Capital norms for operational risks of banks to be revised: RBI

The Reserve Bank of India (RBI) will introduce revised norms for banks for setting aside capital for operational risks from April 01, 2023, to ensure robustness in working of banking entities.

The proposed rules termed the new standardised approach, which is Basel III-compliant, will replace existing approaches like basic Indicator Approach (BIA), and Advanced Measurement Approach (AMA) to measure minimum operational risk capital requirements.

For the purpose of these revised directions operational risks means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk.

The revised directions will apply to all commercial banks in India. However, Local Area Banks, Payments Banks, Regional Rural Banks, and Small Finance Banks have been excluded from its ambit.

Assessing capital requirements will involve three facets. First, business Indicator (BI), which is a financial-statement-based proxy for operational risk. Second, the Business Indicator Component (BIC), which is calculated by multiplying the BI by a set of marginal coefficients. And third, the Internal Loss Multiplier (ILM), which is a scaling factor that is based on a bank’s average historical losses and the BIC.