RBI issues Guidelines on Managing Risks in Outsourcing of Financial services by Co-operative Banks
RBI has observed that the co-operative banks are increasingly using outsourcing as a means for reducing costs as well as for availing specialist expertise, where these are not available internally.
The RBI maintains that it is entirely the banks’ prerogative to take a view on the desirability of outsourcing a permissible activity having regard to all relevant factors, including the commercial aspects of the decision, however such outsourcing results in banks being exposed to various risks.
Therefore, to enable the co-operative banks to put in place necessary safeguards for addressing the risks inherent in outsourcing of activities, RBI has issued guidelines on managing risks in outsourcing of Financial services by Co-operative Banks
Key Highlights of Guidelines on on Managing Risks in Outsourcing of Financial services by Co-operative Banks
The guidelines are concerned with managing risks in outsourcing of financial services and are not applicable to technology-related issues as also activities not related to financial services like usage of courier, catering of staff, housekeeping and janitorial services, security of the premises, movement and archiving of records, etc.
Activities that shall not be outsourced
Core management functions including policy formulation, internal audit and compliance, compliance with KYC norms, credit sanction and management of investment portfolio shall not be outsourced.. However, where required, experts, including former employees, could be hired on a contractual basis subject to the Audit Committee of Board/Board being assured that such expertise does not exist within the audit function of the bank.
Review of Material Outsourcing
RBI / NABARD will review the implementation of these guidelines to assess the quality of related risk management systems particularly in respect of material outsourcing. Material outsourcing arrangements are those, which if disrupted, have the potential to significantly impact the business operations, reputation or profitability of co-operative banks.
Outsourcing Policy
A co-operative bank intending to outsource any of its financial activities shall put in place a comprehensive outsourcing policy, approved by its Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, parameters for defining material outsourcing based on the broad criteria based on materiality, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities.
Role of the Board of Directors (Board), and CEO along with the Senior Management
The Board, and CEO along with the Senior Management shall be ultimately responsible for outsourcing operations and for managing risks inherent in such outsourcing relationships. The Board and CEO along with the Management shall have the responsibility to institute an effective governance mechanism and risk management process for all outsourced operations.
Evaluation of the Risks and Capability of the Service Provider
Various key risk indicators in outsourcing have been provided that need to be evaluated by the co-operative banks. Also, in considering or renewing an outsourcing arrangement, co-operative banks shall undertake appropriate due diligence to assess the capability of the service provider to comply with obligations in the outsourcing agreement
The Outsourcing Agreement
The terms and conditions governing the contract between a co-operative bank and service provider should be carefully defined in written agreements and vetted by bank’s legal counsel on their legal effect and enforceability. Every such agreement should address the risks and risk mitigation strategies. The agreement should be sufficiently flexible to allow the bank to retain an appropriate level of control over the outsourcing and the right to intervene with appropriate measures to meet legal and regulatory obligations. The agreement should also bring out the nature of legal relationship between the parties, i.e., whether agent, principal or otherwise.
Some of the suggestive Key Provisions of the agreement has been given.
Guidelines include various other factors i.e. monitoring and control of Outsourced Activities, Redressal of Grievances, Confidentiality and Security etc. which need to be addressed by cooperative banks
RBI has advised Co-operative banks to conduct a self-assessment of their existing outsourcing arrangements and bring the same in line with above guidelines within a period of six months.
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