Skip to main content

Draft Directions on Outsourcing of Financial Services

Reserve Bank of India (RBI) had issued draft directions on managing risks and code of conduct in outsourcing of financial services.

What is the objective of the directions?

The purpose of the directions on 'managing risks and code of conduct in outsourcing of financial services' is to ensure that outsourcing arrangements neither diminish the ability of the regulated entity (RE) to fulfil its obligations to customers nor impede effective supervision by the supervisory authority. 

What is outsourcing?

“Outsourcing” refers to an RE’s use of a third party (either an affiliated entity within a group or an external entity) to perform activities that would normally be undertaken by the RE itself on a continuing basis, now or in the future.

‘Continuing basis’ would include agreements for a limited period. This means REs shall not enter into perpetual agreements.

What is material outsourcing?

“Material outsourcing arrangement” means an outsourcing arrangement which –

  • In the event of failure of service or breach of security, has the potential to either materially impact an RE’s –
    • business operations, reputation, strategies, or profitability; or
    • ability to manage risk and comply with applicable laws and regulations, or
  • In the event of any unauthorised access or disclosure, loss or theft of customer information, may have a material impact on the RE’s customers.

To whom will the directions be applicable?

The directions will be applicable to the following entities –

  • Commercial Banks [including Local Area Banks (LABs), Regional Rural Banks (RRBs), Payments Banks (PBs), and Small Finance Banks (SFBs)]
  • All-India Financial Institutions (AIFIs) [viz. Exim Bank, National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB), Small Industries Development Bank of India (SIDBI), and National Bank for Financing Infrastructure and Development (NaBFID)]
  • Non-Banking Financial Companies (NBFCs) including Housing Finance Companies (HFCs)
  • Urban Co-operative Banks (UCBs), State Co-operative Banks (StCBs), and Central Co-operative Banks (CCBs)
  • Credit Information Companies (CICs)

Which are the supervisory authorities?

Supervisory authorities include –

  • RBI in case of Commercial Banks (including LABs, PBs, SFBs, and UCBs), NBFCs, CICs, and AIFIs.
  • NABARD in case of StCBs, CCBs, and RRBs
  • NHB in case of HFCs

What are the major directions?

  • REs desirous of outsourcing of financial services shall not require prior approval from RBI. However, such arrangements shall be subject to on-site / off- site monitoring and inspection / scrutiny by the supervisory authority.
  • REs shall not outsource core management functions including policy formulation, decision-making functions like determining compliance with KYC norms, according sanction for loans (i.e. decision to lend shall be solely taken by the RE and the role of the service provider shall only be that of a facilitator), management of investment portfolio, compliance function, and internal audit function.
  • REs shall be responsible not only for the actions of their service provider but also of their sub-agents engaged in the context of outsourced activity. 
  • REs shall also be responsible for the confidentiality of customer information available with the service provider.
  • Access to customer information by staff of the service provider shall be on ‘need to know’ basis, i.e., limited to those areas where the information is required in order to perform the outsourced function.
  • The responsibility for redressal of customers’ grievances related to outsourced services shall rest with the RE. If a complainant does not get any reply from the RE within 30 days after the RE received the complaint or is not satisfied with the reply of the RE, he / she will have the following options for redressal of his / her grievances.
    • RBI’s Ombudsman in case of REs to which RBI’s Integrated Ombudsman Scheme, 2021 applies, or
    • Consumer Education and Protection Cell (CEPC) of respective Regional Office of RBI in case of RBI supervised REs to which RBI’s Integrated Ombudsman Scheme, 2021 does not apply, or
    • Grievance Redressal mechanism of the respective supervisory authority in case of REs supervised by an authority other than RBI.
  • REs shall ensure that the service provider shall neither impede / interfere with the ability of the RE to effectively oversee and manage its activities nor impede the supervisory authority in carrying out the supervisory functions and objectives.
  • In considering or renewing an outsourcing arrangement, REs shall undertake appropriate due diligence to assess the capability of the service provider to comply with obligations in the outsourcing agreement. 
  • The event of termination of any outsourcing agreement, on account of the below-mentioned reasons (indicative in nature), where the service provider deals with customers, shall be publicised by publishing in the leading local newspaper with sufficient circulation in the locality, displaying at a prominent place in the branches, and posting it on the RE’s website so as to ensure that the customers do not continue to deal with the service provider.
    • Fraud committed by the service provider
    • Leakage of information / data
    • Breach of confidentiality or code of conduct by the service provider
    • Blacklisting of the service provider by GoI, RBI, SEBI, or any other regulator / supervisory authority
  • If a service provider’s contract is terminated prematurely prior to the completion of the contracted period of service, on account of the reasons mentioned below (indicative in nature), Indian Banks' Association (IBA) / respective RBI-recognised Self-Regulatory Organizations (SROs) would have to be informed of the reasons for termination. IBA / respective RBI-recognised SROs would be maintaining a caution list of such service providers for sharing among themselves and the respective member REs.
    • Fraud committed by the service provider
    • Leakage of information / data
    • Breach of confidentiality or code of conduct by the service provider
    • Blacklisting of the service provider by GoI, RBI, SEBI, or any other regulator / supervisory authority
  • Some of the key risks in outsourcing that need to be evaluated by the REs are - Compliance Risk, Concentration and Systemic Risk, Contractual Risk, Counterparty Risk, Country Risk, Exit Strategy Risk, Legal Risk, Operational Risk, Reputation Risk, Strategic Risk.
What are the reporting requirements for REs?
  • REs shall immediately notify the supervisory authority in the event of any significant problems that have the potential to materially affect the outsourcing arrangement and, as a consequence, materially affect the business operations, profitability, reputation or strategies of the RE.
  • REs shall report all material financial outsourcing arrangements (including arrangements involving extensive data sharing across geographic locations as part of process outsourcing and when data pertaining to Indian operations are processed abroad) to the supervisory authority on a quarterly basis.
  • REs shall submit an Annual Compliance Certificate giving the particulars of outsourcing contracts, the prescribed periodicity of audit by internal / external auditor, major findings of the audit and action taken through the Board, to their respective supervisory authorities.

References

Reserve Bank of India. (2023, October 26). 'Draft Master Direction on Managing Risks and Code of Conduct in Outsourcing of Financial Services'. Retrieved from https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4334

Reserve Bank of India. (2023, October 26). 'RBI invites comments on draft Master Direction on Managing Risks and Code of Conduct in Outsourcing of Financial Services'. Retrieved from https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56630


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Comments

Popular Posts

Highlights of RBI Annual Report 2023-24 – Chapter 7 to 12

Reserve Bank of India (RBI) has published its annual report for the financial year 2023-24. In a series of articles, we will go through the highlights of the report. This is the fifth and last article in the series.  Chapter 7 – Public Debt Management Ways And Means Advances (WMA) limit for the Government of India (GoI) for H1:2023-24 (April to September 2023) was fixed at ₹1,50,000 crore and for H2:2023-24 (October 2023 to March 2024) was fixed at ₹50,000 crore. RBI issued an ultra-long security of 50-year tenor aggregating ₹30,000 crore to cater to the growing needs of long-term institutional players. Issuance of Sovereign Green Bonds (SGrBs) for an aggregate amount of ₹20,000 crore included maiden issuance of 30-year (₹10,000 crore) SGrB in addition to 5-year (₹5,000 crore) and 10-year (₹5,000 crore) SGrBs. A new 3-year benchmark security was introduced as part of government market borrowing programme during H1:2023-24.  The basket of products offered through the ‘Retail ...

RBI’s Monetary Policy (August 06, 2025): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on August 06, 2025. Here are some of the highlights of the monetary policy announcement. Rates   Change Rate Policy repo rate Unchanged 5.50% Standing deposit facility (SDF) rate 5.25% Marginal standing facility (MSF) rate 5.75% Bank rate 5.75% Monetary policy stance Monetary policy stance unchanged as ‘neutral’. Domestic Economy  Real GDP growth for 2025-26 is projected at 6.5%. CPI headline inflation declined for the eighth consecutive month to a 77-month low (since January 2019) of 2.1% in June, driven primarily by a sharp decline in food inflation. Food inflation recorded its first negative print since February 2019 at (-) 0.2% in June. CPI inflation for 2025-26 is projected at 3.1%. India’s current account deficit (CAD) moderated to 0.6% of GDP in 2024-25 from 0.7% of GDP in 2023-24 due to robust services exports and strong remittances receipts despite higher merchandise trade deficit. As on Augus...

What is Financial Inclusion (FI) Index?

Achieving complete financial inclusion is one of the important goals of the nations and central banks across the world. But how do we measure the extent to which the population of the country is financially included? Well, there is an index in India for this. What is Financial Inclusion (FI) Index? The composite Financial Inclusion (FI) Index was constructed by Reserve Bank of India (RBI) in August 2021, to capture the extent of financial inclusion across the country. FI-Index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with Government and respective sectoral regulators.   What are the parameters of FI-index? The FI-index comprises of three broad parameters (comprising of 97 indicators) with different weights assigned to each parameter. Ease of Access (35%) Availability and usage of services (45%) Quality of services (20%) The 'Quality' parameters captures the qua...

Co-Lending Arrangements (CLAs)

Reserve Bank of India (RBI) has issued directions on co-lending arrangements which will replace the existing guidelines on co-lending by banks and Non-Banking Financial Companies (NBFCs) to priority sector. What is Co-Lending Arrangement (CLA)? Co-Lending Arrangement (CLA) refers to an arrangement, formalised through an ex-ante agreement, between a regulated entity (RE) which is originating the loans (‘originating RE’) and another RE which is co-lending (‘partner RE’), to jointly fund a portfolio of loans, comprising of either secured or unsecured loans, in a pre-agreed proportion, involving revenue and risk sharing. To whom shall the directions be applicable? The directions shall be applicable to CLAs entered into by the following REs – Commercial Banks (excluding Small Finance Banks, Local Area Banks and Regional Rural Banks) All-India Financial Institutions Non-Banking Financial Companies (including Housing Finance Companies) Which lending arrangements are exempt from the applicabil...

Pre-payment Charges on Loans

Reserve Bank of India (RBI) has issued directions on pre-payment charges on loans. What issues were observed by RBI during supervisory reviews? Divergent practices were observed amongst Regulated Entities (REs) with regard to levy of pre-payment charges in case of loans sanctioned to Micro and Small Enterprises (MSEs) which lead to customer grievances and disputes.  Certain REs were found to include restrictive clauses in loan contracts / agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service. To whom shall the directions be applicable? The directions shall apply to all commercial banks (excluding payments banks), co-operative banks, Non-Banking Financial Companies (NBFCs) and All India Financial Institutions (AIFIs). To which loans shall the direction be applicable? The directions shall be applicable to all floating rate loans and advances sanctioned or renewed on or after January 01, 2026. Which ...