The Reserve Bank of India (“RBI”), vide its Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Second Amendment Directions, 2026, dated October 23, 2026, has amended the framework governing minimum capital requirements for operational risk under the Basel III framework. The amendments refine the computation of the Business Indicator, clarify the treatment of historical operational losses and prescribe the methodology for measuring losses arising from damaged or destroyed assets. The revised provisions will come into effect from April 1, 2027.

These changes are significant for banks as they affect the computation of operational risk capital requirements, the quality of historical loss data and the consistency of regulatory reporting.

Computation of the Business Indicator

The amendments bring greater clarity to the computation of the Business Indicator (“BI”), which is determined based on three key components:

Interest, Lease and Dividend Component (“ILDC”).

Services Component (“SC”).

Financial Component (“FC”).

The revised provisions clarify that the mapping of BI items to the schedules and line items of financial statements is indicative. Where the measurement, classification or presentation of an item under the RBI's Financial Statements: Presentation and Disclosures Directions, 2025 differs from the requirements under the operational risk framework, banks must ensure that the items considered for computing operational risk capital align with the descriptions and sub-items specified under the applicable regulatory framework.

From a compliance perspective, this requires banks to examine their existing financial reporting classifications and BI computation methodologies to identify any differences between accounting presentation and regulatory capital computation.

B.Recognition of Historical Operational Losses

The amendments introduce further clarity regarding the Loss Component (“LC”) and the Internal Loss Multiplier (“ILM”), which form part of the methodology for calculating operational risk capital requirements.

The LC is prescribed as 15 (fifteen) times the average annual operational risk losses, net of recoveries. The ILM incorporates a bank's internal operational risk loss experience into the calculation of operational risk capital requirements.

The average annual losses are generally calculated using 10 (ten) years of high-quality operational risk loss data. However, where a bank becomes subject to ILM calculation for the first time and does not have 10 (ten) years of high-quality loss data, it must use its available high-quality loss data if it has at least five years of such data.

These requirements reinforce the importance of maintaining reliable and properly documented operational loss records. Banks should review their historical loss databases, recovery records and internal reconciliation procedures to ensure that the data used for regulatory capital calculations is complete and accurate.

C. Measurement of Losses Arising from Damaged Assets

Another important aspect of the revised framework concerns the measurement of losses arising from damaged or destroyed assets.The manner in which such losses are calculated depends on whether the damaged asset is repaired, replaced or left unrepaired:

Where the asset is neither repaired nor replaced: The operational loss corresponds to the reduction in the asset's book value, together with any residual clean-up or disposal costs.
Where the asset is fully repaired or replaced: The operational loss corresponds to the cost of repair or replacement, together with any residual clean-up or disposal costs.
Where the asset is partially repaired: The operational loss comprises the repair costs, the reduction in book value after repair compared with its pre-loss book value, and any residual clean-up or disposal costs.

The prescribed treatment applies without prejudice to additional indirect losses. Banks should therefore review their operational loss identification and measurement policies to ensure that the accounting treatment of damaged assets is appropriately reflected in operational risk loss records.

D. Compliance and Implementation Considerations

The amendments will take effect from April 1, 2027. Banks within the scope of the Directions should consider undertaking a structured review of their existing operational risk management and regulatory reporting arrangements.

Key areas for review include:

Regulatory reporting: Alignment of financial statement classifications with the BI computation methodology prescribed under the Directions.

Loss data governance: Availability, completeness and quality of historical operational loss data, including the documentation of recoveries.

Internal policies: Review of operational loss identification, measurement and reporting procedures, particularly in relation to damaged or destroyed assets.

Systems and controls: Assessment of whether existing systems adequately capture the information required to calculate the BI, LC and ILM.

Implementation readiness: Timely coordination between regulatory compliance, finance, risk management, internal audit and technology teams to operationalise the revised framework.

E. Implications for the Banking Sector

The amendments provide greater clarity on the calculation of operational risk capital requirements and the treatment of operational losses. They also highlight the importance of consistent data classification, robust internal controls and reliable historical loss records in determining regulatory capital.

For banks, the principal implementation challenge will be ensuring that the prescribed methodology is reflected consistently across financial reporting, operational risk management and regulatory capital computation.

The amendments should accordingly be viewed not merely as changes to the capital calculation methodology, but also as an opportunity to strengthen the governance and documentation supporting operational risk measurement

RBI's Revises Operational Risk Capital Norms