The Reserve bank of India on Monday asked cooperative banks to ensure that the outsourcing policy does not diminish its ability to fulfill its obligations to customers and RBI. RBI said that the policy should also not impede effective supervision by RBI or National Bank for Agriculture and Development (NABARD).
“Co-operative banks, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as would be employed by them if the activities were conducted by the banks and not outsourced. Accordingly, co-operative banks should not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened,” it said
In the new guidelines for managing risk outsourcing of financial services by cooperative banks released by RBI, a cooperative bank intending to outsource any of its financial activities should put in place a comprehensive outsourcing policy.
The policy also requires banks to put in place criteria for selection of such activities as well as service providers, parameters for defining material outsourcing based on the broad criteria, a delegation of authority depending on risks and materiality, and systems to monitor and review the operations of these activities.
RBI said that the board and CEO along with the Senior Management shall be ultimately responsible for outsourcing operations and for managing risks inherent in such outsourcing relationships.
RBI also said that cooperative banks should undertake appropriate due diligence to assess the capability of the service provider to comply with obligations in the outsourcing agreement.
The RBI emphasised that cooperative banks that choose to outsource financial services, however, should not outsource core management functions, including policy formulation, internal audit, and compliance, compliance with KYC norms, credit sanction, and management of investment portfolio.
However, where required, experts, including former employees, could be hired on a contractual basis subject to the Audit Committee of Board/Board being assured that such expertise does not exist within the audit function of the bank.
Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the internal audit function.
During inspections/ scrutinizes, the RBI / NABARD will review the implementation of these guidelines to assess the quality of related risk management systems particularly in respect of material outsourcing.
RBI also added that the grievance redressal mechanism of co-operative banks should not be compromised on account of outsourcing. Outsourcing arrangements shall not affect the rights of a customer against the co-operative bank, including the ability of the customers to redress their grievances as applicable under relevant laws.
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