Skip to main content

What are Minimum Capital Requirements for Operational Risk?

Reserve Bank of India (RBI) has released directions on minimum capital requirements for operational risk.

What is operational risk?

Operational risk 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.

What is the objective of directions on minimum capital requirements for operational risk?

The directions require commercial banks to hold sufficient regulatory capital against its exposures arising from operational risk.

Which entities are covered under the directions?

The directions apply to all Commercial Banks (excluding Local Area Banks, Payments Banks, Regional Rural Banks, and Small Finance Banks).

What will be the changes in calculation of capital for operational risk?

The existing approaches for measuring minimum operational risk capital (ORC) requirements are as below –

  • Basic Indicator Approach (BIA)
  • Standardised Approach (TSA) / Alternative Standardised Approach (ASA) 
  • Advanced Measurement Approach (AMA).

All the existing approaches as mentioned above will be replaced by the new Standardised Approach (or Basel III Standardised Approach).

What are the components of Basel III Standardised Approach (Basel III SA)?

Basel III Standardised Approach (Basel III SA) calculation methodology is based on the following components –

  • Business Indicator (BI), which is a financial-statement-based proxy for operational risk. The constituents of BI include interest, lease and dividend, services and financial.
  • Business Indicator Component (BIC), which is calculated by multiplying the BI by a set of marginal coefficients (αi) (which increase with the size of the BI).
  • Internal Loss Multiplier (ILM), which is a scaling factor that is based on a bank’s average historical losses and the BIC.

The risk-weighted assets (RWA) for operational risk shall be calculated by multiplying the ORC by 12.5.

How shall ORC be calculated within a banking group? 

  • At the consolidated level, the ORC calculations shall be based on fully consolidated BI figures, which net all the intragroup income and expenses.
  • The ORC calculations at a sub-consolidated level shall be based on BI figures for the banks consolidated at that particular sub-level.
  • The ORC calculations at the subsidiary level shall be based on BI figures from the subsidiary.
  • A sub-consolidated bank or a subsidiary of the bank shall use only the losses it has incurred at that particular sub-consolidated or subsidiary level for the ORC calculations.

Which loss event shall be included in the loss data set?

RBI expects that a bank’s data collection and reporting procedures and processes capture all operational risk losses over the threshold of ₹1,00,000. 

However, if a bank excludes any eligible loss data event due to commission or omission errors or any other reason, it shall include such missed out data in the loss data set in the subsequent year by making necessary corrections for the relevant year. Such data shall be included in the loss data set from the year to which it pertains till 10 years from the year of detection of such missed out event.

What shall be the frequency of disclosures for operational risk?

Template Description of the template Frequency of disclosure
ORA General Qualitative information on a bank’s operational risk framework Annual
OR 1 Historical losses Annual
OR 2 Business Indicator and Sub components Quarterly
OR 3 Minimum required operational risk capital Quarterly

From when are the directions applicable?

The effective date of implementation of the directions will be separately communicated by RBI.


References

Reserve Bank of India. (2023, June 26). 'Master Direction on Minimum Capital Requirements for Operational Risk'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12520&Mode=0

Reserve Bank of India. (2023, June 26). 'Press Release - RBI releases ‘Master Direction on Minimum Capital Requirements for Operational Risk’'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55922


Follow at - Telegram   Instagram   LinkedIn   Twitter   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) (Updated as on September 11, 2026)

Reserve Bank of India (RBI) has issued the directions on maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by banks. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Payments Banks (PBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) District Central Co-operative Banks (DCCBs) What is CRR? Every bank shall maintain in India by way of cash reserve, a sum equivalent to such percent of its Net Demand and Time Liabilities (NDTL) in India, as the RBI in terms of Section 42(1) of the RBI Act, 1934 (for scheduled banks) and Section 18(1) of the Banking Regulation Act (BR Act), 1949 (for non-scheduled banks) [including provisions of Section 18(1) of the BR Act as applicable to co-operative banks], may specify. What is incremental CRR? In terms of Secti...
Post a Comment
Read more

Regulatory Measures for the Foreign Exchange Market

Reserve Bank of India (RBI) has announced regulatory measures for the foreign exchange market. Cancellation and rebooking / rollovers of foreign exchange derivative contracts An Authorised Dealer shall not permit users to rebook any foreign exchange derivative contract involving the INR, whether deliverable or non-deliverable, which has been cancelled with any of the Authorised Dealers. An Authorised Dealer may, however, continue to permit users to rollover foreign exchange derivative contracts on maturity, subject to compliance with the extant directions. Threshold limit for taking positions without requirement to establish the existence of underlying Authorised Dealers were permitted to allow users to take positions upto USD 100 million equivalent of notional value (outstanding at any point of time), across all Authorised Dealers, for hedging contracted exposure without the requirement to establish the existence of underlying exposure.  Further, a user was allowed to take positio...
Post a Comment
Read more

Credit Facilities to Scheduled Castes (SCs) & Scheduled Tribes (STs)

Reserve Bank of India (RBI) has issued guidelines on credit facilities to Scheduled Castes (SCs) & Scheduled Tribes (STs). What are the guidelines on credit facilities to SCs & STs? District Level Consultative Committees formed under the Lead Bank Scheme should continue to be the principal mechanism of co-ordination between banks and development agencies.  National Scheduled Tribes Finance & Development Corporation and National Scheduled Castes Finance & Development Corporation have been set up under the administrative control of Ministry of Tribal Affairs and Ministry of Social Justice & Empowerment, respectively. Banks should advise their branches / controlling offices to render all the necessary institutional support to enable these institutions to achieve the desired objectives. Loans sanctioned to State Sponsored Organisations for Scheduled Castes / Scheduled Tribes for the specific purpose of purchase and supply of inputs and / or the marketing of the out...
Post a Comment
Read more

What is Ways and Means Advances (WMA)? (Updated as on September 25, 2026)

Reserve Bank of India (RBI) has recently announced the Ways and Means Advances (WMA) limit for the Government of India. So, what is WMA? What is Ways and Means Advances (WMA)? Ways and Means Advances (WMA) is a collateral free clean advance availed by the Central and State Governments from RBI, to tide over temporary mismatches in the receipts and payments. Section 17(5) of the Reserve Bank of India Act, 1934 empowers RBI to grant WMA to Central and State Governments, as and when required by them. What is Special WMA / Special Drawing Facility (SDF)? In addition to WMA, State Governments are also eligible for a Special Drawing Facility (SDF), which is granted against collateral of Government Securities held by the State Governments.  SDF availed by State Governments / UTs is linked to the quantum of their investments in marketable securities issued by the Government of India, including Auction Treasury Bills (ATBs).  (Updated as on June 28, 2024) Based on the recommendations m...
Post a Comment
Read more

Highlights of RBI Annual Report 2025-26 – Chapter 1 to 3

Reserve Bank of India (RBI) has published its annual report for the financial year 2025-26. In a series of articles, we will go through the highlights of the report. This is the first article in the series.  Legal framework for publication of Annual Report by the RBI Report of the Central Board of Directors on the working of RBI for the year is submitted to the Central Government in terms of Section 53(2) of the RBI Act, 1934. The letter of transmittal is signed by the RBI Governor and addressed to the Finance Secretary, Ministry of Finance, Government of India. Documents submitted by the RBI to the Central Government In pursuance of Section 53(2) of the RBI Act, 1934, the following documents have been submitted to the Central Government – A copy of the Annual Accounts for the year ended March 31, 2026 certified by the RBI’s Auditors and signed by Chief General Manager-in-charge, all the Deputy Governors and Governor. 2 copies of the Annual Report of the Central Board on the workin...
Post a Comment
Read more