Financial institutions need to guard against reputation risks: SBI study

Financial organisations ought to guard against reputation risks by a sizeable investment in process thinking and cultural improvements as they can result in huge losses to the institutions, says a SBI report.

Reputation is the perceived impression that stakeholders have about how a company is managing its business processes, said SBI's 'Ecowrap'.

It further said that measuring the cost of reputation risk is difficult, in part because it can arise as a secondary consequence of other risks.

One way in which it can be measured is through changes in market capitalisation (M-Cap) of the affected institution, which are well placed to capture the many indirect effects of reputation damage through their reflection of lost future earnings, it said.

Recently, the Indian banking industry has faced the biggest fraud so far, of about Rs 13,000 crore.

"Taking change in M-Cap as proxy for reputation risk, we found that post 1-month of the event, the decline in M-Cap is 13.2 times more than the fraud amount. Though, the positive news is that it has recovered fast and post 2-months it is now only 9.2 times of the fraud amount," said the SBI study.

Such risk management programmes needs to be adequately staffed, apart from sizeable investment in process-thinking and simultaneous development of a process-improvement culture, it said.

"Institutions should view risk management as an institutionalisation of best business practices, so as to anticipate risk events, minimise their impact and profit from it," it said.

The report also added that the entire loss in M-Cap of Indian banking industry is not only attributed to fraud event.

During the same time, RBI also came up with a new guidelines regarding the restructuring and asset quality. This is reflected in change in BSE Bankex which has declined 4.5 per cent during 1-month, but later recovered substantially after the announcement of monetary policy, it said.