RBI Tightens Operational Risk And Leverage Ratio Norms For Banks New Rules From April 2027

(MENAFN- KNN India) New Delhi, Oct 24 (KNN) The Reserve Bank of India (RBI) has revised banks' operational risk capital and leverage ratio frameworks, changing income classification, exposure calculations and disclosure requirements. Both sets of directions will take effect from April 1, 2027.

The operational risk framework divides the business indicator used to calculate capital requirements into three components: Interest, Lease and Dividend Component (ILDC), Services Component (SC) and Financial Component (FC).

The ILDC covers interest income from loans, securities, leases and derivatives, and expenses on deposits, debt securities and leases. Interest rate derivative assets must be measured at fair value, with only positive values included.

The SC covers fee and commission income and expenses from securities services, clearing, asset management, custody, payment services, guarantees and foreign transactions. Fees for outsourced non-financial services, including IT, logistics and human resources, are excluded.

The FC requires separate classification of gains and losses from trading and banking book activities.

Operational Loss Data

The RBI has set the loss component for calculating the internal loss multiplier (ILM) at 15 times average annual operational risk losses, net of recoveries. Banks must generally use 10 years of high-quality annual loss data. Those calculating the ILM for the first time may use at least five years of such data.

For damaged or destroyed assets, losses will include the reduction in book value and clean-up or disposal costs if the asset is not restored. If repaired or replaced, the calculation will include the full restoration cost and additional expenses.

The RBI said the mapping of business indicator items to banks' financial statements would be indicative, with further details to follow.

Leverage Ratio Framework

Separately, the RBI has aligned the leverage ratio framework with the Basel Committee on Banking Supervision's 2017 standards.

The minimum ratio will be 4 per cent for domestic systemically important banks (D-SIBs) and 3.5 per cent for other banks. Indian branches of global systemically important banks (G-SIBs) must maintain 3.5 per cent plus the applicable leverage ratio buffer, including any additional buffer prescribed by their home regulator.

The leverage ratio measures Tier 1 capital against total exposures, without adjusting for asset risk, and acts as a backstop to risk-weighted capital requirements.

The framework covers on-balance-sheet assets, derivatives, securities financing and off-balance-sheet items such as commitments, liquidity facilities, guarantees and letters of credit. Banks must generally use gross accounting values and cannot offset assets and liabilities or reduce exposures through collateral and guarantees, except where specifically permitted.

It also prescribes calculations for derivative replacement costs and potential future exposures, treatment of collateral and variation margin, and conditions for netting securities financing transactions. Off-balance-sheet exposures will be converted into credit-equivalent amounts using prescribed credit conversion factors.

Banks must calculate capital and exposure measures quarterly and maintain the minimum ratio at all times. Daily or monthly averages may be used with RBI approval. Indian G-SIB branches that fail to meet leverage ratio buffers will face capital conservation requirements based on their common equity Tier 1 (CET1) risk-based capital and Tier 1 leverage ratios.

Banks must disclose leverage ratios quarterly on standalone and consolidated bases, submit detailed calculations to the RBI's Department of Supervision and follow prescribed Pillar 3 templates.

RBI Rejects Banks' Requests

The revised framework follows draft guidelines issued on August 7, with comments invited until August 28. The RBI rejected banks' requests for additional implementation time and for aligning derivative exposure calculations with the Standardised Approach for Counterparty Credit Risk (SA-CCR).

It clarified that collateral received from counterparties cannot reduce leverage ratio exposure, as the measure captures overall leverage without risk-based adjustments. The central bank also warned that transactions inadequately capturing sources of leverage could invite supervisory action.

The RBI may temporarily exempt central bank reserves from the exposure measure or increase the minimum ratio calibration to support monetary policy transmission.

(KNN Bureau)

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