RBI Guidelines for Co-operative Banks: Outsourcing is nothing but the use of a third party to perform activities on an everyday basis that would be undertaken by a cooperative bank itself, now or in the near time. Continuing basis of particular assignment is done by the outsourcing service provider. The continuous basis will include agreements for a very limited period.
The central bank or Reserve Bank of India on Monday directed cooperative banks not to outsource core management functions like internal audit and compliance, compliance with KYC norms, policy formulation, management of investment portfolio, and credit sanction.
Issuing guidelines for managing risk in outsourcing the financial services from cooperative banks, the RBI said the lenders can have the experts board, including former employees, on a contractual basis subject to some of the rules and regulations.
RBI mentioned that cooperative banks are rapidly using outsourcing for reducing costs as well as for availing specialist expertise, where they won’t have those services. While, this process entirely makes the banks prerogative to take a view on the desirability of outsourcing a permissible function, having to all relevant factors, considering all the commercial aspects of the decision, hence outsourcing results in banks being exposed to various risks.
In the guidelines, the Central bank said, the rules have been issued to enable the cooperative banks to put in place required safeguards for addressing the risks inherent in outsourcing of activities.
They have been asked to do a self-assessment of their existing outsourcing arrangements and bring the same in accordance with these guidelines within a period of six months.
According to the guidelines, outsourcing of any functions by a co-operative bank does not reduce its obligations and those of its Board members and CEO along with the management, who has the ultimate responsibility for the outsourced functions.
A cooperative bank having the intention to outsource any of its financial activities will have to put across a comprehensive outsourcing policy, having the approval by its Board, in line with the criteria indicated in the guidelines.
The central bank also focused on rules and regulations governing the contract between a cooperative bank and service provider should be carefully defined in written agreements and approved by the bank’s legal counsel on their legal effect and enforceability, the new guidelines said.
Going further, the main objective is to mitigate the risk of unexpected termination of the outsourcing agreement or liquidation of the service provider, cooperative banks shall retain a proper level of control over their outsourcing firm and the right to intervene with appropriate measures, to continue their business operations.
If a service provider’s agreement is terminated prematurely previous to the completion of the contracted period of service, IBA or the Indian Banks Association will have to be informed with reasons for the termination. Indian Banks Association will also be maintaining a cautious list of such service providers for the entire banking industry for sharing among banks.
In Closing
Outsourcing is good for cost reduction but as far as competition concerned, core management functions are meant to be kept secret and hence it should not outsource or at least there should be restrictions on the level of outsourcing and hence RBI came up with this strategic move.
