The Reserve Bank of India (RBI), on Monday, asked co-operative banks to ensure that their outsourcing arrangements do not diminish their ability to fulfil their obligations to customers and the RBI.
Further, such arrangements should not impede effective supervision by the RBI/ National Bank for Agriculture and Development (NABARD).
“Co-operative banks, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as would be employed by them, if the activities were conducted by the banks and not outsourced,” said the RBI in its ‘Guidelines for Managing Risk in Outsourcing of Financial Services by Co-operative Banks’.
Accordingly, co-operative banks should not engage in outsourcing that will result in their internal control, business conduct or reputation being compromised or weakened.
The guidelines require a co-operative bank intending to outsource any of its financial activities to put in place a comprehensive outsourcing policy approved by its board.
This policy should incorporate, inter alia, criteria for selection of such activities as well as service providers, parameters for defining material outsourcing, delegation of authority depending on risks and materiality, and systems to monitor and review the operations of these activities.
The RBI said the outsourcing of any activity by a co-operative bank does not diminish its obligations, and those of its board and CEO along with the management, who have the ultimate responsibility for the outsourced activity.
Co-operative banks shall, therefore, be responsible for the actions of their service provider including actions of the Business Correspondents and their retail outlets / sub-agents and the confidentiality of information pertaining to the customers that is available with the service provider. The bank shall retain ultimate control of the outsourced activity.
“These guidelines are concerned with managing risks in outsourcing of financial services…Co-operative banks which desire to outsource would not require prior approval from the RBI / NABARD. However, such arrangements would be subject to on-site / off-site monitoring and inspection/scrutiny by the RBI / NABARD,” said the circular.
The RBI emphasised that co-operative banks that choose to outsource financial services, however, should not outsource core management functions, including policy formulation, internal audit and compliance, compliance with KYC norms, credit sanction, and management of investment portfolio.
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.
Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the internal audit function.
During inspections/ scrutinies, the 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
The central bank said the grievance redressal mechanism of co-operative banks should not be compromised on account of outsourcing.
Outsourcing arrangements shall not affect the rights of a customer against the co-operative bank, including the ability of the customers to redress their grievances as applicable under relevant laws.
While 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, such outsourcing results in banks being exposed to various risks, cautioned RBI.
Co-operative banks have to evaluate various risks such as strategic, reputation, compliance, operational, legal, exit strategy, and concentration and systemic in outsourcing.