The draft guidelines on implementation of the New Capital Adequacy Framework were issued for comments on February 15, 2005. In terms of our draft guidelines banks are required to maintain capital for operational risk as per the Basic Indicator Approach and are required to comply with the Basel Committee’s guidance on Sound Practices for the Management and Supervision of Operational Risk, February 2003. Many banks, both formally and informally, desired that the Reserve Bank issue a guidance note on management of operational risk on the lines of guidance notes issued by the Reserve Bank on management of credit risk and market risk in 2002.

2. Accordingly, a Working Group comprising of senior officials from select banks was constituted to draw up a draft Guidance Note on Management of Operational Risk. On the basis of inputs received from the Working Group draft Guidance Note on Management of Operational Risk has been prepared and is enclosed. The Guidance Note has drawn upon and reflects the international best practices in the area of operational risk management. Banks are requested to furnish their feedback to us within one month from the date of this letter. The draft Guidance Note is also placed on the web-site for wider access and feedback. The Guidance Note would be reviewed and revised in the light of the feedback that may be received

4. Please acknowledge receipt

Yours faithfully,

(C. R. Muralidharan)
Chief General Manager-in-Charge