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Guidance Note on Operational Risk Management and Operational Resilience

Reserve Bank of India (RBI) had released a guidance note on operational risk management and operational resilience.

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. 
  • It includes legal risk but excludes strategic and reputational risk.
  • It is inherent in all banking / financial products, activities, processes and systems.
  • Basel Committee on Banking Supervision (BCBS) recognized Operational Risk as a distinct class of risk in 2001, outside of credit and market risks.

What is Operational Risk Management and Operational Resilience?

  • Operational Risk Management refers to entire gamut of activities right from risk identification, measurement and assessment, monitoring and control, mitigation, reporting to senior management and the Board of Directors on the RE’s risk exposures, Business Continuity Management, and learning through feedback for improvement.
  • Operational Resilience means the ability of an RE to deliver critical operations through disruption. 
  • An effective Operational Risk Management system and a robust level of Operational Resilience work together to reduce the frequency and the impact of Operational Risk events.

What are the features of Guidance Note on Operational Risk Management and Operational Resilience?

The Guidance Note on Operational Risk Management and Operational Resilience has been prepared based on the BCBS principles documents issued in March 2021, viz., (a) ‘Revisions to the Principles for the Sound Management of Operational Risk’ and (b) ‘Principles for Operational Resilience’ as well as the some of the international best practices.

The Guidance Note has been built on 3 pillars –

  • Prepare and Protect
  • Build Resilience
  • Learn and Adapt

Across these 3 pillars, the Guidance Note contains 17 principles.

To whom shall the Guidance Note be applicable?

The Guidance Note shall apply to the following REs –

  • Commercial Banks (including Foreign Banks, Regional Rural Banks, Local Area Banks, Payments Banks, and Small Finance Banks).
  • Primary (Urban) Co-operative Banks / State Co-operative Banks / Central Co-operative Banks 
  • All-India Financial Institutions (viz., Exim Bank, NABARD, NHB, SIDBI, and NaBFID)
  • Non-Banking Financial Companies including Housing Finance Companies.

Who is Supervisory Authority?

Supervisory Authority means –

  • RBI in case of Commercial Banks (including Local Area Banks, Payments Banks, Small Finance Banks, and Primary Urban Co-operative Banks), Non-Banking Financial Companies, and All India Financial Institutions.
  • National Bank for Agriculture and Rural Development (NABARD) in case of State Co-operative Banks, Central Co-operative Banks, and Regional Rural Banks.
  • National Housing Bank (NHB) in case of Housing Finance Companies.

What are the lines of defence for management of Operational Risk?

Three lines of defence for management of Operational Risk –

  • First Line of Defence – Business Unit Management
  • Second Line of Defence – Organisational Operational Risk Management Function including Compliance Function
  • Third Line of Defence – Audit Function


References

Reserve Bank of India. (2024, April 30). 'Guidance Note on Operational Risk Management and Operational Resilience'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12679&Mode=0

Reserve Bank of India. (2024, April 30). 'Guidance Note on Operational Risk Management and Operational Resilience'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57818


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