, e.g. other diagrams separate credit
and counterparty from the transaction, some ignore liquidity, etc.:
 

 
Operational Risks — The new challenge for banks

Though operational risk assessment is in the early stages of development compared to credit and market
risks, its significance has grown.

With the era of globalisation, liberalisation and deregulation of the economy, in general, and the financial
and banking sector, in particular, the banking industry the world over has become more sophisticated and
complex.
Risks other than of credit and market are assuming greater importance with the growing use of financial
technology and the constant upgrading of the banking business profile. The factors responsible for this
paradigm shift are:

1. Higher adoption of automated technology;

2. Emergence of e-commerce;

3. Outsourcing; and

4. Mergers/acquisitions/consolidations.

Basel Definition:-OPERATIONAL RISK

“The risk of direct or indirect loss resulting from inadequate or failed internal processes,
people and systems or from external events”

Trouble spots:

1. INTERNAL PROCESS:-errors, complexity, policy, internal fraud, capacity.

2. PEOPLE:-integrity, competence, management, communication, security

3. SYSTEM:- integrity, confidentialty, availability, capacity.

4. EXTERNAL:- external fraud, legislation ,reliance on third party, competition, reputation, natural
disasters ,terrorism.

RISK IDENTIFICATION AND QUANTIFICATION

 QUALIFICATION & INCOMPETENCE

THEFT & FRAUD

NEGLIGENCE

OPERATIONAL RISK MANAGEMENT & BASEL II SICKNESS & RESIGNATION

Although Basel II was developed to help banks improve risk management, it quickly became perceived by
many banks as yet another regulatory compliance obligation. Meeting its requirements was initially so
complex that Basel II seemed to create more work than value. For many banks, the focus became
KNOW-HOW
meeting the requirements rather than driving business value from the effort. DEPENDENCE

?
Many of the traditional operational risk-management areas—including IT security, compliance, legal, or
insurance—continue to work in silos rather than in an integrated manner. Their efforts tend not to be fully
coordinated with the operational risk-management function or supervised by a risk or an operational risk-
management committee.

Now, banks have a new opportunity to integrate operational risk management into day-to-day and
strategic decision-making to provide value to business and management. There is an opportunity to make
operational risk measurement and analysis a core element of strategic decision-making. To do so,
management must align and coordinate the different operational risk-management activities within the
bank and make the results of individual risk analyses comparable between different areas.

Regulatory compliance tends to focus on risk capital and implementation of minimum standards in a cost-
effective manner. However, better practice risk management ensures that operational risk is considered in
any decision-making process. Specifically:

 A comprehensive view on the risk profile of all areas of the bank enables much more informed
decision-making.
 Coordination of risk-management activities prevents overlap and inefficiencies, allowing
management to leverage resources available for risk-reducing measures (e.g., insurance
programs, business continuity management).
  Including risk analysis of new products, processes, systems, or markets in business decision-
making helps management decide on countermeasures at an early stage of the decision-making
process.

 A deeper understanding of operational risk at the business-process level supports the

enhancement of these processes or systems and can have a direct influence on improved
performance.

In recent years, losses incurred as a result of improper business practices, failed processes, and other
operational risks have mushroomed across a range of industry sectors, including pharmaceuticals, oil and
gas, and financial services. From 2004 to 2008, risk-related losses in top firms represented 4 to 5 percent
of their net income - and considerably more if unpublicized events are added to the total. In 2008 at least
two large banks had operational losses that wiped out more than 10 percent of their pretax net income.
The impact of such losses on shareholder value can be disproportionately severe. The most harmful
crises involved embezzlement, loan fraud, deceptive sales practices, antitrust violations, and
noncompliance with industry regulations.

Operational risk is the risk of loss stemming from the inadequacy or failure of internal processes, people,
and systems or from external events. Reputational risk derives from the stakeholders' perceptions of
companies and of their employees' behavior.

Operational-risk infrastructure remains overly focused on measuring risk rather than mitigating it.
Procedures for wrestling with potentially risky business practices are rarely in place and, where they do
exist, are rarely systematic. "Soft," qualitative issues such as front-office culture and the concerns of key
external stakeholders are typically overlooked. Complacency at the business unit level - a consequence
of the centralization of risk functions and the feeling that "it's someone else's job" - frequently goes
uncorrected. Executives must understand that operational risk is inextricably and increasingly linked to
the reputations of companies. Its management directly influences their actions and thus their reputation
among stakeholders.

Executives need to review and challenge some long-standing and deeply held assumptions about how to
control and manage these risks. The use of traditional methods of measurement and historical data may,
for example, be an effective way to manage credit or market risk, but operational risk is far less
predictable, because past events give much less guidance about future ones. Some companies have
started to address individual areas, but piecemeal strategies can prove downright dangerous if they
overlook important risks.

Most companies have already removed most excess costs from their operations, apparently leaving little
scope for further gains. The next frontier involves eliminating unnecessary operational risks from
seemingly efficient back offices. The savings achieved in some processes by reducing error rates (in
other words, losses from operational risk) can far outweigh the savings achieved through traditional cost
reduction measures. Companies need to create a methodology that simultaneously tackles costs and
operational risk, trading them off against each other where necessary.

Getting a grip on practices and culture is no one-off exercise but a continuing effort. To root out the real
causes of risky practices, managers need to be alert, inquisitive, and skeptical. If employees are just
operating by the book, it's time to change the book. Managers must be prepared to lead by example, to
change the behavior of other employees, and to set and enforce new policies - applying tough sanctions if
necessary.

Senior managers, notably in banking, live in fear that some big operational or reputational scandal will
one day shake the organization. They should confront this growing threat and rethink their entire
approach to risk. Making the mitigation of risk a routine and conscious part of the work of the whole
organization can put managers in control and allow their company to reap the rewards of better risk
management.

SOME OF THE IMPORTANT CAUSES OF OPERATIONAL RISKS

1. Internal frauds due to employees' intentional involvement;

2. External frauds due mainly to robbery and forgery/falsification of documents;

3. Workers compensation claims, violation of employee health and safety rules;

4. Misuse of confidential customer information, money-laundering, sale of unauthorised and

unfamiliar products;

5. Damage to physical assets due to terrorism, earthquakes, fires and floods;

6. Business disruption and system failures due to software, power or network problems

7. Execution errors on account of wrong data entry or incomplete legal documentation.

  FEATURES
 Cause - The underlying reason(s) giving rise to an OR event.
 Effect (= Impact) - The financial or non-financial result of an OR event.

 Foregone (future) revenue (= Opportunity Costs) - Income that would have been earned in the
absence of an OR event.

 Impact - See Effect

 Loss (= LGE) - The negative effect on the Bank`s physical, financial or immaterial assets by an
OR event or a series of OR events. This does not include foregone (future) revenues nor any
investments for preventive action, quality improvement, automation.

 Direct loss - A loss which is directly visible and attributable in P&L accounts.

 Indirect loss - Opportunity costs caused by an OR event and losses which are secondary to direct
losses.

 Gross loss - The loss irrespective of any recoveries (e.g. insurance, cost sharing agreement).

 Net loss - The loss after taking into account recoveries / reimbursements etc.

 Loss given event (LGE) - See loss.

  Near miss - An OR event that potentially could but actually did not result in a loss.

 Opportunity Costs - See Foregone (future) revenue

 Residual Risk - The remaining OR that a firm cannot further reduce through (qualitative and
quantitative) OR management activities without dropping business activities.

 Risk profile - The level of OR across a firm’s business line and/or risk categories.

 Risk tolerance - A firm’s prioritisation of OR management activities

Risk Appetite

 Risk appetite describes the types & degree of operational risk an organization is prepared to
incur. As a result, risk appetite refers to an organization’s attitude towards risk taking and whether
it is willing and able to tolerate either a high or a low level of exposure to operational risk.
 It is defined in quantitative or qualitative terms (e.g. earnings at risk vs. reputation risk), and takes
into consideration risk tolerance (range of acceptable variation).

 What risks will the organization not accept? (e.g. environmental or quality compromises)

 What risks will the organization take on new initiatives? (e.g. new product lines)

 What risks will the organization accept for competing objectives? (e.g. gross profit vs. market
share?)

Risk appetite reflects the amount of risk taking that is acceptable to an organisation.  As a result, risk
appetite refers to the organisation’s attitude towards risk taking and whether it is willing and able to
tolerate either a high or a low level of exposure to specific risks or risk groups.

Among other things, risk appetite plays an important part in supporting risk assessment, monitoring and
control activities.  It does this by helping staff to understand the relative significance of the risks faced by
the organisation and thereby better prioritises risk monitoring and control activities.

Risk appetite plays a key role in maximising return on capital invested as it acts as a driver for allocation
of capital to identified risks.  The better the understanding of risk appetite, the more efficient the allocation
of capital across the organisation.  Risk appetite should be a function of the capacity to bear risk and
should not exceed it.  Constraints on risk appetite include the capital which needs to be maintained to
support a target rating agency’s rating and regulatory capital requirements.

Organisations that effectively articulate their risk appetite and adequately fund their managed risk taking
are better insulated against shock to future earnings, better placed to allocate scarce resources when and
where needed, and better prepared to take advantage of changes in insurance cycles as they arise.

 
   Risk appetite describes the types & degree of operational risk an organization is prepared to
incur. As a result, risk appetite refers to an organization’s attitude towards risk taking and whether
it is willing and able to tolerate either a high or a low level of exposure to operational risk.
 It is defined in quantitative or qualitative terms (e.g. earnings at risk vs. reputation risk), and takes
into consideration risk tolerance (range of acceptable variation).

 What risks will the organization not accept? (e.g. environmental or quality compromises)

 What risks will the organization take on new initiatives? (e.g. new product lines)

 What risks will the organization accept for competing objectives? (e.g. gross profit vs. market
share?)

Risk appetite reflects the amount of risk taking that is acceptable to an organisation.  As a result, risk
appetite refers to the organisation’s attitude towards risk taking and whether it is willing and able to
tolerate either a high or a low level of exposure to specific risks or risk groups.

Among other things, risk appetite plays an important part in supporting risk assessment, monitoring and
control activities.  It does this by helping staff to understand the relative significance of the risks faced by
the organisation and thereby better prioritises risk monitoring and control activities.

Risk appetite plays a key role in maximising return on capital invested as it acts as a driver for allocation
of capital to identified risks.  The better the understanding of risk appetite, the more efficient the allocation
of capital across the organisation.  Risk appetite should be a function of the capacity to bear risk and
should not exceed it.  Constraints on risk appetite include the capital which needs to be maintained to
support a target rating agency’s rating and regulatory capital requirements.

Organisations that effectively articulate their risk appetite and adequately fund their managed risk taking
are better insulated against shock to future earnings, better placed to allocate scarce resources when and
where needed, and better prepared to take advantage of changes in insurance cycles as they arise.

Risk Policy

 Outlines an organization’s operational risk management strategy and objectives.

 Documents the roles, responsibilities, accountabilities and authorities that support the approach
and processes adopted to achieve those objectives.

Commercial banks should, in line with the Guidelines, set up an operational risk management system
suitable to their own business nature, scale and complexity to effectively identify, assess, monitor and
control/mitigate operational risk.

The board of directors in a commercial bank should treat operational risk as a major risk and charge the
ultimate responsibility for monitoring the effectiveness of operational risk management.

The senior management in a commercial bank is responsible for implementing the operational risk
management strategies, general policies and running the system approved by the board.
Commercial banks should designate a certain department to be responsible for the construction and
implementation of operational risk management system. This department should be independent from
others in order to ensure the system’s consistency and effectiveness.

The relevant departments in a commercial bank should be directly responsible for operational risk
management.

The legal office, compliance office, IT office, security office, and human resource office in a commercial
bank should, besides properly managing their own operational risks, provide relevant resources and
assistance within their strength and respective responsibilities to other departments for the purpose of
operational risk management.

The internal audit department in a commercial bank does not directly take charge of or participate in other
departments’ operational risk management, but it should regularly check and evaluate how well the
bank’s operational risk management system operates, supervise the implementation of operational risk
management policies, independently evaluate the bank’s new operational risk management policies,
processes and specific procedures, and report to the board of directors the evaluation results of
operational risk management system.

Required, a Policy Agenda

Considering these aspects, there must be a specific thrust towards an Operational Risk Management
Department in a bank. Its key responsibilities would be:

Identification of key risk indicators;

Self assessment;

Verification of systems and procedures;

Setting up of Business Continuity Plan (BCP)/Disaster Management (DM); and

Maintaining loss database.

Measuring operational risk

A key component of risk management is measuring the size and scope of the firm's risk exposures. As
yet, however, there is no clearly established, single way to measure operational risk on a firm-wide basis.
Instead, several approaches have been developed. An example is the "matrix" approach in which losses
are categorized according to the type of event and the business line in which the event occurred. In this
way, a bank can hope to identify which events have the most impact across the entire firm and which
business practices are most susceptible to operational risk.

Once potential loss events and actual losses are defined, a bank can hope to analyze and perhaps even
model their occurrence. Doing so requires constructing databases for monitoring such losses and creating
risk indicators that summarize these data. Examples of such indicators are the number of failed
transactions over a period of time and the frequency of staff turnover within a division.
Potential losses can be categorized broadly as arising from "high frequency, low impact" (HFLI) events,
such as minor accounting errors or bank teller mistakes, and "low frequency, high impact" (LFHI) events,
such as terrorist attacks or major fraud. Data on losses arising from HFLI events are generally available
from a bank's internal auditing systems. Hence, modeling and budgeting these expected future losses
due to operational risk potentially could be done very accurately. However, LFHI events are uncommon
and thus limit a single bank from having sufficient data for modeling purposes. For such events, a bank
may need to supplement its data with that from other firms. Several private-sector initiatives along these
lines already have been formed, such as the Global Operational Loss Database managed by the British
Bankers' Association.

Although quantitative analysis of operational risk is an important input to bank risk management systems,
these risks cannot be reduced to pure statistical analysis. Hence, qualitative assessments, such as
scenario analysis, will be an integral part of measuring a bank's operational risks.

OPERATIONAL RISK IN HDFC BANK

"Operational Risk" includes all types of risk not covered by market or credit risk. Given the particular
operations of Finance and the Bank, and the portfolios they manage, this includes risks such as:

 infrastructure risk – including risk associated with IT systems and other

electronic and physical infrastructure, security, and disaster recovery

 human factor risk – including human error, misbehavior, failure to perform

duties, employee training and turnover

 structure risk – including risk associated with risk procedures, policies,

oversight and governance structures themselves

This is one area of risk management where, even in the very best organizations, improvements can
almost always be made.

INFRASTRUCTURE

One area of operational risk involves the use of IT systems and other infrastructure by those involved in
risk-related activities. Here it is important to ensure that disasters which may render existing buildings or
equipment unusable are accounted for and that IT systems are secure and well functioning. To this end
the Bank has had the ability to run risk operations from a different building than the main Bank office.

From interviewing members of the Bank’s risk-related IT team, it appears that the team is confident in the
security of their IT systems and processes, and confident that current systems can handle the workload
and type of work required. For example, any changes to the IT systems go through multiple rounds of
analysis/testing and layers of approval, which serves to help reduce the chance of error or misbehavior.

RECENT SOFTWARE USED IN HDFC BANK-----Finware, Cibil, Ubs for corporate clients.

HUMAN FACTORS
One significant area of risk that many firms face (not just Finance and the Bank) involves the potentially
negative impact of various human factors.

Turnover

Employee turnover or absenteeism is one such risk. Employees can choose to move to other jobs, suffer
unexpected illnesses or accidents, or experience other events that keep them away from work and thus
create holes in the ability of organizations to perform certain tasks in a timely and competent fashion. It is
therefore important to have clear plans for covering short-term gaps in the team and for longer-term
employee succession.

The Bank appears to have such plans and supporting artifacts (e.g., user manuals, task documentation,
etc.) in place. For example, information provided suggests that appropriate cross-training programs are in
place at the Bank. The Bank also has written documentation that describes important tasks to be
performed so that a person could step into a new position and have some ability to know what needs to
be done and how to do it. Furthermore, there appears to be appropriate succession planning within the
Bank. This suggests that the current level of plans and artifacts may be appropriate at the Bank.
However, this is another area where continued vigilance is warranted for the future.

Training

Another area to consider is the risk associated with the significant level of skill required to perform many
of the key risk-related tasks broadly defined, across many areas within the Bank and Finance. This
includes not only the duties of the front office and Financial Risk Office, but also risk-related duties
performed by a wide range of other individuals and teams in Finance and the Bank, from planning to
infrastructure, auditing and oversight, to name but a few.

Staff interviewed from Finance and the Bank generally seem to feel that the personnel involved possess
the training and skills appropriate for the current level of complexity in the portfolios and risk tasks; this
does indeed seem to be the case based on the personal interviews and conversations undertaken in
preparing this report. However, given the rapid pace at which the risk industry, risk technology and risk
best practices are progressing, it is prudent to ensure that risk-related personnel continue to receive
appropriate training so that they can remain appropriately skilled as time progresses, and to increase
training and required skill levels as the portfolios and/or tasks become more complex.

 It is essential that careful hiring, retention and training practices remain in

place, and are even enhanced as appropriate, to ensure the ongoing
quality of the team.

Misbehavior

It is important to maintain an ability to detect and hopefully prevent any form of human misbehavior
especially where billions of dollars are potentially involved. This includes intentional misbehavior, such as
fraud, as well as unintentional misbehavior including errors or omissions.
There have been well publicized examples of individuals in certain private sector institutions feeling
pressure to downplay risk concerns in search of higher trading profits, or even attempting to circumvent
the risk management process and/or engage in unethical business behavior to personally profit from
engaging in speculative trading activity or even outright fraud. This risk seems to be less at Finance and
the Bank than one might assume in some private sector financial institutions in part because personnel
involved in the securities trading function at the Bank are not compensated based on profits generated
and thus face less temptation or pressure to hide trades or engage in other intentional misbehavior.

The risk of unintentional misbehavior can be lessened by the use of automated systems and processes to
the extent that this reduces the risk of key-entry errors and other mistakes. Here too the Bank seems to
have something of an advantage given its IT systems and comparatively simple trading strategies.

Continued oversight, audits, robust security measures, and a general culture of responsibility and risk
sensitivity all have important roles to play in reducing risk. Finance and the Bank both seem to have
measures in place to help mitigate such risk, but here again continued vigilance is essential.

Liquidit
Liquidit Operationa
yy
Risk l
Risk Risk
Market
Market
Risk
Risk
Credit
Credit
Risk
Risk

Counterparty
Count r party &
e Risk Risk
Settlement
 LOSS CAUSING EVENTS

HUMAN PROCESSING ERROR An unconscious human error which can result

in a direct loss, a system error or decision error
HUMAN DECISION ERROR A human decision error which is caused by in
complete wrong or unavailable information
SYSREM ERROR An unexpected event which results in a
disruption of system processes or in an
incomplete or incorrect execution of system
processes. The events can occur
autonomously or can be caused by human
imperfection.
PROCESS DESIGN ERROR An unadequate design of a process may result
in human processing errors,system errors and
they may also lead to fraud.
FRAUD A conscious human error which is actively
performed to damage the financial institution.

EXPLANATION WITH EXAMPLE

A distinction between fraud and error should be made since the probability of a financial loss is larger in
case of fraud than in error. An overview of fraud and error relationship is shown below:

1)HUMAN PROCESSING ERROR-------financial/reputation loss

 A payment order has been charged to wrong account; the balance in the account is not
sufficient for a correction.

 A security order has been processed too late and the bank is confronted with a interest
claim.

2)HUMAN PROCESSING ERROR------------human decision error--------financial/reputation loss

 A false assignment of a transaction to the customer’s limit causes an unnecessary rejection of

a profitable transaction by the risk manager.

3) HUMAN PROCESSING ERROR-----system error--------financial / reputation loss

  Wrongly entered transaction in the processing system causes disreputation of batch process
and therefore accounting entries are not executed .Clients dispose incorrectly and confront
the bank with the interest claim

 Files are not labeled as processed due to human error and therefore double processing is
executed. Even if correct processing is performed on time, the error and correction are printed
in the account statement.

4) HUMAN PROCESSING ERROR-------system error-------human decision error------financial / reputation

loss

 Reports include incomplete information , since incomplete data entry distrupts a certain
processing the end of day batch. Based on this report the money market trader funds too small
amount which causes problem in the clearing system.

5) SYSTEM ERROR-----------------financial / reputation loss

 Due to system error account statement is not available.

 The standing orders are not executed due to system error . Clients confront the bank for interest
claim for late payment.

6) SYSTEM ERROR---------- human processing error-----------financial /reputation loss

 A system error causes many manual corrections . Since these corrections are performed under
high time pressure, new errors exists which cause financial damage.

7) SYSTEM ERROR --------- HUMAN PROCESSING ERROR------ HUMAN

DECISION ERROR------- financial/reputation loss

 A system error causes many manual corrections .since theses errors are performed under high
pressure, new error occurs causes an inadequate liquidity report. The money market traders
funds a wrong amount and the bank has to use its credit line with central bank in order to perform
its clearing process. An interest loss is caused since the interest charge of the central bank is
higher than the normal interest charge for money market transactions.

8) SYSTEM ERROR ------HUMAN DECISION ERROR-------financial /reputation loss
  A disruption of front office system causes a delay in information supply to traders. The market is
quite volatile in the moment and the trader is unable to rephrase his strategy since he does not
know his current position and the bank will therefore be confronted with unnecessary losses.

9) PROCESS DESIGN ERROR------financial/ reputation loss

 An ill designed process causes errors which causes bank losses .All accounting entries are
made one day before than necessary and therefore cause interest loss

11) PROCESS DESIGN ERROR------HUMAN PROCESSING ERROR-------- financial

/reputation loss

 The process is not clearly designed and therefore staff interpret the process step wrongly .The
wrong interpretation causes inaccurate data entries and therefore some report are incomplete .
The decision made on these reports causes loss.

Mitigating operational risk

In broad terms, risk management is the process of mitigating the risks faced by a bank, either by hedging
financial transactions, purchasing insurance, or even avoiding specific transactions. With respect to
operational risk, several steps can be taken to mitigate such losses. For example, damages due to natural
disaster can be insured against. Losses arising from business disruptions due to electrical or
telecommunications failures can be mitigated by establishing redundant backup facilities. Losses due to
internal reasons, such as employee fraud or product flaws, are harder to identify and insure against, but
they can be mitigated with strong internal auditing procedures.

Since operational risk management will depend on many firm-specific factors, many managerial methods
also are possible and will probably be put in place over time. However, some general principles, such as
good management information systems and contingency planning, are necessary for effective operational
risk management. BCBS (December 2001) laid out a framework for managing operational risk at
internationally active banks; this framework also could be more broadly applied to other types of financial
institutions.

The framework consists of two general categories. The first includes general corporate principles for
developing and maintaining a bank's operational risk management environment. For example, a bank's
governing board of directors should recognize operational risk as a distinct area of concern and establish
internal processes for periodically reviewing operational risk strategy. To foster an effective risk
management environment, the strategy should be integral to a bank's regular activities and should involve
all levels of bank personnel.

The second category consists of general procedures for actual operational risk management. For
example, banks should implement monitoring systems for operational risk exposures and losses for major
business lines. Policies and procedures for controlling or mitigating operational risk should be in place
and enforced through regular internal.

Basel-II Implementation

Regulators take a tough view on risk. Over the past few decades the Bank for International Settlements
(BIS), based in Basel, has been working to set standards for both how risk is measured and the capital
which regulators require banks to hold for the risks they take. The BIS works with the “Basel Committee
on Banking Supervision” on standards for risk measurement and management. “Basel", as the shorthand
goes, is used by banks to mean a variety of regulatory guidelines including those that set capital
requirements based on risk. European Union regulation tends to complement Basel's guideline, e.g. the
Capital Adequacy Directive. Regulators believe that capital requirements are the key regulatory
mechanism for banks after supervision. "Capital is pivotal to everything that a bank does, and changing it
- and we believe Basel II could change it dramatically - has wide-ranging implications for bank
management and bank investors."i[i]ii If based on risk assessments, capital requirements should change
banks'  behaviours toward risk because they:
1. constrain a key performance measure, return on equity;
2. influence a bank’s ability to lend and spend;
3. limit dividends and capital repatriation.
 
Yet risk is a difficult term to pin down. Categorising risks is more empirical than analytical and
taxonomies of risk can seem arbitrary, overlapping or in contradiction with each other. For instance, the
current consensus is that banks face three types of risk – market, credit and operational. Yet to an
outsider, disasters such as Barings or AIB seem to be people risks, while the epidemic of US savings &
loan fiascos or Argentina’s financial failures cannot be easily pigeonholed.

The 3 Pillars of Basel II

Stable Banking System

 Credit

Market Discipline
risks

Supervisory
Review
Market

risks
Operati-
requirement
Min. capital

onal

risk

National Laws
EU Directives
Basel Proposal

The two major Basel agreements are the Capital Accord of 1988, Basel I, and the still-in-draft-after-a-few-
years Basel II. Basel I focused on market risk with some specification of credit risk. Basel I was seen to
be very crude, especially for corporate lending where, despite differences in lending, say between a large
multinational or a local used car dealer, all corporate lending required the same amount of capital
backing. Basel I’s crudity meant that banks started to discriminate or arbitrage between regulatory and
economic capital. Corporate lending markets are believed to have been starved of bank capital while low
capital requirements in areas such as mortgages, asset management and insurance attracted undue
banking favour. Basel I did not properly recognise credit risk mitigation and did not cover non-credit risks.
Basel I had no operational risk capital requirements. Basel II's impact will be seen through three Pillars:
 
← Pillar 1 - Provide fixes to the minimum capital requirements of Basel I and introduce a new,
specific operational risk change; 
←
← Pillar 2 - Gives more power to the supervisor/regulator;
←
← Pillar 3 -  insists on more disclosure to the market

Which Approach to Choose?

 Banks are encouraged to move along the spectrum of available approaches as they
develop more sophisticated operational risk measurement systems and practices.
 Internationally active banks and banks with significant operational risk exposures are
expected to use an approach that is more sophisticated than the Basic Indicator
Approach and that is appropriate for the risk profile of the institution.

 A bank will be permitted to use the Basic Indicator or Standardized Approach for some
parts of its operations and an AMA for others.
An Integrated Approach to Governance and Risk Management

The report points to the benefits of taking an integrated approach to governance and risk management,
which are that it :

* Reduces the inefficiencies inherent in the more traditional, segmented approach to risk management
and promotes cost reductions through the development of synergies among business units and
departments (both through the aggregation of risks for more accurate quantification and the adoption of
coherent risk response strategies).

* Minimizes costly risk exposures, by allowing the company to identify interdependencies among risks that
would remain unnoticed under the traditional risk management model.

* Provides — through its emphasis on overall risk appetite — a more objective basis for resource
allocation, therefore improving capital efficiency and return on equity.

* Stabilizes earnings and reduces stock-price volatility. Empirical evidence, especially in the insurance
industry, supports the use of hedging techniques to reduce unanticipated earnings fluctuations; further
studies highlight the need to coordinate hedging activities among functional or business silos in order to
optimize the benefits.

* Offers the tools to make more profitable, risk-adjusted investment decisions.

* Improves transparency to stakeholders, therefore reducing regulatory scrutiny, litigation expenses, costs
of access to equity capital and the rate of return on incurred debt.

OPERATIONAL RISK SHOULD NOT BE VIEWED A S A SEPARATE DOMAIN RISK

Operational risk has often been viewed as a separate domain risk like counterparty risk, credit risk,
liquidity risk, market risk, and the like. But that assumption is probably wrong. Here’s why.

Every aspect of business has an operational risk component. A bank may have the best technologies and
people using analytics, running scenarios and modeling risk. They may have superior skills in credit
analysis or investments. But if the results of a risk evaluation are not communicated or acted on, no
analysis in the world can help. In this sense, operational risk often looks like a breakdown in process
regardless of where it’s found. And certainly, process has been the culprit in many a risk event. Still, there
are many more elements to operational risk than process per se.

Consider:
• Inadequate review of information generated
• Mere mistakes, a human element that can be reduced but not totally eliminated
• Miscommunication of risk information that leads to lack of action or inappropriate action
• Lack of communication based on poor communication protocols
• Unchecked aggressiveness that leads to mistakes of judgment (sometimes tied to reward systems)
• Financial crimes – internal and external – have been a growing challenge in the past year, and, at its
most basic element, represents a control issue
• Incomplete or fragmented risk management due to lack of proper integration of all risks (in many ways,
a process issue)
• Security risks that open the door to other risk events
• A failure of culture where management has not instilled, demanded, and structured a culture of risk
management that meets the institution’s risk-bearing ability. And finally
• The unknown, the unanticipated, the underestimated, the unseen

Risk Management Tools

A robust operational risk management process consists of clearly defined steps which involves:

1. Identification of the risk events

2. Analysis

3. assessment of the impact

4. treatment and reporting

 While sophisticated tools for measuring and managing operational risks are still to
evolve, the current practices in this area are based on self-assessment. The starting
point is the development of enterprise-wise generic standards for OR which includes
Corporate Governance standards. It is extremely important for a robust risk
management framework that the operational risks are managed where they originate.
Risk management and compliance monitoring is a line management function and the
risk culture has to be driven by the line Manager. It is, therefore, the line manager’s
responsibility to develop the generic operational risk standards applicable to his line of
business. The purpose of this tool is to set minimum operational risk standards for all
business and functional units to establish controls and monitor risks through Control
Standards and Risk Indicators.
 Once the standards are set, the line manager has to undertake a periodic operational
risk self assessment to identify key areas of risk so that necessary risk based controls
and checks can be developed to monitor and mitigate the risks.

 Control Standards set minimum controls and minimum requirements for self-assessment
of effectiveness of controls for the key processes

 The Risk indicators identify operational risks and control weaknesses through statistical
trend analysis. The Risk Indicators are reviewed periodically to ensure that they are
constantly updated.

Reporting is a very important tool in the management of operational risks since it ensures timely
escalation and senior management overview. Reporting should include significant operational risk
exceptions, corporate governance exceptions, minutes of meetings of Operations Risk Committee and
real time incident reports.

HDFC- OPERATIONAL RISK AREAS (PROCESSING)

 1) Welcome desk
2) Personal banker desk

3) Teller desk

4) Cheque clearance desk

5) Server room

6) Direct selling agents desk

7) Credit Cards desk

WELCOME DESK

It is a place where queries of customers are solved such as:

1. Statement requirement
2. Retained ATM card related problem

3. Account opening formalities enquery

4. Account closure procedure

5. Existing account details

6. Miscellaneous problems

RISK INVOLVED

1. Wrong feeding of account number of customer into software and mentioning wrong details.
2. Account details of the customer if communicated to the some other person in relation with
customer involves risk in processing.

3. Retained ATM cards if given without seeing the original proof then this involves risk.

4. Retained ATM cards if given to the customers relatives even with the consent of customer
involves risk.

5. Retained cards given without taking the photocopy of original id proof involves risk.

6. Not informing customer clearly about closure of account formalities involves risk.

7. Incomplete information to the customer regarding different types of accounts.

8. Accepting couriers on banks behalf without making proper entry in respectine registers.

PERSONAL BANKER DESK

Two to three personal banker desk is present in front office for helping the customers in opening the
accounts. At this desk customers account opening formalities are completed as well as accounts brought
by sales force is also opened.

RISKS INVOLVED

1. Incomplete forms accepted from customers.

2. Less number of documents taken from customers for account opening .

3. Signatures varies of the customer on the form and the accepted documents.

4. Not communicating the customer regarding different schemes available in the account such as
CREDIT CARD , INSTRA ALERT, SWEEP IN FACILITY,

DEBIT CARD, WOMEN CARD, PHONE BANKING.

5. Incomplete information to the customer regarding different charges levied.

6. Delay in completing the formalities of sales force brought accounts.

TELLER DESK

Teller desk is available in 2 to 3 desks where cash and cheques are deposited. Two desk are available for
normal customers and one desk is available for preffered customer.

RISKS INVOLVED

1. Accepting cash less or more than specified limit mentioned in voucher.

2. Accepting mutilated notes from the depositor.

3. Error occur during feeding to the system correct account number during deposit or withdrawal.

4. Accepting duplicate Indian currency notes at teller desk.

5. Accepting cash with incomplete vouchers.

CHEQUE CLEARANCE DESK

It is a place where cheques are deposited for clearance and cheques are given for meeting operating
expenses of branch.

RISKS INVOLVED

1. Accepting cheques without banks voucher or incomplete vouchers involves risk.

2. NRI cheques are deposited only in NRI accounts.

3. Wrong entry of account number during cheques deposit .

DIRECT SELLING AGENTS

It is a place where DSA works through their sales force.

RISKS INVOLVED

1. When incomplete documents are taken from the customers.

2. When some documents are not authenticated

3. When account opening forms are not properly filled according to the customers needs

4. When CPV is not done according to banks rules

CREDIT CARDS DESK

It is a place where credit card needs as well as problems are solved.

RISKS INVOLVED

1. Card is issued without finding out properly the eligibility of the customer involves risk.
2. When card issue form is not completely filled .

3. When cards are issued without taking or seeing id proof original’

HOW TO CALCULATE OPERATIONAL RISK

Basel II has not been specific about how operational risk will be calculated. Basel II currently indicates
that operational risk will, on average, come to about 20% of the overall capital charge. Basel II provides
three methods for calculating operational risk:

 Basic indicator approach: where capital is calculated on gross income. This is a simple system
but criticised for a number of reasons, not least of which is that Basel II started at 30%, most
banks are assuming 20% and several analysts expect the final factor to be 10% to 15%. Setting
the factor seems to be driven by regulatory politics, rather than dynamically by markets;

 Standardised approach: where there is a different indicator for each line of business, e.g.
corporate finance, trading, retail banking, commercial banking, payment and settlement, retail
brokerage, asset management, etc. At heart, this is only a slight improvement on the basic
indicator approach, merely achieving a more detailed set of indicators;

 Internal measurement approach: where banks calculate their expected loss by line of business
and regulators apply an additional factor. Basel has also indicated that advanced risk transfer
techniques, especially insurance, will only be of benefit in lessening capital requirements for
those banks which use advanced measurement techniques within the internal measurement
approach

OPERATIONAL RISK INDICATORS

Most operational risks are best managed within the departments in which they arise. Information
technology professionals are best suited for addressing systems-related risks. Back office staff are best
suited to address settlement risks, etc. However, overall planning, coordination, and monitoring should be
provided by a centralized operational risk management department. This should closely coordinate with
market risk and credit risk management departments within an overall enterprise risk management
framework.

Contingencies broadly fall into two categories:

1. those that occur frequently and entail modest losses;

2. those that occur infrequently but may entail substantial losses.
Accordingly, operational risk management should combine both qualitative and quantitative techniques for
assessing risks

EXAMPLES

settlement errors in a trading operation's back office happen with sufficient regularity that they can be
modeled statistically. Other contingencies affect financial institutions infrequently and are of a non-uniform
nature, which makes modeling difficult.

include acts of terrorism, natural disasters, and trader fraud.

Qualitative techniques include

1. loss event reports,

2. management oversight,

3. employee questionnaires,

4. exit interviews,

5. management self assessment, and

6. internal audit.

Quantitative techniques

Quantitative techniques have been developed primarily for the purpose of assigning capital charges for
banks' operational risks. Much work in this field was performed by regulators developing the Basel II
accord on bank capital adequacy. Early results were reported in a (January 2001) consultative document,
which was included in a package of documents outlining the proposed Basel II accord. Extensive industry
feedback on that document lead the committee to issue a follow-up (September 2001) working paper on
operational risk. A subsequent (April 2003) consultative document made further modifications to Basel II.
The final Basel II accord was released in 2004.
Basel II allows large banks to base operational risk capital requirements on their own internal models.
This has spawned considerable independent research into methods for measuring operational risk.
Techniques have been borrowed from fields such as actuarial science and engineering reliability analysis.

Contingencies of an infrequent but potentially catastrophic nature can, to some extent, be modeled using
techniques developed for property & casualty insurance. Contingencies that arise more frequently are
more amendable to statistical analysis.

Statistical modeling requires data. For operational contingencies, two forms of data are useful:

1. data on historical loss events, and

2. data on risk indicators.

Loss events run the gamut—settlement errors, systems failures, petty fraud, customer lawsuits, etc.
Losses may be direct (as in the case of theft) or indirect (as in the case of damage to the institution's
reputation). There are three ways data on loss events can be categorized:

 event
 cause

 consequence

EXAMPLE

An event might be a mis-entered trade. the cause might be inadequate training, a systems
problem or employee fatigue. Consequences might include a market loss, fees paid to a
counterparty, a lawsuit or damage to the firm's reputation. Any event may have multiple causes
or consequences. Tracking all three dimensions of loss events facilitates the construction of event
matrices, identifying the frequency with which certain causes are associated with specific events
and consequences. Even with no further analysis, such matrices can identify for management
areas for improvement in procedures, training, staffing, etc.

Categories of Loss Events

Event-Type
Categories Activities Examples
Category Definition
(Level 2) (Level 3)
(Level 1)

Internal Fraud Loss due to acts of a type Unauthorized Transactions not reported
intended to defraud, Activity (intentional)
 misappropriate property or Transaction type
circumvent regulations, the unauthorized (with monetary
law or company policy, loss)
excluding diversity / Mismarking of position
discrimination events, which (intentional)
involves at least one internal
party. Theft and Fraud Fraud / credit fraud /
worthless deposits
Theft / extortion /
embezzlement / robbery
Misappropriation of assets
Forgery
Check kiting
Smuggling
Account take-over /
impersonation, etc.
Tax non-compliance /
evasion (willful)
Bribes / kickbacks
Insider trading (not on
firm's account)

External Fraud Losses due to acts of a type Theft and Fraud Theft / robbery
intended to defraud, Forgery
misappropriate property or Check kiting
circumvent the law, by a third
party Systems Security Hacking damage
Theft of information (with
monetary loss)

Employment Losses arising from acts Employee Compensation, benefit,

Practices and inconsistent with Relations termination issues
Workplace Safety employment, health or safety Organized labor activities
laws or agreements, from
payment of personal injury Safe Environment General liability (slips and
claims, or from diversity / falls, etc.)
discrimination events. Employee health & safety
rules and events
Workers compensation

Diversity & All discrimination types

Discrimination

Clients, Products & Losses arising from an Suitability, Fiduciary breaches /

Business Practice unintentional or negligent Disclosure & guideline violations
failure to meet a professional Fiduciary Suitability / disclosure
 obligation to specific clients issues (KYC, etc.)
(including fiduciary and Retail consumer
suitability requirements), or disclosure violations
from the nature or design of a Breach of privacy
product. Aggressive sales
Account churning
Misuse of confidential
information
Lender liability

Improper Business Antitrust

or Market Practices Improper trade / market
practice
Market manipulation
Insider trading (on firm's
account)
Unlicensed activity
Money laundering

Product Flaws Product defects

(unauthorized, etc.)
Model errors

Selection, Failure t investigate client

Sponsorship & per guidelines
Exposure Exceeding client exposure
limits

Advisory Activities Disputes over

performance or advisory
activities

Damage to Losses arising from loss or Disasters and Natural disaster losses
Physical Assets damage to physical assets Other Events Human losses from
from natural disaster or other external sources (terrorism,
events vandalism)

Business Losses arising from disruption Systems Hardware

Disruption & of business or system failures Software
Systems Failures Telecommunications
Utility outage / disruptions

Execution, Delivery Losses from failed transaction Transaction Miscommunication

& Process processing or process Capture, Execution Data entry, maintenance
Management management, from relations & Maintenance or loading error
with trade counterparties and Missed deadline or
 vendors responsibility
Model / system
misoperation
Accounting error / entity
attribution error
Other task
misperformance
Delivery failure
Collateral management
failure
Reference data
maintenance

Monitoring & Failed mandatory

Reporting reporting obligation
Inaccurate external report
(loss incurred)

Customer Intake & Client permissions /

Documentation disclaimers missed
Legal documents missing /
incomplete

Customer / Client Unapproved access given

Account to accounts
Management Incorrect client records
(loss incurred)
Negligent loss or damage
of client assets

Trade Non-client counterparty

Counterparties misperformance
Misc. non-client
counterparty disputes

Vendors & Outsourcing

Suppliers Vendor disputes

Risk indicators differ from loss events. They are not associated with specific losses, but indicate the
general level of operational risk. Examples of risk indicators a firm might track are:

 amount of overtime being performed by back-office staff,

 staffing levels,
 daily transaction volumes,
 employee turnover rates,
  systems downtime.

From a modeling standpoint, the goal is to find relationships between specific risk indicators and
corresponding rates of loss events. If such relationships can be identified, then risk indicators can be used
to identify periods of elevated operational risk.

Once operational risks have been—qualitatively or quantitatively—assessed, the next step is to somehow
manage them. Solutions may attempt to

 Avoid certain risks,

 Accept others, but attempt to mitigate their consequences, or

 Simply accept some risks as a part of doing business.

Specific techniques might include: employee training, close management oversight, segregation of duties,
purchase of insurance, employee background checks, exiting certain businesses, and the capitalization of
risks. Choice of techniques will depend upon a cost-benefit analysis.

RISK MANAGEMENT IN HDFC BANK

KNOW YOUR CUSTOMER

Know your customer (KYC) is the due diligence and bank regulation that financial institutions and other
regulated companies must perform to identify their clients and ascertain relevant information pertinent to
doing financial business with them.

Know your customer policies have becoming increasingly important globally to prevent identity theft fraud,
money laundering and terrorist financing. In a simple form these rules may equate to answering twelve
questions, but this is the tip of the iceberg and regulators now expect much more. KYC should not be
thought of as a form to be filled - it is a process to be undergone from the start of a customer relationship
to the end.

One aspect of KYC checking is to verify that the customer is not on any list of known fraudsters, terrorists
or money launderers, such as the Office of Foreign Assets Control's Specially Designated Nationals list.
This list contains thousands of entries and is updated at least monthly. As well as sanctions lists there are
lists of third party vendors that track links between persons regarded as high-risk owing to negative
reports in the media about them or in public records.

Beyond name matching, a key aspect of KYC controls is to monitor transactions of a customer against
their recorded profile, history on the customers account(s) and with peers.

ROLE OF KYC IN RISK MANAGEMENT

Board of Directors of the bank should ensure that an effective KYC programme is put in place by
establishing appropriate procedures and ensuring their effective implementation. It should cover proper
management oversight, systems and controls, segregation of duties, training and other related matters.
Responsibility should be explicitly allocated within the bank for ensuring that the bank's policies and
procedures are implemented effectively. Banks may, in consultation with their boards, devise procedures
for creating Risk Profiles of their existing and new customers and apply various Anti Money Laundering
measures keeping in view the risks involved in a transaction, account or banking/business relationship.
Banks' internal audit and compliance functions have an important role in evaluating and ensuring
adherence to the KYC policies and procedures. As a general rule, the compliance function should provide
an independent evaluation of the bank's own policies and procedures, including legal and regulatory
requirements. Banks should ensure that their audit machinery is staffed adequately with individuals who
are well-versed in such policies and procedures. Concurrent/ Internal Auditors should specifically check
and verify the application of KYC procedures at the branches and comment on the lapses observed in this
regard. The compliance in this regard may be put up before the Audit Committee of the Board on
quarterly intervals.
Banks must have an ongoing employee training programme so that the members of the staff are
adequately trained in KYC procedures. Training requirements should have different focuses for frontline
staff, compliance staff and staff dealing with new customers. It is crucial that all those concerned fully
understand the rationale behind the KYC policies and implement them consistently.

ACCEPTING CHEQUES AND STATEMENT FROM SAME BANK

With the introduction of telephone and electronic banking, increasingly accounts are being opened by
banks for customers without the need for the customer to visit the bank branch. In the case of non-face-
to-face customers, apart from applying the usual customer identification procedures, there must be
specific and adequate procedures to mitigate the higher risk involved. Certification of all the documents
presented may be insisted upon and, if necessary, additional documents may be called for. In such
cases, banks may also require the first payment to be effected through the customer's account with
another bank which, in turn, adheres to similar KYC standards. In the case of cross-border customers,
there is the additional difficulty of matching the customer with the documentation and the bank may have
to rely on third party certification/introduction. In such cases, it must be ensured that the third party is a
regulated and supervised entity and has adequate KYC systems in place.

NOT ACCEPTING CASH FOR OPENING AN ACCOUNT

HDFC bank as a risk management do not open an account with cash. Though it is not recommended by
RBI but it has been adopted by hdfc bank as their own tool to control operational [Link] deposits
involve risk regarding customer identification.

NRI CHEQUES ARE DEPOSITED IN NRI ACCOUNT ONLY

Non – Resident Indians requires to deposit cheques only in NRI accounts and no other account.

IN JOINT ACCOUNT ONE OF THE APPLICANT IN JOINT ACCOUNT SHOULD HAVE PAN CARD

In HDFC bank for opening joint account one of the applicant must have pan card otherwise bank would
refuse to open an account.
PAN CARD IS NECESSARY FOR DEPOSIT AT OR ABOVE 50000

If any account is opened with form 60 or 61 then for deposit equal or above 50000 needs have PAN card
otherwise it would not be accepted by bank for deposits.

CUSTOMER POINT VERFICATION (C.P.V)

Customer point verification is done when customer do not have any landline telephone connection .
Banks field officer will be sent in order to verify clients [Link] banker is satisfied regarding clients
identity then an account is opened . Though it is not mandatory by RBI but it have been adopted by bank
as a tool to manage risk.

FOCUS ON EFFECTIVE WORK PLACE ORGANISATION

BELIEVE IN

SMALL CHANGES LEAD LARGE IMPROVEMENT

Every successful organization have their own strategy to win the race in the competitive market. They
use some technique and methodology for smooth running of business. HDFC BANK also aquired the
Japanese technique for smooth running of work and effective work place organization.

Five ‘S’ Part of Kaizen is the technique which is used in the bank .For easy and systematic work place
and eliminating unnecessary things from the work place.

BENEFIT OF FIVE “S”

 It can be started immediately.

 Every one has to participate.
 Five “ S” is an entirely people driven initiatives.
 Brings in concept of ownership.
 All wastage are made visible.

FIVE ‘S’ Means :-

S-1 SORT SEIRI

S-2 SYSTEMATIZE SEITON

S-3 SPIC-N-SPAN SEIRO

 S-4 STANDARDIZE SEIKETSU

S-5 SUSTAIN SHITSUKE

SORT :-

It focus on eliminating unnecessary items from the work [Link] is excellent way to free up
valuable floor [Link] segregate items as per “require and wanted”.

Frequently Less
Required Frequently
Remove Required
everything from
workplace

Wanted but
not Required
Junk

(2) SYSTEMATIZE :-

Systematize is focus on efficient and effective Storage method. That means it identify, organize
and arrange [Link] largely focus on good labeling and identification [Link] :- “A place for
everything and everything in its place”.

(3) SPIC- n - SPAN :-

Spic-n-Span focuses on regular clearing and self inspection. It brings in the sense of ownership.

(4) STANDERDIZE :-
 It focus on simplification and standardization. It involve standard rules and policies. It establish
checklist to facilitates autonomous maintenance of workplace. It assign responsibility for doing various
jobs and decide on Five S frequency.

(5) SUSTAIN:-

It focuses on defining a new status and standard of organized work place. Sustain means
regular training to maintain standards developed under S-4. It brings in self- discipline and commitment
towards workplace organization.

What Kinds of Changes Should Companies Address to Improve Their Risk Management
Practices?

The first step for any organization to improving their Risk Management practices is to conduct a Risk
Management Assessment that accurately defines their current Risk Management capabilities, identifies
and priorities their deficiencies, and provides achievable recommendations and a plan for implementing
improvements. Performing this Risk Management Assessment accurately is vital because it will establish
a foundation to build upon!

Pitfalls to Avoid When Performing the Risk Management Assessment

Many organizations chose to perform a Risk Management Self-Assessment, but it is far more effective to
have an experianced independent entity perform the Risk Management Assessment because most
organization thinks they are performing Risk Management effectively, but actually, very few are.

Typical Deficiencies Identified Through Risk Management Assessments

Because no two companies are alike, the results from the Risk Management Assessments are often very
different, but below are some common deficiency identified, which represent some, not all, areas requiring
changes for an organization to improve their Risk Management practices.

No centralized Corporate Governance body exists to provide effective management or “Tone at the Top”
regarding the expectations, policies, procedures, scope, approach and action required to implement and
maintain an internal control framework needed to effectively perform Risk Management across the
organization.

An experianced Chief Risk Officer does not exist to assist the Corporate Governance body in
implementing, maintaining, monitoring, and performing continuous improvement of the internal control
framework needed to effectively perform Risk Management across the organization.

The organization does not fully understand the potential risks facing the entire organization. The Risk
Management approach is focused on a vertical or silo approach that only address potential risks within
individual areas, and does not take an organization wide approach that would consider how risks may
impact other areas across the organization.
BANKS TO BE ENCOURAGEDTO IMPROVE OPERATIONAL RISK MANAGEMENT

To encourage banks to improve their operational risk management systems, the new Basel Accord also
will set criteria for implementing more advanced approaches to operational risk. Such approaches are
based on banks' internal calculations of the probabilities of operational risk events occurring and the
average losses from those events. The use of these approaches will generally result in a reduction of the
operational risk capital requirement, as is currently done for market risk capital requirements and is
proposed for credit risk capital requirements. These criteria and the new capital regulations will require
bank supervisors to conduct evaluations of operational risk management systems on a regular basis. As
noted by BCBS, these supervisory evaluations would be complemented greatly by public disclosure
sufficient to allow independent assessments by market participants.

Conclusion

Operational risk is intrinsic to financial institutions and thus should be an important component of
their firm-wide risk management systems. However, operational risk is harder to quantify and model than
market and credit risks. Over the past few years, improvements in management information systems and
computing technology have opened the way for improved operational risk measurement and
management. Over the coming few years, financial institutions and their regulators will continue to
develop their approaches for operational risk management and capital budgeting
 7 P’S OF MARKETING FOR HDFC BANK

PRODUCT MIX

1. DEPOSITS

HDFC Bank offers wide variety of Deposit Products to suit the customers requirements. HDFC Bank
currently has an nationwide network of 1412 Branches and 3295 ATM's in
528 Indian towns and cities.

Savings Account: HDFC Bank offers a power packed Savings Account with a host of convenient
features and banking channels to transact through.

Senior Citizen Services: The Senior Citizen Services from HDFC Bank have several advantages that
are tailored to bring more convenience and enjoyment in one’s life.

Kids advantage account: It's really important to help children learn the value of finances and money
management at an early age. Banking is a serious business, but HDFC makes banking a pleasure and at
the same time children learn how to manage their personal finances.

Fixed Deposits: Safety, Flexibility, Liquidity and Returns!!!! A combination of unbeatable features of the
Fixed Deposit from HDFC Bank.

Recurring Deposits: Through HDFC Bank Recurring Deposit one can invest small amounts of money
every month that ends up with a large saving on maturity. So the customers enjoy twin advantages-
affordability and higher earnings.
HDFC Bank Salary Account: is a benefit-rich payroll account for Employers and Employees. As an
organization, one can opt for the Salary Accounts to enable easy disbursements of salaries and enjoy
numerous other benefits too.

2. INVESTMENTS

Along with Deposit products and Loan offerings, HDFC Bank assists in managing the finances by
providing various investment options such as:

 HDFC Bank Tax Saving Bonds

 Government of India Bonds
 Investment in Mutual Funds
 Initial Public Offers by Corporate
 Investment in "Pure Gold"
 Foreign Exchange Services

3. ANYWHERE BANKING

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over 1412
branches spread over 528 cities across India. All branches are linked on an online real-time basis.
Customers in over 500 locations are also serviced through Telephone Banking. The Bank's expansion
plans take into account the need to have a presence in all major industrial and commercial centres where
its corporate customers are located as well as the need to build a strong retail customer base for both
deposits and loan products. Being a clearing/settlement bank to various leading stock exchanges, the
Bank has branches in the centres where the NSE/BSE

have a strong and active member base.

The Bank also has a network of about over 3295 networked ATMs across these cities. Moreover, HDFC
Bank's ATM network can be accessed by all domestic and international Visa/MasterCard, Visa
Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.

4. LOANS

a) Home Loans

b) Personal Loans

c) Car Loans

d) Two Wheeler Loans

e) Commercial Vehicle Loans

f) Loans against Securities

g) Farm Equipment Loans

h) Construction Equipment Loans

i) Office Equipment Loans

j) Medical Equipment Loans

5. CARDS

a) Credit Card

b) Debit cum ATM Card

c) Travel Card

6. DEMAT SERVICES

HDFC Bank Demat Services boasts of an ever-growing customer base of over 7 lacs account holders. In
their continuous endeavor to offer best of the class services to our customers we offer the following
features:

 Digitally signed transaction statement by e-mail.

 Corporate benefit tracking.
 e-Instruction facility - facility to transfer securities 24 hours a day, 7 days a week through Internet
Interactive Voice Response (IVR) at a lower cost.
 Dedicated specially trained customer care executives at their call centre, to handle all queries.

7. MOBILE BANKING

With HDFC Bank, banking is no longer what it used to be. HDFC Bank offers Mobile Banking facility to all
its Bank, Credit Card and Demat customers. HDFC Bank Mobile Banking enables you to bank while being
on the move.
8. NRI SERVICES

ONLINE MONEY TRANSFER facility available to NRIs worldwide

PRICING MIX

The pricing decisions or the decisions related to interest and fee or commission charged by banks are
found instrumental in motivating or influencing the target market.

The RBI and the IBA are concerned with regulations. The rate of interest is regulated by the RBI and
other charges are controlled by IBA.

The pricing policy of a bank is considered important for raising the number of customers’ vis-à-vis the
accretion of deposits. Also the quality of service provided has direct relationship with the fees charged.
Thus while deciding the price mix customer services rank the top position.

The banking organizations are required to frame two- fold strategies. First, the strategy is concerned with
interest and fee charged and the second strategy is related to the interest paid. Since both the strategies
throw a vice- versa impact, it is important that banks attempt to establish a correlation between two. It is
essential that both the buyers as well as the sellers have feeling of winning.

Pricing Bank Products Starts With Three Basic Questions.

1. What rate does the bank need to meet its financial objectives?

2. What is the market rate for the core product?

3. What would the bank have to do to sales and operations to make its rates the most competitive
in its market?

PLACE

This component of marketing mix is related to the offering of services. The services are sold through the
branches.

The 2 important decision making areas are: making available the promised services to the ultimate users
and selecting a suitable place for bank branches.

The number of branches OF HDFC:.1412 branches spread over 528 cities across India.

Why the particular place is selected as branch?

 The selection of a suitable place for the establishment of a branch is significant with
 the view point of making place accessible.

 The safety and security provisions

 Convenient to both the parties, such as the users and the bankers
 Infrastructure facility
 Near to station and located in Civil Lines
 Market coverage

PROMOTION MIX

 Advertising: Television, radio, movies, theatres

 Print media: hoardings, newspaper, magazines
 Publicity: road shows, campus visits, sandwich man, Sponsorship
 Sales promotion: gifts, discount and commission, incentives,etc.
 Personal selling: Cross-sale (selling at competitors place),personalized service
 Telemarketing:

PROCESS

Flow of activities: all the major activities of HDFC banks follow RBI guidelines. There has to be
adherence to certain rules and principles in the banking operations. The activities have been segregated
into various departments accordingly.

Standardization: HDFC Bank has got standardized procedures got typical transactions. In fact not only
all the branches of a single-bank, but all the banks have some standardization in them. This is because of
the rules they are subject to. Besides this, each of the banks has its standard forms, documentations etc.
Standardization saves a lot of time behind individual transaction.

Customization: There are specialty counters at each branch to deal with customers of a particular
scheme. Besides this the customers can select their deposit period among the available alternatives.
Number of steps: numbers of steps are usually specified and a specific pattern is followed to minimize
time taken.

Simplicity: in HDFC Bank various functions are segregated. Separate counters exist with clear
indication. Thus a customer wanting to deposit money goes to ‘deposits’ counter and does not mingle
elsewhere. This makes procedures not only simple but consume less time. Besides instruction boards in
national boards in national and regional language help the customers further.

PHYSICAL EVIDENCES

Physical evidence is the material part of a service. Strictly speaking there are no physical attributes to a
service, so a consumer tends to rely on material clues. There are many examples of physical evidence,
including some of the following:

 Internet/web pages
 Paperwork
 Brochures
 Furnishings
 Business cards
 The building itself (such as prestigious offices or scenic headquarters)

The physical evidences also include signage, reports, punch lines, other tangibles, employee’s dress
code etc.

Signage: each and every bank has its logo by which a person can identify the company. Thus such
signages are significant for creating visualization and corporate identity.

Financial reports: The Company’s financial reports are issued to the customers to emphasis or
credibility.

Tangibles: bank gives pens, writing pads to the internal customers. Even the passbooks, chequebooks,
etc reduce the inherent intangibility of services.

Punch lines: punch lines or the corporate statement depict the philosophy and attitude of the bank.
Banks have influential punch lines to attract the customers.
Employee’s dress code: HDFC Bank follows a formal dress code for their internal customers. This
helps the customers to feel the ease and comfort.

THE PEOPLE

All people directly or indirectly involved in the consumption of banking services are an important part of
the extended marketing mix.

Knowledge Workers, Employees, Management and other Consumers often add significant value to the
total product or service offering.

It is the employees of a bank which represent the organisation to its customers.

In a bank organization, employees are essentially the contact personnel with customer. Therefore, an
employee plays an important role in the marketing operations of a service organisation.

To realize its potential in bank marketing, HDFC becomes conscious in its potential in internal marketing -
the attraction, development, motivation and retention of qualified employee-customers through need
meeting job-products. Internal marketing paves way for external marketing of services. In internal
marketing a variety of activities are used internally in an active, marketing like manner and in a
coordinated way. The starting point in internal marketing is that the employees are the first internal market
for the organization.

The basic objective of internal marketing is to develop motivated and customer conscious employees.

A service company can be only as good as its people. A service is a performance and it is usually difficult
to separate the performance from the people.

If the people don’t meet customers' expectations, then neither does the service. Therefore, investing in
people quality in service business means investing in product quality.
SWOT ANALYSIS OF HDFC BANK

STRENGTH WEAKNESSES

 Right strategy for the right

products.  Some gaps in product range for
certain sectors.
 Superior customer service
vs. competitors.  Customer service staff needs
training.
 Great Brand Image
 Management cover insufficient.
 High degree of customer
satisfaction. 

 Good place to work

 Lower response time with

efficient and effective
service.
  Dedicated workforce aiming
at making a long-term
career in the field.

Opportunities Threats

 Profit margins can be good.  Legislation could impact.

 Could extend to overseas  Great risk involved

broadly.  Very high competition prevailing
 Could seek better customer in the industry.
deals.  Vulnerable to reactive
attack by major competitors
 Fast-track career development
opportunities on an industry-  Lack of infrastructure in rural
wide basis. areas could constrain
investment.
 An applied research centre to
create opportunities for  High volume/low cost market is
developing techniques to intensely competitive.
provide added-value services.
 RECENT MARKETING STRATEGIES USED BY HDFC BANK

For Resident Indians

Offers for Existing Customers

Celebrations come Early with HDFC Bank - Swipe More Earn More offer

Shop with your HDFC Bank Credit Card at least 7 times between 1st July 2009 and 16th August 2009 &
get rewarded on each additional swipe.

Exclusive offer from IndiGo Airlines for HDFC Bank Credit Cardholders

Take off With Flat 15% Discount on IndiGo airlines base fare.
Log on to [Link] to book your tickets
Use coupon code " FLYHDFC2"

Fabulous offer from Shoppers Stop for HDFC Bank Credit Cardholders.

Shop on [Link] with HDFC Bank Cr Card & enjoy 7.5% cashback
Exclusive offer for HDFC Bank Titanium Credit Card

Enjoy a lavish feast at your favourite restaurant and get rewarded like never before.
Earn double reward points every time you swipe your HDFC Bank Titanium Credit Card at any restaurant
in India.
Just ask for an HDFC Bank chargeslip.

7.5% cashback* @ [Link] for HDFC Bank MasterCard Credit Cardholders

Exclusive offer for HDFC Bank Titanium Credit Card

Enjoy a lavish feast at your favourite restaurant and get rewarded like never before.
Earn double reward points every time you swipe your HDFC Bank Titanium Credit Card at any restaurant
in India.
Just ask for an HDFC Bank chargeslip.

100% Luxury, 25% off on 'The Golden Chariot'

HDFC Bank now offers a 25% discount on selected travel packages available on The Golden Chariot, a
luxury train that threads its way through the majestic landscapes of Karnataka.
Log on to [Link] for online booking

Exclusive offer for HDFC Bank Woman's Gold Credit Card

Binge and earn double reward points every time you swipe your HDFC Bank Woman's Gold Credit Card
at any restaurant in India.

Reliance Data Card Offer for HDFC Bank Credit Card customers

Reliance Netconnect, in association with HDFC Bank, brings you an exclusive offer that gives you the
power to access the internet anytime, anywhere

HDFC Bank Gold Credit Card

5% Cash back on domestic air ticket bookings through domestic airline websites*
5% Cash back on rail ticket bookings through [Link]

Free Airmiles across leading airlines on redemption of reward points.

* Conditions apply

Exclusive offers for HDFC Bank Corporate Credit Cardholders

Exclusive offers for HDFC Bank Business Credit Cardholders

Reduced Rate of Interest Offer

This exclusive offer helps you save as you spend. You save on interest charged on balance carried
forward.
Go ahead and use your HDFC Bank Credit Card for all purchases and get the maximum benefit from this
RRI offer.

18% discount on online purchases on [Link]

Offers at FNP stores:

10% off on purchases upto Rs.1000/-

12.5% off on purchases between Rs.1001/- Rs.1500/-

15% off on purchases above Rs.1501/-

Validity - January 2009 to 31st July 2009

Valid on Debit Cards only.

Features

15% discount on Diagnostics.

15% discount on Diagnostics.

15% Discount on Apollo Health Edge Card issued by the Clinic. Cost price Rs.749/-

Validity - January 2009 to 31st December 2009

Upto 40% discount on packages.

Now, with your HDFC BANK Credit card Get an amazing 15% Discount* on booking a ticket on IndiGo

Offer Details

 Flat 15% Discount on the base fare.

 Tickets have to be booked through [Link].

 Use the coupon code " FLYHDFC2" while booking the ticket to avail discount.

 The offer is valid on all HDFC Bank Credit Cards.

Offer Valid from 1st July - 31st August 09.

Five irresistible deals you can avail of by simply using your HDFC Bank Visa Debit card to shop.

Big Bazaar

2 [Link] sugar at Big Bazaar on purchases worth Rs.1000* or more!

All you need to do is use your HDFC Bank Visa Debit card to pay.

Pizza Hut

Save up to 32%* on any king size meal at Pizza Hut

Just swipe your HDFC Bank Visa Debit Card.

 Cafe Coffee Day

Get a free* cappuccino on purchase worth Rs.125 at Café Coffee Day.

Just make sure that you pay with your HDFC Bank Visa Debit card.

PVR Cinemas

Popcorn & Cola free* on purchase of two tickets at PVR Cinemas

Movies become more fun when you pay with your HDFC Bank Visa Debit Card.

Visa Bill Pay

Get 5% off on mobile/telephone/electricity bills paid through HDFC Bank Visa Debit Card on
[Link]/hdfc

HDFC Bank Meritus scholarship program

The HDFC Bank Meritus Scholarships is an initiative by which we intend to bring more opportunities to
talented and deserving students.
We plan to give out over 5000 Scholarships ranging from Rs.2,500 to Rs.10 Lakh amounting to Rs.1.5 crore, to
students from the 4th to the 9th standard.

A special panel of judges will evaluate the final shortlisted participants and decide the winners.

Evaluation will be based on the following parameters:

a. Academics: Last 2 years performance in school
b. Extracurricular activities and Sports: Competitions won in intra-school, inter-school, state level and
national level
c. Final written tests

All these schemes are being used by HDFC Bank as an acquisition and retention strategy.

CHAPTER 3 REVIEW OF LITERATURE

MARKETING STRATEGIES

Customer-centric Banking

A Key-Note Address
By
Shri P.S. Shenoy
Chairman & Managing Director
Bank of Baroda

In recent years, the banking industry around the world has been undergoing a rapid transformation. In
India also, the wave of deregulation of early 1990s has created heightened competition and greater risk
for banks and other financial intermediaries. The cross-border flows and entry of new players and
products have forced banks to adjust the product-mix and undertake rapid changes in their processes and
operations to remain competitive. The deepening of technology has facilitated better tracking and
fulfillment of commitments, multiple delivery channels for customers and faster resolution of
miscoordinations.
Unlike in the past, the banks today are market driven and market responsive. The top concern in the mind
of every bank's CEO is increasing or at least maintaining the market share in every line of business
against the backdrop of heightened competition. With the entry of new players and multiple channels,
customers (both corporate and retail) have become more discerning and less "loyal" to banks. This
makes it imperative that banks provide best possible products and services to ensure customer
satisfaction. To address the challenge of retention of customers, there have been active efforts in the
banking circles to switch over to customer-centric business model. The success of such a model depends
upon the approach adopted by banks with respect to customer data management and customer
relationship management.

Over the years, Indian banks have expanded to cover a large geographic & functional area to meet the
developmental needs. They have been managing a world of information about customers - their profiles,
location, etc. They have a close relationship with their customers and a good knowledge of their needs,
requirements and cash positions. Though this offers them a unique advantage, they face a fundamental
problem.

Furthermore, banks need to have very strong in-house research and market intelligence units in order to
face the future challenges of competition, especially customer retention.

Customer-centricity also implies increasing investment in technology.

It must be noted, however, that customer-centric banking also involves many risks. The banking industry
world over is being thrust into a wild new world of privacy controversy. The banks need to set up serious
governance systems for privacy risk management.

New dimensions in marketing strategy

Dhimant Bhatt

Mumbai , Sept.30

THE race to adopt unconventional modes of marketing has acquired new dimensions.

Companies are no longer looking at direct sales vis-a-vis cross brand associations but are keener on
acquiring databases of high networth clientele of lifestyle products with an eye on strategic sales pitches
over a period of time.

Leading financial institutions and bankers such as ICICI have also begun to adopt similar marketing
strategy. When India's leading customised jewellery designer, Ms Poonam Soni, decided to host a major
show in Mumbai for unveiling her new collection called "Woven Hues" for a select audience, she found
the ICICI Bank team more than eager to be associated with her brand Signature Line.

The ICICI Bank's target was the high networth individuals who attended the show in Mumbai on July 10.
Ms Poonam Soni said, "ICICI definitely got their share of branding without interfering with our logistics.
Apart from the fact that my clientele is very niche, the presence of former Miss Universe Lara Dutta and
lots of celebrities aptly met their marketing requirement."

"For the bank, the mere recall value created amongst its target audience vis-a-vis the invitation and the
venue backdrop and the opportunity to network served its marketing agenda," she added.
Financial Services Industry

Calculating the markup: when times are tough, bankers need to review their pricing
practices to maximize the profitability of their existing customers. Here is a list of
initiatives

The current financial crisis is arguably the worst most banking managers have experienced in their
professional lives. But remember that markets and industries are redefined in rimes of shake ups, not in
rimes of stability.

The current crisis should actually have a positive impact on those who develop the right strategies and
take the right actions.

From a broader perspective, banks will be forced to review their business models. "pull back" from riskier
endeavors and refocus on optimizing their core businesses. Above all, managers must maximize the
profitability of their current customers. This requires some fundamental changes in banks' pricing and
marketing practices. This article lists some of the most important initiatives banks should undertake.

 Re-establish trust and improve price image.

 Second, banks should focus on rewarding customers for their business and loyalty.

 Increase the profitability of portfolios by effectively managing discounts.

* Understand what drives customers' sensitivity to prices for your products and develop like-minded
"pricing segments." Usually, the most important drivers include the competitive intensity in the specific
area where the customer is located, customer size and behavioral characteristics, and any value-added
services included in the product offering.

* Determine how each of these drivers impacts customer sensitivity to prices. In other words, what is the
elasticity effect of each driver? There are many methods to measure this, from pragmatic approaches
based on structured expert judgment to customer surveys assessing elasticities using direct and indirect
price questioning.
Banking

Lower risk = greater customer value

HDFC Bank’s mission to reduce credit card related risks and fraud allows it to provide better value to its
customers. Soutiman Das Gupta has the details

HDFC Bank’s mission to reduce credit card related risks and fraud allows it to provide better value to its
customers. Soutiman Das Gupta has the details

HDFC Bank’s move to reduce fraud related to credit cards was unique and
intelligent. It was unique because it was the first bank in the country to
implement a Proactive Risk Management (PRM) solution, and intelligent
because it created a truly win-win situation for its customers and the
organisation’s business.

We presented HDFC Bank with the Intelligent Enterprise Award 2005

in the Banking category at the Technology Senate 2005, and C N
Ram, Head, Information Technology, HDFC Bank, accepted the
trophy.

C N Ram
Innovation Provides The Edge
Head, IT HDFC Bank

“Banks have long been plagued by fraudulent use of credit cards. There have been numerous instances
of illegal transactions in many banks worldwide
which have resulted in loss of money and customer satisfaction,” explains [Link] got the management
at HDFC Bank looking for means to counter the menace. In 2004, the bank decided to implement a PRM
tool for its needs.

The Needs Are Highlighted

The bank looked for a number of benefits from the PRM solution.

The primary objective was to reduce credit card related risks and fraudulent practices in the
bank. The other objective was to provide more value to customers by sending an alert every
time a suspect transaction was made. “This means that whenever there was a purchase of
high-value, or a transaction was carried out at a risk-prone merchant location, the
cardholder would be called on the phone or sent an e-mail, depending on the perceived risk,
to confirm the authenticity of the transaction,” explains Ram.

HDFC Bank gets best retail bank award

PTI | September 16, 2008 | 13:50 IST

HDFC bank has won the Asian Banker's Best Retail Bank in India 2008 award for the second year in a
row beating a host of other competitors in Asia Pacific, Gulf Cooperation council and Central Asia on a
range of parameters.

The parameters included perception among peers and in the marketplace, annual financial performance,
sustainability and transparency in strategy, ethicality, sales capability, risk management, processes,
technology and efficiency, penetration and efficiency of distribution channels, and people's skills,
according to an Asian Banker press release in Chennai on Tuesday.

HDFC Bank scored particularly high on risk management, sales capability and people skills.
"HDFC Bank leads all competitors in the South Asian retail financial services industry on a range of
measures-particularly in Annual Financial Performance and Sustainability of business," the magazine said
in its September 2008 special edition.

The Survey also recognised HDFC Bank for it's, as the magazine put it, "strengthened direct sales
capabilities and improved cross selling, which resulted in a spike in second product penetration amongst
liability customers."

The Asian Bankers Excellence in Retail financial Services awards are Asia's most prestigious banking
industry awards programme and are held in high regard by the financial services sector.

The awards were based on a detailed evaluation of banks on a wide-ranging performance assessment
conducted by a distinguished panel of international banking experts.

According to the Asian Banker,the annual Awards recognise the banks that have been simplifying their
processes and launching innovative products.

[Link]'s Brand Watch: How Different From Competitors? - A sneak peek at the new
HDFC Bank ad campaign

gg
 H D ow ifferent F C rom ompetitors ?
A sneak peek at HDFC's 'We understand your world' campaign
e
By HETAL ADESARA
(Posted on 21 February 2004)

No longer a recluse in the world of advertising, Indian financial services are out there in full force to grab
customer attention offering rosy policies and even rosier dreams. On the other hand, what the agency
'wallas' have to keep in mind is to refrain from making any tall claims in the ads they churn out for these
financial bodies... which in turn leaves them with a very limited milieu to work on. And what with all the
clutter, one can hardly differentiate one ad from the other these days as far as this particular sector is
concerned. So what is the solution? As always, the clichéd word "different" springs to mind.

And different it is... The recently launched ad campaigns across the media for HDFC Bank has sure
caught on with people. When one thinks about the banks which advertise in the media, the first (and
maybe only) name that comes to mind is that of ICICI and its larger than life brand ambassador - Amitabh
Bachchan. Well, nothing as flamboyant as that in the case of HDFC; though whatever has been done has
been noticed, to say the least!
 The 'Don't Wait' hoardings of HDFC Bank seen all over
the city

With a 360 degrees approach in advertising which covers television, radio, print and outdoor;
HDFC's ads with the tag line "We understand your world;" conceptualised by Euro RSCG are
surely making their presence felt. The message is clear and the consumer connect is ubiquitous.

[Link]'s Media, Advertising, Marketing Watch

HDFC Standard Life is Rajasthan Royals associate sponsor

[Link] Team

(15 April 2009 11:30 pm)

NEW DELHI: Emerging Media-owned IPL franchise Rajasthan Royals has signed HDFC Standard Life as
its associate sponsor and insurance partner. HDFC Standard Life executive vice president and head-
Marketing Sanjay Tripathy said, “Though branded as ‘underdogs’ in the last IPL, the players believed in
themselves and performed to their potential and eventually emerged as champions. This spirit goes well
with our brand thought Sar utha ke jiyo."
In addition to the sponsorship of the Rajasthan Royals, HDFC Standard Life will also be initiating the Sar
utha ke jiyo – most valuable player of the match award. The Rajasthan Royals coaching staff including
Shane Warne will select the 'most valuable player' of the day from their team who will receive a cash
incentive of $1000 for each match.“ We are happy to be associated with a brand that is one of India’s
leading private life insurance players as the associate sponsors and insurance partner. We look forward
to a fruitful relationship with them,” added film star and co-owner, Shilpa Shetty Rajasthan Royals.

HDFC Standard Life Unveils `Sar Utha Ke Jiyo,` a Music Album that embodies and
propagates `Self Respect`

Released on: October 15, 2008, 1:36 am

Press Release Author: HDFC Standard Life
Industry: Financial

Press Release Summary: HDFC Standard life launch new album 'Sar Utha Ke Jiyo', the
album epitomizes 'Self Respect' and 'Self Reliance', as strong virtues to lead life
at one's own terms. The album's six songs comprise of two original compositions and
four compilations symbolizing 'Self Respect' and 'Self Reliance'.

HDFC Bank plans marketing drive in smaller towns

Our Bureau Mumbai, Nov. 4

HDFC Bank has launched neighbourhood marketing initiatives in tier-two cities and towns to create
awareness about its various products and services.

Speaking to Business Line, Mr Ajay Kelkar, Head, Marketing, HDFC Bank, said that these initiatives are
especially targeted at those consumers who are not aware about the bank's various valueadded services
such as direct banking facilities.

"We are going to demonstrate the advantages of net banking and mobile banking, as these concepts are
relatively new to people living in smaller towns and cities," said Mr Kelkar.
The bank has also launched another initiative called Business Ki Baten, which is targeted at areas where
the bulk of the population comprises small businessmen. Mr Kelkar said that the bank would get experts
to talk on a number of issues such as value-add tax and sales tax.

Promotions to mark HDFC Bank strategy

Ajita Shashidhar

Chennai , Jan. 13

FROM doing cross-selling exercises to organising school-level painting competitions, promotional

activities are going to be the main focus of HDFC Bank's marketing strategy this year.

Speaking to Business Line, Mr Ajay Kelkar, Vice-President and Head, Marketing, HDFC Bank, said, "We
are looking at positioning HDFC as a one-stop financial supermarket and the objective of the promos is
not just acquisition of new customers, but we are also looking at creating product awareness, enhancing
usage and also providing value-adds to our customers to reward them for their faith and loyalty."

The first promo this year is titled Wheels Of Fortune, which will be on during the month of January. "This
promo is targeted at all those customers who avail a personal loan, car or two-wheeler loan. There will be
a lucky draw at the end of the promo and the winners would get exotic prizes."

Also on the cards is a school-level painting competition on wildlife across cities to promote the Kids
Advantage account.

The next step to these mass promos, according to Mr Kelkar, would be more personalised promos. "We
plan to send personalised mailers about our various products to all those we come in contact with during
these mass promotions."
The bank has also tied up with Business Today, to sponsor 10,000 copies of the magazine in each metro.
The cover of the sponsored copies would be the December 2003 issue of Business Today, which rated
HDFC Bank as the best bank in the country. On the opposite side, would be an advertorial which would
talk about HDFC as a `one-stop financial supermarket'. "These copies would be circulated among top
corporates and our high-profile customers," said Mr Kelkar.

“HDFC Bank is possibly the only bank in India, and one of the very few in Asia, to have embarked
on a data-led marketing analytics campaigns initiative, using marketing automation technology
provided by Unica. Through this tool, we have been able to intelligently use the 4-5 terabytes of
customer data available in its warehouse. We have set up a team to conduct marketing campaigns
in a scientific manner using customer data, usage patterns, preferences, lifecycle, etc, the bank
also conducts event-based marketing.”
Ajay Kelkar, Vice-President and Head – Marketing, HDFC Bank

HDFC Bank devises novel strategy to promote debit cards  

Raghu Mohan  

Mumbai, July 26: HDFC Bank has embarked on an innovative strategy to promote the use of debit-cards.
It has launched `Visa Magic Moments' - you will get a refund on any purchase made on a HDFC Bank
debit-card during randomly picked up five-minute periods during the day. This offering on the HDFC Bank
- Visa International `Electron' debit-card is the best ever that has been extended to customers. The deal
will be on from July 24 to September 24.
Again, there will be 12 randomly picked five-minute durations during which you could swing a
refund. There is a small catch though: HDFC Bank will call you up if you are the selected
customer, and you will then have to answer a question correctly. Says HDFC Bank's country-
head (marketing & retail assets), Neeraj Swaroop, "Debit-card holders can benefit from `Visa
Magic Moments' promotion.

HDFC: Strong financial franchise

Suresh Krishnamurthy

ALL credit to the HDFC group that made the most of the opportunities that emerged in the domestic
financial sector over the past decade. Creating many on the way. HDFC has made a mark, either directly
or through its subsidiaries, in conventional banking, asset management and insurance.

An environment of financial sector deregulation that facilitated the delivery of banking and related services
to the retail sector, in particular the affluent section of the Indian households, played no small part in the
growth of HDFC group. The magnitude and quality of success enjoyed by HDFC is, however, mainly
attributable to its strategies.

Two factors have played a key role: Brand building and reliance on technology. The strength of the HDFC
brand built mainly around its retail home finance business gave the company a head start when it forayed
into other segments of the financial sector. An early start in the use of technology and the rapid pace it
was absorbed has helped it offer better services, well ahead of competition.
OPERATIONAL RISK MANAGEMENT

Risk Management is the identification, assessment, and prioritization of risks followed by coordinated
and economical application of resources to minimize, monitor, and control the probability and/or
impact of unfortunate events. Risks can come from uncertainty in financial markets, project failures,
legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an
adversary.
Operational Risk Management: An Emergent Industry

Kimberly D. Krawiec, University of North Carolina School of Law

Financial institutions have always been exposed to operational risk – the risk of loss from faulty internal
controls, human error or misconduct, external events, or legal liability. Only in the past decade, however,
has operational risk risen to claim a central role in risk management within financial institutions, taking its
place alongside market and credit risk as a hazard that financial institutions, regulators, and academics
seriously study, model, and attempt to control and quantify. This newfound prominence is reflected in the
Basel II capital accord, in numerous books and articles on operational risk, and in the emergence of a
rapidly expanding operational risk management profession that is expected to grow at a compound
annual rate of 5.5%, from US$992 million in 2006 to US$1.16 billion in 2009.

This increased emphasis on operational risk management corresponds to a much wider trend of
“responsive” or “enforced self-” regulation, both in the United States and internationally, that attaches
significant importance to the internal control and compliance mechanisms of business and financial
institutions. Driven by legal changes and well-organized compliance industries that include lawyers,
accountants, consultants, in-house compliance and human resources personnel, risk management
experts, and workplace diversity trainers (hereafter, “legal intermediaries”), internal compliance
expenditures have increased substantially throughout the past decade, assuming an ever-greater role in
legal liability determinations and organizational decision-making, and consuming an ever-greater portion
of corporate and financial institution budgets.

Managing operational risks

Operational risk management is not about placing obstacles in the path of business initiatives. It is simply
about formally looking for and quantifying the risks, says V. Shankar

There is no reward without risk. The conduct of any business demands the acceptance of risk. While the
main risks are taken with the expectation of appropriate rewards, often there are a host of hidden or
implicit risks that vitiate the risk-reward equation.

Financial businesses, particularly those involving managing other persons' money, face a host of risks.
Predominant among them are market and credit risks, but these are quite well understood and there are
accepted procedures to measure and mitigate them. Operational risk is defined by the Basel Committee
on Banking Supervision as "the risk of loss, resulting from inadequate or failed internal processes, people
or systems, or from external events.'' In other words, take away market, counterparty, credit and such
other risks, what you have left is operations risk.

This somewhat abstruse definition can be clarified with examples. Some common operational risks are
those of incorrect transaction processing (Account 1 is credited instead of Account 2); failure of systems
or technology (An ATM does not work because the link to the host computer has failed) and employee or
customer fraud. None of these is in any way linked to the process of managing money, but they are all
operations supporting that goal.

Operational risks are relatively less understood, and rarely are there formal processes to recognise,
quantify and control them. A reason is the relative discomfort of CEOs with the operations function, a
subject covered in a previous article (The Hindu dated October 20, 2003). Another is that operations per
se has long been a cottage industry activity, whether carried out externally, or within the financial
enterprise. It is only recently that operations has started to gain acceptance as a mainstream and critical
function and be recognised as one on which customer satisfaction ultimately depends. Partly this
development has been led by large private sector banks such as HDFC Bank and ICICI Bank which have
made a beginning in the area of operations risk management. This in turn is a result of BPOs with
overseas clients, all of which are contractually required to show that they manage and mitigate risk.

Risk Management: The Elusive “Risk Culture”

By Bill Sharon
SORMS

The “Imaginable And The Unimaginable” As A Basis For Risk Management

At the recent World Economic Forum in Davos, Switzerland, William J. Parrett, CEO of Deloitte Touche
Tohmatsu, lamented the narrow focus of risk management efforts to the area of financial risk. He went on
to state that there were physical risks that were not being adequately addressed; the primary example he
cited was the impact of a potential bird flu pandemic. A white paper referenced in the press release on the
Deloitte site goes on to encourage those involved in risk management to “imagine the unimaginable”
when assessing potential risk to an organization. The key requirement for the success of this effort is the
fostering of "a holistic and integrated risk management culture".
Op risk professionals must revisit their attitude to qualitative data. John Kiddy,
CEO of Chase Cooper, says we must stop thinking of it as ‘just’ qualitative data
and view it as a precious source of intellectual capital.

Most operational risk professionals are aware that there is far more so-called qualitative data available
through risk and control assessments (RCSA) than reliable quantitative data.

'So-called’ because much of the data collected through RCSA is not truly qualitative at all. It is most often
an estimation of quantitative statistics such as expected frequency of an event, expected severity, and
information about the design and performance of controls. The analysis of this qualitative data by
quantitative methods represents one of the biggest untapped opportunities for the industry, and
particularly for op risk professionals.

Modelling techniques are not only relevant for capital charge calculation purposes, but are valuable for all
institutions in understanding their business and generating business benefits.

As James Reason pointed out in Human Error: Models and Management, the ‘person’ approach seeks to
control errors (risk events) by reducing unwanted variability in human behaviour, by creating procedures
and applying sanctions to those that fail to carry them out. This is augmented by the ‘legal’ approach,
which seeks by regulation to make individuals responsible for systemic breakdowns. Sarbanes-Oxley

requirements are the embodiment of the ‘person’ and ‘legal’ approaches – the idea that bad things only
happen to bad people, what psychologists call the ‘just world hypothesis’. This might be emotionally
appealing, but does it enhance the safety of investors’ money?

Operational Risk Management and the Financial Services Sector

It's no surprise that financial institutions are assuming a leadership role when it comes to addressing
cyber security issues and protecting customers. After all, increases in phishing incidents and other forms
of online fraud are dramatically heightening consumer concerns about the safety of the Internet for
conducting financial transactions. At the same time, lost and stolen data, including personally identifying
consumer information, continues to add to consumer fears and concerns. This article examines some of
today's leading threats and vulnerabilities, the potential crisis in consumer confidence, and the steps that
the financial services sector is taking to safeguard information and manage cyber security risks.
 Rethinking Risk Management
By Sohini Bagchi
Bangalore, Feb 13, 2006 1221 hrs IST

Risk management is fast becoming a key facet of concern for today's enterprise. According to a recent
Forrester study, nearly 62% CIOs globally have already focused on enterprise risk management.
CXOtoday finds out how market dynamics are forcing a different approach to risk management in
business. They see it more as an opportunity to compete in the marketplace, rather than as a threat, as
was viewed earlier and are increasingly finding innovative ways to engage IT for successful risk
management." On an effective risk management strategy, Sunil Chandiramani, Partner, Ernst & Young,
explained: "Firstly, the CIO and the IT team should use their discretion to identify the risks involved in the
company, based on their current business objectives. Once the potential risks are decided, it is essential
to frame a policy." Herein comes the importance of an expert consultant or an implementation partner
who can contribute to the process in a more effective way. On the many concerns, he underscored that
the CIO has to remember that it is not technology alone, rather an amalgamation of people, processes
and technology that leads to proactive risk management.. Further, the CIO should take a positive
approach in learning and evaluating from the risk management strategies. He feels that with 9/11 and
many other recent threats in global business, the scope of risk management has grown across verticals.
With HDFC Bank recently going live with SunGard's Adaptiv Market Risk for consolidated risk
management, there is little doubt that IT-managers in BFSI are desperately investing a lot on risk
management solution to provide centralized processing risk management operations. Sudhir Joshi,
Treasurer, HDFC Bank explained that the bank's role in money market, debt securities, foreign exchange
and derivatives required a solution to meet front-to-back processing and risk management needs. This
compelled the bank to go for an enterprise-wide market risk management and derivative processing for a
major part of its treasury businesses

HIGHLIGHTS FROM THE AIRMIC CONFERENCE

Various items arising from one of the main events in the risk management year.

AIRMIC publishes research into risk appetite

A call for greater consistency in the application of the concept of risk appetite and recognition of its value
to organizations, are among the findings of a report commissioned by AIRMIC. The research, carried out
by Marsh and the University of Nottingham, concluded that the concept of risk appetite was increasingly
important to company boards but that there was inconsistency in how it is defined and applied.
It also found a strong desire among practitioners to share best practice and agree consistency of
terminology and methodology.
According to the report, risk appetite is a well established and useful concept in the context of insurance
buying. However, how to apply it as a strategic tool in a wider business context is still a developing area.
It said the main benefits of understanding risk appetite include: to support the better allocation of
resources; improve decision-making and make it more consistent; encourage more effective risk taking,
thereby ultimately supporting the organization’s reputation.
It concluded that application of the concept will always vary depending on industry, culture, data
availability, degrees of centralisation and existing Enterprise Risk Management maturity. Nonetheless, it
is important and beneficial to develop an agreed language and understanding of good practice.
One common theme among practitioners, the report states, is the need to agree a risk appetite statement
at the highest level in order to improve oversight of risk management, achieve board understanding of the
concept and buy-in from colleagues.

Risk managers need to work smarter to avoid the effects of recession

With the economic climate taking its toll across industry at large, a significant number of risk management
positions have either been made redundant, or not been replaced as incumbents have left, the AIRMIC
conference heard.
Garry Taylor, head of global risk property at Lockton International and Ian Canham of IC Advisory
discussed why and how risk managers could demonstrate the real value that they deliver to their
management and boards, so that organizations going through a tough period do not see risk
management as a luxury they can do without.

They cited five key things that risk managers can do to clearly demonstrate the value of the role:

• Understanding the strategy – of the business for which they work and the stakeholders’ objectives.
• Quantifying the financial value – so that there is cost certainty around the programme and the amount
spent is the same as, or less than, that spent by your peer group.
• Knowing your insurers – at all layers and in detail. Also knowledge of who might offer alternative cover if
an insurer comes off your programme.
• Explaining the total cost of risk – from the essentials such as premiums and brokerage to the more
complex issues such as ART and enterprise risk.
• Professional interaction – risk managers have dealings with a wide group of stakeholders and need to
ensure that colleagues buy in to the process.
Risk management is a key focus area at ICICI

Posted Date: 16 Mar 2008    

Risk management is a key focus area at ICICI Bank and viewed as a strategic tool for competitive
advantage. In the Indian context ICICI Bank has been doing pioneering work in this area since 1996,
when a specailised risk management group was set up within the Bank.

RCAG is a centralised group based at Mumbai with the responsibility of enterprise wide risk management.
RCAG is headed by a senior executive of the rank of General Manager who reports to the Executive
Director (Corporate Center). The philosophy at ICICI Bank is to have a separate risk management group
(independent of the business group) whose mandate is to analyse, measure, monitor and manage risks.
Risk management is done under the overall supervision of the Board of Directors and sub committees of
the Board - Risk Committee, Credit Committee and Audit Committee.

RESEARCH METHODOLOGY
Primary Objective:

The primary objective is to study and understand the various strategies undertaken
by HDFC Bank inorder to increase its customer base. Major emphasis was also laid
on the operational risks involved and the steps undertaken to minimize them.

Objectives which are being covered by in this project are as following

 Base line survey to identify the level of customer satisfaction.

 A study of the marketing strategies used by HDFC Bank inorder to increase its
customer satisfaction and have long term customer relationships.
 Understanding the operational risks involved in the banking operations and the
various measures undertaken to eradicate them.

4.2 RESEARCH DESIGN

Descriptive research

The main purpose of descriptive research is description of state of affairs as it exists at present.

The main characteristic of this method is that the researcher has no control over the variables; he can
only report what has happened or what is happening.

SAMPLING TECHNIQUE

Simple Random sampling

This type of sampling is also known as chance sampling or probability sampling where each and every
item in the population has an equal chance of inclusion in the sample

SAMPLE SIZE

A total of 120 respondents were chosen. The people who filled in the questionnaire were the existing
customers of the bank.

REASERCH TOOLS AND DATA ANALYSIS

As no study could be successfully completed without proper tools and techniques, same with this project.
For the better presentation and right explanation SPSS and EXCEL FILE are used as research tools .
Crosstabs, Bar graphs, Pie Charts, etc are used for analysis of data.

Limitations:

Language barrier as the questionnaire was in English.

There is no authenticity of the data available.

People were hesitating in disclosing their family income.

People were not interested in filling up the questionnaire as they found it of no use.

Data collection:

Data has been collected from sources like books, periodicals, journals, newspapers, Internet and through
the questionnaires.

Primary Data:

The primary data has been collected by raising a questionnaire to a sample size of 120.

The questionnaire is based entirely to check the level of customer satisfaction.

Secondary Data:

The secondary data has been collected from the data base of company, magazines, journals, information
brochures and various web sites.

SCOPE OF STUDY

Each and every project study along with its certain objectives also has scope for future. And this scope in
future gives to new researches a new need to research a new project with a new scope. Scope of the
study not only consist one or two future business plan but sometime it also gives idea about a new
business which becomes much more profitable for the researches then the older one.

Scope of the study could give the projected scenario for a new successful strategy with a proper
implementation plan.

As Corporate Social Responsibility is defined as operating a business that meets or exceeds the ethical,
legal, commercial and public expectations that society has of business.
Corporate Social Responsibility is one such niche area of Corporate Behavior and Governance that
needs to get aggressively addressed and implemented tactfully in the organizations. At the same time
CSR is one such effective tool that synergizes the efforts of Corporate and the social sector agencies
towards sustainable growth and development of societal objectives at large.
India is a fast growing economy and is booming with national and multinational firms. At the same time,
the Indian land also faces social challenges like poverty, population growth, corruption, illiteracy just to
name a few. Therefore it is all the more imperative for the Indian companies to be sensitized to CSR in
the right perspective in order to facilitate and create an enabling environment for equitable partnership
between the civil society and business.
This study will help us to identify the community and to understand community needs.

By matching the findings of the base line survey with on going initiative in the community, gaps will be
identified

This study will provide way forward to bridge those gaps. That will be an effort to enhance the brand
image and reputation of the business and leads to improvement in sales and customer loyalty, and
increased ability to attract and retain employees. By capitalizing on it, the organizations can improve their
financial performance and attract more investment with immense economic value.

SUGGESTIONS

.
 Create a small-bank feel with big-bank capabilities.
Customers expect—and reward—personalized, informed service,
whether that service is delivered by a teller, a call center operator,
or a “blended agent” responding to their queries via e-mail
or instant messaging.

 Boost the productivity of revenue-generating employees.

The most successful bank branches are the ones that take full
advantage of the skill sets already in place.. Effective staffing solutions
allow branch staff to step in and pull contact center duty during
lulls.

 Give customers one-number access to key personnel.

More than ever, the customer is king. Give customers the
convenience they demand with one-number access to the
individual bank personnel they wish to reach.
.
 Build customer intimacy and retention.
The way to higher per-customer revenues is through customer
intimacy that is built over time. Reaching this goal requires a
thorough understanding of the needs of each customer and a
complete history of customer interactions.

 Communicate a consistent brand experience.

In the heightened competition to win and keep branch
customers, brand is everything.

 Reduce the exposure to risk.

Successfully competing at the branch level these days means
giving customers enhanced self-service options via the Web,
e-mail, and integrated kiosks. But each electronic convenience
provided bears some risk, in the form of computer viruses,
denial of service attacks, hacking, and internal threats.
Complying with a maze of new laws and regulations adds to
the challenge. And finally, disasters, either natural or manmade,
can strike at any time.

 Drive down the total cost of ownership and accelerate

your return on investment.
No branch strategy is complete without a means of controlling
costs and increasing return on investment.
 CUSTOMER SATISFACTION QUESTIONNAIRE

WE VALUE YOUR FEEDBACK

1) How long have you been associated with HDFC Bank?

< 6 months 6-12 months
□ 1-2 years 2-5 years
□ >5 years

2) Which product(s) of HDFC Bank are you currently using?

Product Name

a) Current Account

b) Savings Account

c) Fixed Deposits
 d) Loans

e) Insurance

f) Mutual funds

g) Credit/ Debit Cards

h) Locker

2) What strikes you in the first place when you think of HDFC Bank?
Good ambience Better service
Wide range of products

4) HDFC Bank is accessible in terms of:

YES NO

a) Branches
3) What according to you
b) Net Banking is the strength of HDFC
bank?
c) Phone Banking Products
Services
d) Mobile Banking Wide network
e) ATM Customer Centric
approach

4) Does HDFC Bank use updated technologies to enhance its services?

Yes No

5) How do you rate the marketing strategies adopted by the Bank for customer awareness?
Dissatisfied Neither satisfied nor dissatisfied
Satisfied

8) How effective you feel employees are while they are serving you in terms of:

Parameters 1 (Excellent) 2 (Very good) 3 (Good) 4 (Fair) 5 (Adequate)

Code of conduct

Knowledge

Handling of queries
9) Does your query get solved with in the official query processing time?

Always Often
Sometimes Never

10) Rank HDFC Bank on the following parameters:

1. Completely dissatisfied 2. Partially dissatisfied 3. Neither satisfied nor dissatisfied

4. Partially satisfied 5. Complete satisfied

Parameters

1 2 3 4 5

Efficiency

Manpower

Internet/phone banking

Product range

Grievances redressal

11) If you have an option to switch from HDFC Bank which other bank’s services would you prefer?

□ ICICI Bank UTI Bank

□ Standard Chartered Bank SBI Bank
□ Others

12) What is the basic problem you are facing with the bank?

Personal Details:

Name:

Gender: Male Female

Age:

Occupation:
□ Business Service
□ Professional Others(please specify)
Income:
□ Less than 1 lakhs 1-3 lakhs
□ 3-5 lakhs More than 5 lakhs
i

ii

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[Link]/org/diary/[Link]

[Link]/icwai/knowledgebank/[Link]

[Link]/smJan-Feb1/per_bank.htm

[Link]/doc/3369283/HDFC-Marketing

[Link]/bank-marketing/.../[Link]
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[Link]/projects/[Link]

[Link]/Brandspeak/[Link]?brand_id=81

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[Link]/wiki/Operational_risk

[Link]/Better_operational-risk_management_for_banks_1835 -

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[Link]/topic/[Link]?f=705&s
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[Link]/10.1108/13581980210810283

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[Link]/ticker/[Link]?...

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[Link]/...Risk_Management/[Link]

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[Link]/pfsuser/aboutus/.../[Link]

[Link]/fsm/journal/v13/n3/.../[Link] -

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