RBI issues guidance note on operational resilience and risk management

RBI issues guidance note on operational resilience and risk management

Brief Overview:

RBI has introduced Guidance Note on Operational Risk Management and Operational Resilience vide press release dated 30th April 2024 (“Guidance Note”). This Guidance Note aligns the RBIs regulatory guidance with the Basel Committee on Banking Supervision (BCBS) Principles, viz., (a) ‘Revisions to the Principles for the Sound Management of Operational Risk’ and (b) ‘Principles for Operational Resilience’.

Technical Details:

This Guidance Note replaces the erstwhile guidance note dated 14th October 2005. The key highlights of this Guidance Note are as follows:

1) Applicable now to all NBFCs, including HFCs, co-operative banks, and financial institutions, in addition to scheduled commercial banks.

2) Introduces the ‘three lines of defence model’, which elucidates how business unit forms the first line of defence, then the operational risk management function, and lastly the audit function.

3) Provides detailed principles on:

(a) change in management;

(b) mapping of internal and external interconnections and interdependencies, incident management, ICT, and disclosures;

(c) third-party relationship, (which is a broader concept than outsourcing); and

(d) lessons learned exercise and continuous feedback mechanism.

JC takeaway:

Until recently, the predominant operational risks that regulated entities (“REs”) faced emanated from vulnerabilities related to increasing dependence and rapid adoption of technology for provision of financial services and intermediation. However, the financial sector’s growing reliance on third-party providers has highlighted the increasing importance of operational risk management and operational resilience and the introduction of the Guidance Note not only benefits the REs by strengthening its ability to remain a viable going concern but also supports the financial system by ensuring continuous delivery of critical operations during any disruption.

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