RBI Proposes NBFCs, Co-op Banks Under Operational Risk Norms

Photo : Reuters

The Reserve Bank of India (RBI) took a significant step on Tuesday by unveiling a comprehensive guidance note on Operational Risk Management and Operational Resilience, aligning with global standards set by the Basel Committee on Banking Supervision (BCBS). This guidance marks a pivotal shift as it extends its purview beyond traditional commercial banks to include a broader spectrum of regulated entities, encompassing non-banking finance companies (NBFCs), primary urban cooperative banks, and central cooperative banks.

This move comes as a response to the evolving landscape of operational risks faced by financial institutions, exacerbated by factors such as pandemics, cyber incidents, technological failures, and natural disasters. The 2005 guidance, which targeted commercial banks exclusively, will now be replaced, reflecting the need for a more robust framework to tackle contemporary challenges.

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The newly introduced guidelines outline a three lines of defence model, emphasizing the collective responsibility of different stakeholders within the organization. Business units constitute the first line of defence, followed by the organisational operational risk management function, including the compliance function, as the second line of defence. The audit function serves as the final line of defence, ensuring oversight and accountability across operational risk management practices.

RBI underscores the criticality of operational resilience, highlighting the potential ramifications of operational disruptions on the viability of regulated entities, their customers, and broader financial stability. These disruptions can stem from a myriad of sources, ranging from man-made causes to technological threats, geopolitical conflicts, and natural calamities.

Central to the guidance is the imperative for regulated entities to proactively assess and mitigate operational risks, leveraging robust internal controls and risk management strategies. This entails a comprehensive approach encompassing risk identification, assessment, monitoring, and mitigation, aimed at ensuring uninterrupted delivery of critical operations even in the face of disruptions.

Of particular significance is the growing reliance of the financial sector on third-party providers, including technology service providers, a trend accentuated by the COVID-19 pandemic. The shift towards virtual working arrangements has underscored the need for enhanced Operational Risk Management and Operational Resilience practices to mitigate vulnerabilities arising from increased reliance on external partners.

By prioritizing operational risk management, regulated entities not only safeguard their own viability but also contribute to the resilience of the broader financial system. This concerted effort towards strengthening operational resilience aligns with RBI's overarching goal of fostering a robust and stable financial ecosystem capable of withstanding unforeseen challenges and disruptions.

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