OPERATIONAL RISK MANAGEMENT IN TRANSITION – THE RECENT RBI MASTER DIRECTION ON MINIMUM CAPITAL REQUIREMENT

Paper Number :WP31/2023
Publication Date :Aug. 18, 2023

The Reserve Bank of India, Master Direction on Minimum Capital Requirement for Operational Risk (OR), released on June 26, 2023, replaces all the existing Basel II risk approaches. The capital estimation in the new and revised approach, i.e. Standardised Approach (SA) of Basel III is based upon the financial statement based business indicator (BI) and the bank’s historical loss data, which adds risk sensitivity in capital framework. Business Indicator (BI), is an exposure indicator, which replaces, Gross Income considered under Basel II. The alpha factor deliberated under Basel II is now replaced with coefficient under Standardised Approach (SA) of Basel III. The revised methodology is also a transition from the model based methodology, i.e. Advanced Measurement Approach (AMA) of Basel II. It would help the banks in maintaining minimum capital for Operational Risk in line with their Operational Risk profile.