Cooperative banks shall not outsource core management functions: RBI


The Reserve Bank of India on Monday directed cooperative banks not to outsource core management functions such as policy formula, internal audit and compliance, compliance with KYC standards, credit sanction and management of financial investment portfolio.

Issuing guidelines for handling risk in outsourcing of monetary services by cooperative banks, the central bank stated the lending institutions can work with specialists, consisting of former workers, on a contractual basis subject to particular conditions.

Outsourcing’ is specified as usage of a third-party to perform activities on a continuing basis that would typically be undertaken by a cooperative bank itself, now or in the future. ‘Continuing basis’ would include agreements for a restricted duration.

Cooperative banks are significantly utilizing contracting out as a method for decreasing expenses along with for availing specialist know-how, where these are not offered internally.

While it is totally the banks’ prerogative to take a view on the desirability of contracting out a permissible activity having regard to all appropriate elements, consisting of the commercial elements of the choice, such outsourcing leads to banks being exposed to various dangers, the RBI stated.

“Cooperative banks which select to contract out monetary services, nevertheless, will not contract out core management functions consisting of policy formulation, internal audit and compliance, compliance with KYC standards, credit sanction and management of financial investment portfolio,” the standards said.

The standards, the RBI said, have been issued to make it possible for the cooperative banks to put in location essential safeguards for resolving the risks inherent in outsourcing of activities.

They have been asked to carry out a self-assessment of their existing outsourcing arrangements and bring the very same in line with these standards within a duration of six months.

Based on the guidelines, outsourcing of any activity by a co-operative bank does not reduce its commitments and those of its Board and CEO along with the management, who have the supreme responsibility for the outsourced activity.

A cooperative bank planning to outsource any of its financial activities will need to put in location a comprehensive outsourcing policy, approved by its Board, in line with the requirements suggested in the guidelines.

The a sign key threats in outsourcing that need to be examined by the co-operative banks, include, strategic threat, reputation risk, compliance threat, operational risk, legal threat, exit method threat, and country danger.

Also, the conditions governing the contract between a cooperative bank and service supplier need to be carefully defined in written contracts and vetted by bank’s legal counsel on their legal effect and enforceability, the standards said.

Further, in order to mitigate the threat of unanticipated termination of the contracting out contract or liquidation of the company, cooperative banks will maintain a proper level of control over their outsourcing and the right to intervene with appropriate steps, to continue their company operations in such.

If a company’s contract is terminated too soon prior to the conclusion of the contracted period of service, Indian Banks’ Association (IBA) would need to be informed with factors for termination. IBA would be preserving a care list of such service providers for the entire banking market for sharing amongst banks.Published at Mon,
28 Jun 2021 17:23:23 +0000