RBI tightens operational risk capital norms for banks from April 2027 | Finance News
The Reserve Bank of India (RBI) on Friday tightened norms for calculating banks’ operational risk capital, specifying how lenders must classify interest income and expenses, fee-based services, and gains and losses from trading and banking book activities. The revised directions will come into effect on April 1, 2027.
The amendments also set out requirements for valuing certain derivative assets, using historical operational loss data and calculating losses from damaged or destroyed assets.
The revised framework divides the business indicator used to calculate operational risk capital into three components — Interest, Lease and Dividend Component (ILDC), Services Component (SC) and Financial Component (FC).
Under the ILDC, banks must account for interest income from loans and advances, securities, financial and operating leases, hedge accounting derivatives and other interest income. Interest expenses will include payments on deposits, debt securities and leases, along with depreciation and impairment of operating leased assets.
The RBI has also specified that interest rate derivative assets affecting interest income must be measured at fair value rather than notional value. Only positive fair values will be included, and negative fair values cannot be deducted.
The Services Component covers fee and commission income from securities-related services, clearing and settlement, asset management, custody, payment services, structured finance, securitisation servicing, loan commitments, guarantees and foreign transactions. Related fee expenses will also be included, while outsourcing fees for non-financial services, such as information technology, logistics and human resources, will be excluded from this component.
Under the Financial Component, banks must separately classify gains and losses from trading book and banking book activities in line with the RBI’s capital adequacy directions.
The central bank has also specified the treatment of operational loss data used to calculate the internal loss multiplier (ILM). The loss component will be 15 times the average annual operational risk losses, net of recoveries.
Banks will generally have to use 10 years of high-quality annual operational loss data for the calculation. Those calculating the ILM for the first time may use available data if they have at least five years of high-quality loss history.
The directions also specify how banks should calculate losses from damaged or destroyed assets. Where an asset is not repaired or replaced, the loss will include the reduction in its book value and any residual clean-up or disposal costs. If the asset is restored, the calculation will include the full cost of repair or replacement and additional costs.
The RBI said the mapping of business indicator items to banks’ financial statements would be indicative, with further details on the mapping to be provided in due course.
