RBI extends operational risk management guidelines to NBFCs and HFCs

RBI risk management: Reserve Bank of India (RBI) announced the expansion of its operational risk management guidelines to encompass non-banking financial companies (NBFCs), including housing finance companies (HFCs). This update, unveiled on Tuesday, marks a pivotal shift from the previous focus solely on commercial banks under the 2005 'Guidance Note on Management of Operational Risk.'

The RBI underscored the criticality of operational resilience for regulated entities (REs), emphasising that operational disruptions could not only jeopardise the viability of these entities but also impact customers, market participants, and overall financial stability. Such disruptions may stem from a myriad of factors, including man-made causes, IT threats, business disruptions, frauds, and natural disasters.

Aligning with international standards set by the Basel Committee on Banking Supervision (BCBS), the latest 'Guidance Note on Operational Risk Management and Operational Resilience' seeks to fortify operational risk management practices within the financial sector. By extending its applicability to NBFCs, HFCs, co-operative banks, and financial institutions, the RBI aims to foster a more robust operational framework across the industry.

Key revisions in the updated guidance note include the adoption of the "three lines of defence model," delineating responsibilities among business units, operational risk management functions, and audit functions. Moreover, the note introduces distinct principles for incident management, information and communication technology (ICT), disclosures, and lessons learned exercises.

The COVID-19 pandemic has accentuated the significance of operational risk management, particularly in light of increased reliance on technology and third-party providers. The RBI's proactive stance reflects its commitment to bolstering the resilience of the financial ecosystem against evolving challenges and disruptions.

(with PTI inputs)