Co-operative banks: RBI issues guidelines to manage risk arising from outsourcing

The indicative key risks in outsourcing that need to be evaluated include strategic, reputation, compliance and operational risks, among others.

The Reserve Bank of India on Monday released guidelines for co-operative banks to manage risks that could arise from outsourcing of financial services. The regulator said the chief executive officer and the senior management of co-operative banks would be responsible for evaluating risks and materiality of all existing and prospective outsourcing activities.

The regulator specified that a bank shall retain ultimate control of outsourced activities. Co-operative banks will now have to conduct a self-assessment of their existing outsourcing arrangements and bring the same in line with the guidelines released on Monday within six months.

“The underlying principles behind these guidelines are that the co-operative bank should ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and the RBI, nor impede effective supervision by Reserve Bank of India (RBI)/ National Bank for Agriculture and Development (NABARD),” the central bank said on Monday. These guidelines are not applicable to technology-related issues, it added.

The RBI has also made it clear that co-operative banks shall be responsible for the actions of their service provider, including actions of business correspondents and their retail outlets/sub-agents. The grievance redressal mechanism of co-operative banks should not be compromised on account of outsourcing.

Co-operative banks will also need to put in place a management structure to monitor and control outsourcing activities. The indicative key risks in outsourcing that need to be evaluated include strategic, reputation, compliance and operational risks, among others.

A co-operative bank intending to outsource any of its financial activities will need to put in place a comprehensive outsourcing policy approved by its board. If a service provider’s contract is terminated prematurely prior to the completion of service, the Indian Banks’ Association (IBA) would have to be informed with reasons for termination. The IBA would be maintaining a caution list of such service providers for the entire banking industry for sharing among banks.