Guidelines on Outsourcing of Financial Services by Banks : Banknet India

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Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks – Compliance Certificate

April 22, 2009:

Until a couple of years ago, it was mainly private banks and foreign banks that were outsourcing their operations. After the implementation of a core-banking solutions, now many state-owned banks are outsorcing activities from third-party service providers.

In terms of exixting RBI guidelines on outsourcing by banks-

The bank should have in place a management structure to monitor and control its outsourcing activities. It should ensure that outsourcing agreements with the service provider contain provisions to address their monitoring and control of outsourced

A central record of all material outsourcing that is readily accessible for review by the Board and senior management of the bank should be maintained. The records should be updated promptly and half yearly reviews should be placed before the Board.

Regular audits by either the internal auditors or external auditors of the bank should assess the adequacy of the risk management practices adopted in overseeing and managing the outsourcing arrangement, the bank’s compliance with its risk management framework and the requirements of these guidelines.

Banks should at least on an annual basis, review the financial and operational condition of the service provider to assess its ability to continue to meet its outsourcing obligations. Such due diligence reviews, which can be based on all available information about the service provider should highlight any deterioration or breach in performance standards, confidentiality and security, and in business continuity preparedness.

In the event of termination of the agreement for any reason, this should be publicized so as to ensure that the customers do not continue to entertain the service provider.

RBI has now advised banks to 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 Board.

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