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RBI announces outsourcing rules for cooperative banks

The Reserve Bank of India (RBI), while issuing guidelines for the management of the risk associated with outsourcing financial services by cooperative banks, has stated that lenders will be able to hire experts, including former employees, on a contractual basis, subject to conditions. However, it has directed cooperative banks not to outsource core management functions including policy formulation, internal audit and compliance, compliance with KYC norms, credit sanction and the management of investment portfolios. Banks have been asked to conduct self-assessments of their existing outsourcing mechanisms and comply with the new requirements within 6 months. As per the guidelines, outsourcing does not reduce the obligations of the bank, its Board, the CEO, and its management.

Indicative key risks that must be evaluated by the co-op banks include strategic risk, reputation risk, compliance risk, operational risk, legal risk, exit strategy risk, and country risk. Banks must also retain an appropriate level of control over their outsourcing and the right to intervene with appropriate measures, in the event of a sudden and unexpected termination of an outsourcing agreement. The Indian Banks' Association (IBA) will maintain a caution list of service providers for the entire banking industry, keeping track of service providers that prematurely terminate their contracts.

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