The Reserve Bank of India (RBI) on 23 October issued amendment directions that fix 1 April 2027 as the date commercial banks switch to the Basel III standardised approach for operational risk capital. The amendment also adds an indicative mapping of the new business indicator to the schedules of Indian bank financial statements and incorporates clarifications issued by the Basel Committee on Banking Supervision. The Governor announced the date a year ago. For India’s larger banks, operational risk capital will depend on up to ten years of their own loss history, and the amendment sets out how those losses are counted.
The switch applies to commercial banks from 1 April 2027
The RBI’s press release says the revised Basel III capital framework, announced in the Governor’s statement of 1 October 2025, applies to commercial banks other than small finance banks, payments banks and regional rural banks. The operational risk rules sit in Chapter IV of the Forthcoming Instructions Directions of 28 November 2025, which until now carried no effective date.
The new method replaces the Basic Indicator Approach, under which capital is a fixed percentage of average gross income. The RBI does not require a parallel run, so banks will not report the two calculations side by side before the switch.
Bank size sets the base charge and loss history adjusts it
The standardised approach starts from a business indicator (BI), built from three components of the income statement and balance sheet: interest, leases and dividends; services; and the financial component covering trading and banking book gains and losses. The BI is multiplied by marginal coefficients that rise with size. Under the 2025 directions, the coefficient is 12% on BI up to ₹8,000 crore, 15% on BI between ₹8,000 crore and ₹2,40,000 crore, and 18% above that. The RBI’s own illustration, a bank with BI of ₹3,50,000 crore, produces a business indicator component (BIC) of ₹55,560 crore.
For a bank in the first bucket, capital equals the BIC. For banks in buckets two and three with at least five years of high-quality loss data, the BIC is multiplied by an internal loss multiplier (ILM). The ILM compares a loss component, set at 15 times average annual operational losses, with the BIC. A bank whose losses are high relative to its size gets a multiplier above one and holds more capital, and a bank with a clean record holds less. Risk-weighted assets equal the capital requirement multiplied by 12.5.
India’s choice to use the multiplier sets it apart from some other large markets. The European Union’s Capital Requirements Regulation and the UK Prudential Regulation Authority’s Basel 3.1 rules both set the ILM at one, so loss history does not move the charge for banks there. In India, two banks with the same business indicator can end up with different operational risk charges if one has a heavier record of fraud and other losses.
Losses now count net of recoveries, with rules for damaged assets
The amendment rewrites the paragraph on the loss component so that it uses average annual losses “net of recoveries.” Insurance payouts, sums recovered from fraudsters and returned misdirected transfers therefore reduce the losses that feed the multiplier, provided the bank can evidence them under the data standards in the directions.
The RBI also added an explanation on damaged or destroyed assets. If a bank does not replace or repair the asset, the loss equals the fall in book value plus clean-up or disposal costs. If it replaces or fully repairs it, the loss is the cost of doing so plus residual clean-up costs. A partial repair counts the repair cost plus the remaining loss in book value. These rules decide how a branch fire or a flood at a data centre enters the ten-year record.
The data window is unchanged. The loss component uses ten years of high-quality loss data, and a bank with between five and ten years uses what it has. Banks in buckets two and three without five years of data hold capital equal to the BIC, though the RBI’s Department of Supervision may still require a multiplier above one.
The business indicator now ties to specific schedules
Most of the amendment is a rewritten Table 8. Each BI item now carries an indicative mapping to the schedules in the prescribed balance sheet and profit and loss account: interest income to Schedules 13 and 14, interest expense to Schedules 15 and 16, and interest-earning assets to Schedules 6, 7, 8, 9 and 11. Interest rate derivative assets that affect interest income must be counted in interest-earning assets at their positive fair value instead of their notional amount. Income and expenses from operating leases move into the interest, leases and dividend component and out of other operating income and expenses.
The RBI says the mapping is indicative. Where its financial statement directions classify an item differently, banks must follow the operational risk definitions. Finance and risk teams will have to reconcile the two before the first reporting date.
What to watch
- 1 April 2027: Basel III standardised approach for operational risk takes effect for commercial banks
- Pillar 3 disclosures of BI, loss data and any excluded losses in the first year
- Any RBI decision to apply an ILM above one to banks without five years of loss data
- Separate RBI timelines for small finance banks, payments banks and regional rural banks
Primary sources
- RBI, Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Second Amendment Directions, 2026, 23 October 2026
- RBI, Press release on the Second Amendment Directions on Minimum Capital Requirements for Operational Risk, 23 October 2026
- RBI, Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Directions, 2025, 28 November 2025
Related: Basel review grades Australia, Japan and Korea compliant on the leverage ratio
Photo (cropped): Anurag Vijay 03, CC BY-SA 4.0 via Wikimedia Commons
