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The Reserve Bank of India (RBI) is contemplating a ban on banks and Regulated Entities (REs) from outsourcing Know Your Customer (KYC) norm compliance verification, according to a recent draft circular. The move is part of an effort to ensure that core management functions like policy formulation, KYC compliance determination, investment portfolio management, compliance function, and internal audit function are not outsourced by REs.
The draft further stipulates that these entities should make independent decisions on credit extension to customers. It also calls for the establishment of a board-approved code of conduct for Direct Selling Agents (DSAs), Direct Marketing Agents (DMAs), and recovery agents.
The proposed rules prohibit contact with borrowers or guarantors for loan recovery outside prescribed hours and any form of intimidation or harassment. They highlight the importance of proper training for DSAs, DMAs, and recovery agents.
For REs intending to outsource financial activities, the RBI proposes the establishment of a comprehensive board-approved outsourcing policy. This policy should include criteria for activity selection, service provider selection, defining material outsourcing parameters, delegation of authority based on risk and materiality, and systems for monitoring and reviewing operations.
The central bank insists that the board and senior management must manage outsourcing risks through an effective governance mechanism and risk management process. The board or a committee must approve a framework to assess the risks and materiality of existing and prospective outsourcing arrangements.
Key risks in outsourcing that REs need to assess include compliance risk, concentration and systemic risk, contractual risk, among others. This is part of the RBI’s broader strategy to enhance oversight and ensure robust governance within India’s banking sector.
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