The Reserve Bank of India (RBI) on December 15, 2021 has issued a press release to invite comments on the Draft master direction on minimum capital requirements for operational risk which shall be applicable to all Commercial Banks (excluding Local Area Banks, Payments Banks, Regional Rural Banks, and Small Finance Banks).
The foremost provisions of the Master Directions are as followed:
• Application of Basel III SA within a banking group
o At the consolidated level, the Basel III SA calculations shall be based on fully consolidated BI figures, which net all the intragroup income and expenses.
o The calculations at a sub-consolidated level shall be based on BI figures for the banks consolidated at that particular sub-level.
o The calculations at the subsidiary level shall be based on BI figures from the subsidiary.
o A sub-consolidated bank or a subsidiary bank shall use only the losses it has incurred at that particular sub-level.
• Loss data identification, collection, and treatment for banks in buckets 2 & 3
o Identification and collection of the operational risk loss data shall be guided by the criteria provided in point no.4 of Technical Guidance Note, Annex 2.
o Banks which do not meet the five years of high quality loss data criteria shall be required to hold capital at a minimum equal to the BIC. The Reserve Bank (Department of Supervision) may however require the bank to apply an ILM which is greater than 1 to calculate the capital requirements if the bank’s ILM is greater than 1 and supervisors believe the losses are representative of the bank’s operational risk exposure. The exclusion of internal loss data due to non-compliance with the loss data criteria, and the application of any resulting multipliers, shall be publicly disclosed in accordance with the Pillar 3 requirements.
o Inclusion of losses related to mergers and acquisitions and exclusion of losses shall be guided by the criteria provided in point no. 4.3 & 4.4 resp. of Technical Guidance Note, Annex 2.
• Inclusion of BI items related to mergers and acquisitions
o BI items from merged entities or acquired businesses shall be included in the calculation of ORC immediately after the merger/acquisition and shall be disclosed under Pillar 3.
• Exclusions of divested activities from the BI
o Divested activities shall be excluded from the calculation of the BI amount used for the calculation of ORC only after the Reserve Bank’s (Department of Supervision’s) approval. Such exclusions shall be disclosed under Pillar 3.
• Disclosure
o Each of the BI sub-items for each of the three years of the BI component calculation window shall be disclosed in accordance with the Pillar 3 requirements.
o For banks in buckets 2 & 3, annual loss data for each of the last ten years or each of the years with available annual loss data shall be disclosed in accordance with the Pillar 3 requirements. Loss data shall be reported net of recoveries, both before and after loss exclusions.
o The disclosures on general qualitative information on a bank’s operational risk framework and quantitative information on BI sub-items and loss data shall be made as prescribed in Annex 3.
The following instructions and guidelines have also been repealed by this direction:
• Paragraph 3. S. No. b. & c. of Introduction of Advanced Approaches of Basel II Framework in India – Time Schedule - DBOD.BP.BC.No.23/21.06.001/2009-10 dated July 7, 2009
• Implementation of The Standardised Approach (TSA) for Calculation of Capital Charge for Operational Risk - DBOD.No.BP.BC.84/21.06.001/2009-10 dated March 31, 2010
• Implementation of the Advanced Measurement Approach (AMA) for Calculation of Capital Charge for Operational Risk - DBOD.No.BP.BC.88/21.06.014/2010-11 dated April 27, 2011
• Revisions to Basel II-Advanced Approaches of Operational Risk- TSA and AMA - DBOD.No.BP.BC.43/21.06.017/2014-15 dated October 16, 2014
• Paragraph 9 on ‘Capital charge for Operational Risk’ and Table- DF-8 on ‘Operational Risk’ of Master Circular- Basel III Capital Regulations - DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015
The comments on the draft Master Directions from all stakeholders may be sent by email with the subject line “Comments on Draft Master Direction on Minimum Capital Requirements for Operational Risk”, by January 31, 2022.
[Press Release: 2021-2022/1358]
