RBI updated its guidance note from two decades ago, which will directly affect banks and NBFCs

The Reserve Bank on Tuesday updated its 'Guidance Note' on Operational Risk Management for the financial sector and extended its scope to NBFCs including housing finance companies. The 2005 'Guidance Note on Operational Risk Management' covered only commercial banks.

The Reserve Bank of India (RBI) said that operational disruptions can threaten the existence of any regulated entity (RE). may affect its customers and other market participants. Ultimately it has a very bad impact on financial stability.

The cause of operational errors could be anything. Such as any human reason, IT-related threats, geopolitical conflict, business disruption, internal or external fraud, dependence on third parties, or any natural reason. The purpose of the RBI guidance note is to improve risk management in any regulated institution so that such problems have minimal impact on the institution and customers.

For example, if a regulated entity is overly dependent on a third party, then it is not right for it. If there is any issue with the third party, it may impact the functioning of the regulated entity as well. Therefore, the guidance note will explain how to deal with such situations.

One of the main changes in the updated guidance note is that its scope has now been extended to all non-banking finance companies, housing finance companies, and cooperative banks along with commercial banks. The central bank has repealed the 2005 guidance note, which applied only to commercial banks. The security model of the new note has steps to reduce the risk of fraud at a financial institution.