By Abhisht Chaturvedi
The Reserve Bank of India (RBI) released an update to its "Guidance Note on Management of Operational Risk" on April 1, 2024. This update incorporates the latest international best practices and aligns with the Basel Committee on Banking Supervision (BCBS) principles.
The note applies to regulated entities (REs) in the financial sector, including commercial banks, cooperative banks, all-India financial institutions, and non-banking financial companies (NBFCs). The inclusion of NBFCs in the operational risk management note is an indication of greater and more active regulation of the NBFC sector at par with the regular commercial banks and the rest of the financial sector going forward.
Further, the RBI noted that until recently, the primary operational risks faced by regulated entities (REs) stemmed from vulnerabilities associated with the increasing dependence on and rapid adoption of technology for providing financial services and intermediation.
However, the financial sector’s growing reliance on third-party providers (including technology service providers), amplified by the Covid-19 pandemic and the shift to virtual working arrangements, has underscored the rising importance of operational risk management and operational resilience. This not only strengthens an RE's ability to remain a viable ongoing concern but also supports the financial system by ensuring the continuous delivery of critical operations during any disruption.
These updates also signify the RBI's ongoing commitment to strengthening the risk management practices of Indian banks. They encourage banks to move beyond simply managing operational risks to building resilience against unforeseen events.
Here's a breakdown of the key changes:
Focus on Operational Resilience: The updated note emphasizes the concept of operational resilience. This refers to a bank's ability to absorb, adapt to, and recover from operational disruptions while maintaining critical functions.
Alignment with BCBS Principles: The framework is now aligned with the revised "Principles for the Sound Management of Operational Risk" and "Principles for Operational Resilience" issued by BCBS. This ensures consistency with international standards.
Scenario Testing: The updated note emphasizes the importance of conducting regular scenario testing. This involves simulating potential operational disruptions like cyberattacks, natural disasters, or system failures to assess the bank's ability to respond and recover.
Incident Response Management: The guidance highlights the need for a robust incident response management plan. This plan outlines the steps a bank will take to identify, contain, recover from, and learn from operational disruptions.
Continuous Improvement in Risk Management
It's important to understand that the RBI's approach to risk management is dynamic. While there haven't been any entirely new guidance notes in recent days, the RBI constantly revises and updates existing ones to reflect evolving risks and best practices. They actively monitor the banking landscape and may issue specific circulars or notifications addressing emerging risk areas.
Here are some ways the RBI promotes continuous improvement in risk management:
Supervisory Reviews: The RBI conducts regular on-site and off-site supervisory reviews of banks to assess their risk management practices. Based on these reviews, they may provide specific guidance or recommendations for improvement.
Benchmarking: The RBI encourages banks to benchmark their risk management practices against national and international standards. This helps banks identify areas for improvement and learn from best practices adopted by other institutions.
Industry Outreach: The RBI regularly interacts with the banking industry through workshops, seminars, and conferences. These interactions facilitate discussions on emerging risk trends and best practices in risk management.
Conclusion
The recent update to the "Guidance Note on Operational Risk Management and Operational Resilience" demonstrates the RBI's proactive approach to strengthening risk management in Indian banks. While there may not be frequent issuance of entirely new guidance notes, the RBI's commitment to continuous improvement ensures a robust and evolving framework for managing risks in the banking sector.
Abhisht is a Research Analyst at Insights International. His research interests include tech policy, media, and communications.
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