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## Reserve Bank of India – Master Direction on Minimum Capital Requirements for Operational Risk (2021)

Overview:

These directions replace existing approaches for measuring minimum operational risk capital requirements with a new standardized approach based on Basel III standards, effective April 1, 2023.

Key Points:

Definition of Operational Risk: Refers to loss from inadequate internal processes, people, systems, or external events; excludes strategic and reputational risk.
Scope: Applies to all commercial banks (excluding Local Area Banks, Payments Banks, Regional Rural Banks, and Small Finance Banks).
Basel III Standardized Approach (SA): The new framework consists of three components:
Business Indicator (BI): Calculated from financial statement data reflecting operational risk exposure.
Business Indicator Component (BIC): BI multiplied by marginal coefficients based on BI size (see Table 1).
Internal Loss Multiplier (ILM): A scaling factor based on historical losses and BIC.
Operational Risk Capital (ORC) Calculation:

Bucket 1 Banks: ORC = BIC
Buckets 2 & 3 Banks with ≥5 years data: ORC = BIC x ILM
Buckets 2 & 3 Banks with <5 years data: ORC may be calculated using fewer years of data if ILM > 1 and supervisor deems losses representative.
Risk-Weighted Assets (RWA): RWA for operational risk is calculated by multiplying ORC by 12.5.
Consolidation Rules: Basel III SA calculations at the consolidated level use fully consolidated BI figures; sub-consolidated and subsidiary levels use BI figures specific to those entities.
Loss Data Requirements:

Banks in buckets 2 & 3 must have at least five years of high-quality operational risk loss data.
Loss data identification, collection, and treatment are guided by Technical Guidance Notes (Annex 2).
Mergers and acquisitions require immediate inclusion of BI items from merged/acquired entities and disclosure under Pillar 3.