Growth of information technology has opened various paths for the business. Since then, the outsourcing activities have become a major driver in the growth of businesses. The terms of outsourcing are governed by the contract between the parties.
Additionally, Reserve Bank of India (RBI) governs the outsourcing by NBFCs through its circular on 9th November 2017. It aims at managing the risks and laying down a Code of Conduct for outsourcing the financial services by NBFCs. Any contract or arrangement with any third party must strictly observe this circular both in letter and spirit. Salient features of the same are summarized in this article.
Meaning of ‘outsourcing’
‘Outsourcing’ is defined as the NBFC’s use of a third party to perform activities on a continuing basis that would normally be undertaken by the NBFC itself. This may be either an affiliated entity within a corporate group or an entity that is a third party to the corporate group.
Activities that shall not be outsourced
NBFCs shall not outsource core management functions. These include internal audit, strategic and compliance function, decision making functions, giving sanctions to loans and management of investment portfolio.
Material outsourcing means outsourcing arrangements which may significantly impact business operations, reputation, profitability or customer service.
Liability of NBFCs in outsourcing arrangements
The outsourcing of any activity by NBFC does not diminish the obligations of the NBFC, its Board, and its senior management. They have the ultimate responsibility for the outsourced activity. NBFCs would therefore be responsible for the actions of their service provider including Direct Sales Agents/ Direct Marketing Agents and recovery agents including the confidentiality of information pertaining to the customers. NBFCs shall retain ultimate control of the outsourced activity.
Outsourcing by NBFCs does not dilute any right of the consumer including the right to seek redress before an appropriate forum. It is mandatory for NBFCs to disclose the role of agents in their product literature.
Outsourcing policy
Every NBFC planning to outsource its financial services shall have comprehensive outsourcing policy approved by the Board of Company. Such policy shall include criteria for selection of outsourcing activities, delegation of authority depending on risks and materiality, and systems to monitor and review the operations of these activities.
The Board and the senior management of NBFCs shall fulfil their specific responsibilities as indicated.
Evaluation of risks
Every NBFC outsourcing financial services shall guard against various risks. Possible risks are strategic risk, reputation risk, legal risk, exit strategy risk, counter party risk, contractual risk, country risk, concentration and systemic Risk.
Evaluating the Capability of the Service Provider
Before entering into an outsourcing agreement, NBFC shall perform due diligence of the service provider. Due diligence shall take into consideration qualitative and quantitative, financial, operational and reputational factors.
Outsourcing agreement
The agreement shall be sufficiently flexible to allow the NBFC to retain an appropriate level of control over the outsourcing and the right to intervene with appropriate measures. Additionally, the agreement shall also bring out the nature of legal relationship between the parties.
Business Continuity and Management of Disaster Recovery Plan
NBFCs shall retain an appropriate level of control with the right to intervene with appropriate measures. NBFC shall be able to continue its business operations without incurring prohibitive expenses and without any break in its services to the customers
Monitoring and Control of Outsourced Activities
NBFCS shall ensure that outsourcing agreements contain provisions to address their monitoring and control of outsourced activities. Further, NBFCs shall at least annually, review the financial and operational condition of the service provider to assess its ability to continue to meet its outsourcing obligations.
Given the need to focus on the core areas in the business, NBFCs are outsourcing more and more activities. However, as observed by us, many companies are not aware of the RBI requirements with reference to outsourcing. Such non-compliance may attract fine of INR 1,00,000/- under Section 58B of the Reserve Bank of India Act, 1934.
- Team Efficax