RBI Goes Tough on NBFCs for Outsourcing

Proposing tough guidelines for outsourcing of work by Non Banking Finance Companies (NBFCs), Reserve Bank of India (RBI) said NBFCs should ensure that their outsourcing arrangements neither diminish their ability to fulfil their obligations to customers and RBI, nor impede effective supervision by the central bank.

The move aims to ensure that their recovery agents do not resort to intimidation or harassment, either verbal or physical of borrowers.

While releasing its draft guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs, the RBI said, “NBFCs should not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened.”

NBFCs should not outsource core management functions including internal audit, compliance function and decision-making functions like determining compliance with KYC norms for opening deposit accounts, according sanction for loans and management of investment portfolio.

Further, the apex bank said service providers should not be located outside India.

The RBI said that NBFCs would be responsible for the actions of their service providers including direct sales agents / direct marketing agents and recovery agents and the confidentiality of information pertaining to the customers that is available with the service provider.

Further the RBI said that outsourcing arrangements should not affect the rights of a customer against the NBFC, including the ability of the customer to obtain redress as applicable under relevant laws.

“NBFCs need to have a robust grievance redress mechanism, which in no way should be compromised on account of outsourcing,” said the RBI.

The service provider, if it is not a subsidiary of the NBFC, should not be owned or controlled by any director or officer / employee of the NBFC or their relatives.

The RBI also said that the NBFCs must ensure that they have the ability to access all books, records and information relevant to the outsourced activity available with the service provider;
The RBI also said that suggestions/comments on the draft guidelines may be sent to it on or before May 8, 2015. The final guidelines will be issued after taking into consideration the feedback, comments and suggestions on the draft guidelines.