Page 31 - Insurance Times February 2022

organisations operating in the market with different focus - Strategic and compliance functions and decision
sector. In such a competitive environment, banks making functions, such as determining compliance
continuously face challenges to enhance their operational with KYC norms for opening deposit accounts,
efficiency, reduce operating costs, and improve its services according sanction for loans and management of
to their customers. As a result, outsourcing business investment portfolio.
functions has become an integral part of banking operations. - However for NBFCs, these functions may be
Outsourcing simply means delegating some of the inhouse
outsourced within the NBFC's group entities subject
operations or processes to third party.
to compliance with certain instructions.
Y Banks or NBFCs which desire to outsource financial
Some of the commonly outsourced functions in
services other than specified above would not require
banking industry are as below: prior approval from RBI. However, such arrangements
Y IT infrastructure management including managing and would be subject to on-site/ off- site monitoring and
operating servers inspection/ scrutiny by RBI.
Y Network administration and management Y In regards to outsourced services relating to credit

Y Core banking application products development and cards, RBI's detailed instructions contained in its circular
maintenance on credit card activities would be applicable.

Y Managing isolated cloud centres Y The risk management practices stated in the guidelines
provides for :
Y Managing call centres and phone banking operations
- Development of comprehensive board approved
Y Loan recovery functions Outsourcing policy

Y Housekeeping and premises infrastructure operations - Role and responsibility of Board and Senior
Y Physical security functions Management
- Evaluation of risks in outsourcing activities
4. RBI Guidelines on Outsourcing - Evaluation the Capability of the Service Provider
The Reserve Bank of India has issued guidelines on
- Outsourcing Agreement
Outsourcing to provide direction or guidance to banks, NBFCs
to adopt sound and responsive risk management practices - Confidentiality and Security
for effective oversight, due diligence and management of - Responsibilities of Direct Sales Agents (DSA)/ Direct
risk arising from outsourcing activities. Marketing Agents (DMA)/Recovery Agents

Some important insights of the RBI guidelines: - Business Continuity and Management of Disaster
Recovery Plan
Y The guidelines are applicable to material outsourcing
arrangements which may be entered into by bank or - Monitoring and Control of Outsourced Activities
NBFC with a service provider located in India or - Redress of Grievances related to Outsourced
elsewhere. The service provider may either be a Services
member of the group/ conglomerate to which the bank - Reporting of transactions to FIU or other
or NBFC belongs, or an unrelated party.
competent authorities
Y The guidelines are concerned with managing risks in
outsourcing of financial services and are not applicable 5. Operational risks in outsourced
to technology-related issues and activities not related activities
to services like usage of courier, catering of staff,
In a quest bring in efficiency and optimise operating costs,
housekeeping and janitorial services, security of the outsourcing has become a standard business practice across
premises, movement and archiving of records etc. industries. It has also created new risk avenues for the banks
Y Activities that cannot be outsourced: specifically with relation to quality of service, continuity of
- Core management functions, including internal operations, and compliance with regulations which directly
audit (internal auditors can be on contract). can impact customer satisfaction.

The Insurance Times, February 2022 31