RBI finalises norms for banks to hold capital for operational risks

Mumbai, June 26, 2023

Apex bank will communicate date of implementation separately

The Reserve Bank of India (RBI) has finalised directions for commercial banks to hold sufficient regulatory capital against their exposures arising from operational risks.

It would cover the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

RBI, in a communication to regulated entities, said the effective date for implementation of these directions will be communicated separately.

Entities like local area banks, payment banks, regional rural banks, and small finance banks are excluded from the application of these norms for operational risk capital.

While legal risks would form part of operational risks, the strategic and reputational risks are excluded from the ambit of calculating capital requirements.

RBI had issued draft norms ‘Master Direction on Minimum Capital Requirements for Operational Risk’ on December 15, 2021, as a part of convergence with Basel III standards.

The existing norms for measuring minimum operational risk capital (ORC) will be replaced by the new standardised approach under Basel III when the directions come into effect.

At present, banks use methods like basic indicator approach (BIA) and the standardised approach (TSA) to measure minimum ORC.

RBI said the business indicator (BI), which is a financial statement-based proxy for operational risk, would be used for calculating capital requirements for operational risks.

BI would cover facets like interest, lease and dividend, and services and financial components.

As for treatment of mergers and acquisitions, RBI said BI items from acquired businesses or merged entities over three years prior to the date of acquisition/merger will form part of the calculation for ORC.

[The Business Standard]