RBI Amends Guidelines on operational risk, Includes NBFCs

On Tuesday, the Reserve Bank of India (RBI) revised its “guidance note” regarding the operational risk management framework of lenders, encompassing a wider range of lenders, including Cooperative Banks and Non-Banking Financial Companies (NBFCs). All banking and financial products, services, operations, procedures, and systems carry some level of operational risk.

The RBI emphasised aligning with the Basel Committee on Banking Supervision (BCBS) recommendations, urging lenders to adopt a three-line defence approach. Firstly, business units must identify and manage inherent risks. Secondly, an independent risk management function should assess operational risks and control effectiveness. Thirdly, an audit function ensures compliance without involvement in operational risk management development.

Furthermore, RBI stressed the importance of a code of conduct set by the Board of Directors, emphasising integrity, ethical values, and conflict prevention. Senior management should ensure comprehensive change management, supported by robust control environments and risk mitigation strategies.

Lenders are advised to map critical operations and their dependencies for operational resilience and maintain business continuity plans. Moreover, they must manage third-party relationships to prevent disruptions to critical operations. These measures aim to enhance the stability and reliability of financial systems.