Operational Risk in Indian Banking: From Compliance to Resilience

Imagine This…

You open your bank’s mobile app to transfer money. The screen freezes. Hours pass, and the system is still down. Customers are frustrated, social media is buzzing, and the bank scrambles to fix the outage.

It’s operational risk in action.

What Do We Mean by Operational Risk?

The Operational risk is the risk of loss, resulting from inadequate or failed internal processes, people, systems, or from external events. It includes legal risk, but not strategic or reputational risk.

In simple terms: It’s the risk that something goes wrong in the day‑to‑day running of a bank, whether it’s a system crash, a fraud, or even a natural disaster.

Why It Matters

Indian banks and NBFCs are running on technology like never before e.g. internet banking, mobile apps, cloud systems, and outsourced vendors. This makes services faster, but also more fragile and prone to the operational risk.

The RBI has warned that a single disruption, say, a cyber‑attack or vendor failure, can ripple out to customers, markets, and even financial stability. COVID‑19 proved the point. Remote work and digital channels multiplied these risks.

Everyday Examples You’ll Recognise

• A branch skips proper KYC checks → fraudsters slip through → fines and losses.
• Core banking system outage → customers can’t transact → reputational damage.
• Outsourced ATM vendor fails → delays, complaints, regulatory scrutiny.
• Cyber‑attack on mobile banking → data breach, remediation costs, loss of trust.
• Flood hits a processing centre → poor continuity planning → operations disrupted.

The Regulatory Push: Basel to RBI

a. Capital Requirement for Operational Risk

In line with Basel III and RBI’s April 2024 guidance, banks, NBFCs, HFCs, and cooperative banks must now calculate capital for operational risk under the Standardised Measurement Approach (SMA). This replaces the older Basic Indicator and Standardised Approaches. Under SMA, the capital charge is linked to two factors: the Business Indicator (BI), which reflects the scale of operations, and the Internal Loss Multiplier (ILM), which adjusts for an institution’s own history of operational losses. The framework creates a clear incentive — stronger controls and fewer losses can reduce capital requirements, while weak practices increase the buffer that must be held.

Globally, the Basel Committee sets standards on operational risk and resilience. In 2021, it updated its principles to reflect today’s digital, interconnected world.

b. RBI’s April 2024 Guidance Note

In India, the RBI’s April 2024 Guidance Note, replaced its 2005 framework. It applies not just to banks, but also to NBFCs, HFCs, and cooperative banks.

Key highlights:

• Three Lines of Defence: Business units are the first line, directly responsible for managing risks in their day‑to‑day activities. The second line is the independent risk management function, which sets policies and monitors compliance. The third line is internal audit, which provides assurance that both the first and second lines are working effectively.
• Operational Resilience: The guidance stresses that disruptions are inevitable, whether from cyber‑attacks, vendor failures, or natural disasters. Institutions must identify their critical operations, map interdependencies, and ensure continuity plans are tested so that essential services can continue even under stress.
• Vendor & ICT Risk: With banks and NBFCs outsourcing more functions and relying heavily on technology, the RBI requires stronger due diligence of third parties, clear contractual safeguards, and monitoring of vendor performance. ICT governance must cover cybersecurity, data integrity, and system resilience to reduce the risk of large‑scale outages or breaches.
• Proportionate Approach: The framework recognises that not all entities have the same size or complexity. While large banks must implement comprehensive systems, smaller cooperative banks or NBFCs can adopt proportionate measures, but all are expected to align with the principles of sound operational risk management and resilience.

What’s New

• Coverage extended beyond banks: Now includes NBFCs, housing finance companies, and cooperative banks, widening RBI’s oversight. This ensures even smaller players adopt structured risk and resilience practices.
• From risk management to resilience: Focus is no longer just on identifying risks, but on ensuring critical services continue during disruptions. The shift reflects lessons from COVID‑19 and global cyber incidents.
• Stricter vendor/third‑party oversight: Banks must perform stronger due diligence and monitoring of outsourced partners. The aim is to reduce dependency risks and avoid service breakdowns.
• Digital/ICT risk at the core: Cybersecurity, data integrity, and system resilience are now central to operational risk frameworks. This is vital as digital channels become the primary customer touchpoint.
• Greater accountability at the top: Boards and senior management are directly responsible for setting the tone and ensuring compliance. This raises governance standards and makes leadership answerable for failures.

Implications for India’s Financial Industry

For Indian bankers and other players in financial players, operational risk is no longer a back‑office issue. It’s a frontline regulatory concern.

• Weak controls can mean fines, losses, and reputational damage. Even a single lapse in KYC, reporting, or system security can trigger regulatory penalties and erode customer trust.
• Awareness of vendor, cyber, and continuity risks helps design stronger safeguards. Mapping these risks in advance allows institutions to build layered defences and avoid costly service disruptions.
• Linking concepts to RBI’s updated guidance makes learning more relevant. Using real regulatory expectations ensures that staff training is practical, current, and directly tied to compliance outcomes.
• NBFCs and co‑ops must now upgrade frameworks to match banks. The widened scope means smaller entities can no longer rely on lighter processes; they must adopt structured risk and resilience practices.

Final Word

Operational risk has always been part of banking, but in today’s India it’s sharper, faster, and more visible. The RBI’s 2024 guidance raises the bar: banks and NBFCs must move from simply managing risk to proving they can stay resilient under disruption.

For bankers, risk officers and credit officers, this isn’t just about compliance, it’s about ensuring secure, sustainable, and trusted banking operations in a digital age.

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