RBI expands operational risk management guidance to include NBFCs

Reserve Bank of India (RBI) unveiled updated operational risk management guidelines on Tuesday, extending its scope to encompass non-banking financial companies (NBFCs), including housing finance firms. move marks a major expansion of regulatory framework, which previously focussed solely on commercial banks.

Recognising potential threat posed by operational disruptions to viability of regulated entities (REs), RBI stressed on need for robust risk management practices. Such disruptions can arise from various sources, including man-me causes, IT threats, geopolitical conflicts, fraud, errors, and natural disasters.

revised 'Guidance Note on Operational Risk Management and Operational Resilience' aligns with international best practices outlined by Basel Committee on Banking Supervision (BCBS). Its overarching goal is to enhance operational resilience of REs by improving risk management effectiveness and dressing complex interconnections within financial system.

Key enhancements in updated guidance include extending its applicability to NBFCs, co-operative banks, and financial institutions, alongside commercial banks. new framework emphasises ''three lines of defence model,'' delineating roles of business units, operational risk management functions, and audit functions in mitigating risks.

Furrmore, guidance introduces separate principles for incident management, information and communication technology (ICT), and disclosures. It also emphasizes importance of ''lessons learned exercises'' and continuous feedback mechanisms to enhance risk awareness and responsiveness.

COVID-19 pandemic underlined criticality of operational resilience, particularly as financial sector increasingly relies on technology and third-party providers. RBI's updated guidance aims to dress se evolving challenges and ensure sector's ability to withstand and recover from operational disruptions effectively.

By extending operational risk management principles to NBFCs and or financial entities, RBI seeks to foster a more resilient and secure financial ecosystem.

(With PTI inputs)