Press Information Bureau

Government of India

Ministry of Finance

06-September-2011 18:09 IST

Guidelines Issued to Enable Banks to Effectively Manage Risks Arising Out of Outsourcing

Reserve Bank of India (RBI) has issued Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks on 3rd November, 2006, to enable the banks to effectively manage the risks arising out of outsourcing. As per these guidelines, the banks are required to put in place a Board approved comprehensive policy detailing all relevant aspects such as the services to be outsourced, criteria for selection of such activities as well as service providers, parameters for defining material outsourcing, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities. However, the guidelines specify that banks should not outsource core management functions including internal audit, compliance function and decision-making functions like determining compliance with Know Your Customer (KYC) norms for opening deposit accounts, according sanction for loans, management of investment portfolio etc. Further, it is entirely for the banks to take a view on the desirability of outsourcing having regard to all relevant factors, including the commercial aspects of the decision.

Government has granted autonomy to the public sector banks in respect of human resource issues relating to them including staffing pattern, recruitment, placement, transfer, training, promotion, etc. Accordingly, the banks evaluate their manpower requirement and undertake the recruitment process in accordance with their Board approved policies.

This information was given by the Minister of State for Finance Shri Namo Narain Meena in a written reply to a question raised in Rajya Sabha today.

DSM/SS/GN

Outsourcing risk management requires Board-approved policies and prohibits outsourcing core management functions by banks to manage service-provider risks. Reserve Bank guidelines require banks to adopt a Board-approved comprehensive policy for outsourcing, detailing services, selection criteria, parameters for material outsourcing, delegation of authority, and monitoring systems; they prohibit outsourcing of core management functions including internal audit, compliance, KYC decision-making, loan sanctioning and investment portfolio management, while leaving the decision to outsource to bank discretion subject to commercial and risk considerations.