The Reserve Bank of India on Wednesday released the draft Master Directions on minimum capital requirements for operational risk as part of convergence of its regulations for banks with Basel III standards.

The provisions of these directions shall apply to all commercial banks excluding local area banks, payments banks, regional rural banks, and small finance banks, the RBI said, adding that the directions shall come into effect from April 1, 2023.

“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,” said the draft master directions.

The RBI has sought comments from stakeholders on the draft master directions by January 31, 2022.

All existing approaches – Basic Indicator Approach (BIA), The Standardised Approach (TSA)/ Alternative Standardised Approach (ASA) and Advanced Measurement Approach (AMA) for measuring minimum operational risk capital requirements shall be replaced by the new standardised approach (Basel III Standardised Approach), it further said.

Basel III SA calculation methodology is based on the Business Indicator (BI), the Business Indicator Component (BIC) and the Internal Loss Multiplier (ILM).

The BI is a financial-statement-based proxy for operational risk while the BIC is calculated by multiplying the BI by a set of marginal coefficients (αi). The ILM is a scaling factor that is based on a bank’s average historical losses and the BIC.

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