Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs
1. Introduction:
NBFCs have been outsourcing various activities and are hence exposed to various risks as such as strategic risk, country risk, compliance risk, operational risk, legal risk etc. The outsourced activities are to be brought within regulatory purview to protect the interest of the customers of NBFCs and to ensure that the NBFC concerned and the Reserve Bank of India have access to all relevant books, records and information available with service provider.
Reserve Bank of India (RBI) has issued these particular directions for managing risks associated with outsourcing of financial services by NBFCs and code of conduct to be adhered by both service provider and NBFC involved in such financial activity being outsourced.
2. Activities that can be outsourced:
NBFCs under these regulations shall outsource only material financial services such as application processing (loan/credit card), document processing, marketing, supervisions of loans including recovery, data processing and back office related activities etc.
These directions are not applicable to the following:
- Technology related issues;
- Activities not related to financial services;
- Non-material outsourcing arrangements.
Material outsourcing arrangements are those which if disrupted have the potential to significantly impact the business operations, reputation, profitability or customer service. Materiality of outsourcing depends on various factors such as its likely impact on reputation of NBFC, brand value, solvency, earnings, liquidity and cost of outsourcing to the in-house operational cost of the NBFC.
For outsourcing NBFC shall not require any prior approval from RBI however such outsourcing arrangements shall be subject to the on-site/off-site inspection/scrutiny by RBI.
3. Activities that can’t be outsourced: NBFCs outsourcing financial services shall not outsource following while outsourcing financial services
- Core Management Functions including Internal Audit;
- Strategic and Compliance Functions;
- Decision making functions such as according sanction for loans, management of investment of portfolio, determining compliance with KYC while opening of accounts
4. To whom financial services activities can be outsourced:
- Third party service provider located in India or elsewhere;
- Member within the same group/conglomerate.
5. Outsourcing Agreement: Outsourcing Agreement shall be in such manner that it
- Activities being outsourced are clearly mentioned including service and performance standards;
- Allow the NBFC to retain an appropriate level of control over the outsourcing;
- Allow the NBFC Right to intervene with appropriate measures to meet legal and regulatory requirements;
- Nature of relationship between NBFC and service provider whether principal or agent or otherwise;
- It must be ensured that NBFC has the ability to access all books, records and information relevant to the outsourced activity available with the service provider;
- prior approval/ consent by the NBFC for the use of sub-contractors by the service provider for all or part of an outsourced activity;
- It must be ensured that no breach of security and leakage of confidential customer related information take place.
And such other things as more specifically mentioned in the directions.
6. Continuous obligations of NBFC in outsourcing:
- NBFC, its Board of Directors and Senior management obligations under the law shall not be discharged by mere fact of outsourcing;
- NBFC shall be responsible for the actions of their service provider including direct sales agent/recovery agents etc;
- Such outsourcing of activity shall not affect the rights of customer against the NBFC including obtaining redress;
- NBFC need to have Grievance Redress Mechanism, which in no way shall be compromised on account of outsourcing;
- NBFCs shall incorporate a clause in the relative product literature/ brochures, etc., stating that they are using/may use the services of agents in sales/ marketing/recovery etc.
7. Role of Board of Directors and Senior Management:
- Developing and implementing sound outsourcing policies and procedures commensurate with the nature, scope and complexity of the outsourcing activity;
- To have in place board approved Outsourcing policy to outsource any of its financial activities including criteria for selection of financial services, criteria for selection of service provider;
- To review outsource policy periodically and to identify new material financial outsourcing activities;
- Evaluating risks associated with outsourcing and taking appropriate steps to mitigate risks;
- Undertaking due diligence to assess the capability of service provider to comply with obligations in the outsourcing agreement;
- To have in place Board approved Code of Conduct for DSA/ Recovery Agents, and obtain their undertaking to abide by the code;
- Review on annual basis the financial and operational position of service provider to assess its ability to continue to meets its obligations.
8. Miscellaneous:
- In the event of termination of the outsourcing agreement for any reason in cases where the service provider deals with the customers, the same shall be publicized by displaying at a prominent place in the branch, posting it on the web-site, and informing the customers so as to ensure that the customers do not continue to deal with the service provider;
- In case of entering into outsourcing arrangements with the member of same group/conglomerate, the outsourcing arrangements shall cover the clear demarcation of sharing resources i.e. premises, personnel, etc and customer shall be specifically informed which company is offering the product/service;
- In case of activities outsourced outside India, NBFC shall ensure government policies and political, social, economic and legal conditions are taken into account;
- It shall be ensured that regulating authority of off-shore location does not have access to the data pertaining to Indian operations of NBFC.
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