RBI amends Operational Risk Capital framework for Commercial Banks: revised provisions to take effect from 1 April 2027

On 23 October 2026, the Reserve Bank of India (RBI) issued the Reserve Bank of India (Commercial Banks — Forthcoming Instructions) Second Amendment Directions, 2026, amending Chapter IV of the Reserve Bank of India (Commercial Banks — Forthcoming Instructions) Directions, 2025, relating to Minimum Capital Requirements for Operational Risk.

The amendments seek to provide greater clarity and consistency in the computation of the Business Indicator (BI), Operational Risk Capital (ORC), and the Internal Loss Multiplier (ILM) under the operational risk capital framework applicable to commercial banks.

The amendments will come into force on 1 April 2027.

The key changes include:

1. Introduction of indicative mapping between Business Indicator components and prescribed financial statement schedules.

2. Clarification regarding accounting treatment of lease-related income and expenses.

3. Guidance on treatment of derivative assets in calculating interest-earning assets.

4. Revision of the Internal Loss Multiplier (ILM) calculation to use operational loss data net of recoveries.

5. Flexibility for banks lacking ten years of operational loss data to use at least five years of high-quality loss data.

6. Detailed methodology for recognising operational losses arising from damage or destruction of bank assets.

The amendment modifies provisions contained in Chapter IV of the Reserve Bank of India (Commercial Banks — Forthcoming Instructions) Directions, 2025, which implement a capital framework for operational risk broadly aligned with international prudential standards. The framework calculates operational risk capital using:

• Business Indicator (BI);

• Business Indicator Components: Interest, Lease and Dividend Component (ILDC); Services Component (SC); Financial Component (FC); and

• Internal Loss Multiplier (ILM).

Major Amendments

1. Revised Paragraph 29: Business Indicator Mapping Framework

Earlier Position

The original framework under the Reserve Bank of India’s operational risk capital directions specified the constituent elements of the Business Indicator (BI) but did not expressly link those elements to individual schedules in banks’ prescribed financial statements.

Amendment

The amendment revises Paragraph 29 to clarify that the constituent elements of the Business Indicator are to be derived from the corresponding schedules of banks’ prescribed financial statements. It also introduces an indicative mapping framework that aligns Business Indicator components, such as the Interest, Lease and Dividend Component (ILDC), Services Component (SC), and Financial Component (FC), with specific financial statement schedules.

Significance

The amendment enhances consistency in regulatory reporting and reduces interpretational differences among banks when calculating operational risk capital.

2. Introduction of Indicative Mapping to Financial Statements

The amendment inserts a new column in Table VIII providing an “Indicative Mapping to Specific Schedules in the Balance Sheet and/or Profit and Loss Account”. The mapping identifies the financial statement schedules that may be referred to for determining various Business Indicator (BI) items.

BI Item — Indicative Schedule

Interest Income — Schedule 13, 14

Interest Expenses — Schedule 15, 16

Interest Earning Assets — Schedule 6, 7, 8, 9, 11

Dividend Income — Schedule 13, 14

Fee & Commission Income — Schedule 14

Fee & Commission Expenses — Schedule 16

Other Operating Income — Schedule 14

Other Operating Expenses — Schedule 15, 16 and Provisions & Contingencies

Trading Book Profit/Loss — Schedule 14

Banking Book Profit/Loss — Schedule 14

3. Clarification Regarding Leases

RBI has clarified that:

• The amendment expressly includes rental income from operating leases within the Interest, Lease and Dividend Component (ILDC).

• For the purpose of calculating the Interest, Lease and Dividend Component (ILDC), the amendment expressly includes:

  • rental expenses; and

  • losses from leased assets

4. Treatment of Derivative Assets

A new explanation clarifies that:

• Interest-rate derivative assets affecting interest income must be included in interest-earning assets.

• Such assets must be recorded at fair value, notional value.

• Only positive fair values are to be considered.

• Negative fair values cannot be offset against positive values.

This prevents understatement of interest-earning assets and promotes uniform treatment of derivative exposures across banks.

5. Revision to Internal Loss Multiplier (ILM)—Amendment to Paragraph 31

The amendment clarifies that the Loss Component (LC) is equal to fifteen times the average annual operational risk losses, calculated net of recoveries.

6. Flexible Operational Loss Data Requirement—Amendment to Paragraph 32

The previous framework required ten years of high quality operational risk annual loss data.

The amendment now permits a bank that:

• has become subject to ILM calculations for the first time; and

• possesses at least five years of high-quality loss data,

  to calculate the Loss Component using the available high-quality loss data, provided that at least five years of such data are available.

  This eases implementation challenges for banks that do not yet possess a full ten-year operational loss history while maintaining data-quality standards.

7. Clarification on Operational Losses from Damaged Assets

RBI has introduced a detailed guidance on how operational losses should be measured when a bank asset is damaged or destroyed.

Scenario 1: Where an asset is not repaired or replaced

Operational loss equals:

• reduction in book value; plus

• clean-up or disposal costs.

Scenario 2: Where an asset is fully repaired or replaced

Operational loss equals:

• repair/replacement cost; plus

• residual clean-up or disposal costs.

Scenario 3: Where an asset is partially repaired

Operational loss equals:

• repair cost; plus

• post-repair loss in book value; plus

• residual clean-up or disposal costs.

The amendment is largely clarificatory and implementation-oriented, rather than introducing a new capital regime. Its principal objective is to standardise the computation of operational risk capital by refining the Business Indicator (BI) framework, strengthening its linkage with prescribed financial statements, facilitating the practical implementation of the Internal Loss Multiplier (ILM) framework, and providing detailed guidance on the recognition and measurement of operational losses.

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