MUMBAI: The Reserve Bank of India (RBI) on Friday unveiled a draft guidance note on management of operational risk by banks.
The RBI has sought to make bank boards primarily responsible for managing operational risks in banks and such risks should be dealt as a separate risk management function across the organisation. It may be noted that the new capital adequacy framework requires banks to hold capital explicitly towards operational risk.
The RBI also wants boards to have the "ultimate responsibility" to ensure that the senior management establishes and maintains an adequate and effective system of internal controls. The senior management will implement the operational risk management, approved by the bank's board.
The internal audit function within the bank will assist the senior management and board, in reviewing the application and effectiveness of procedures and practices approved by the senior management.
The direction for effective operational risk management should be embedded in the policies and procedures that clearly describe the key elements for identifying, assessing, monitoring and mitigating operational risk.
The new capital adequacy framework, released by the RBI recently put forward various options for calculating the charge on operational risk capital. "Banks may adopt any one of the approaches, it is intended that they will benchmark their operational risk management systems with the various options and aim to move towards more sophisticated approaches," said RBI.
The guidance note, released by RBI is an outline of a set of sound principles for effective management and supervision of operational risk by banks. The RBI has invited comments from banks for review and revision of the guidance note.
The final guidance note, to be released by the RBI later would help banks upgrade their operational risk management system.