RBI says that Co-op banks should not outsource their core functions of management
The RBI on Monday directed cooperative banks to not outsource core management functions like policy formulation, internal audit and compliance, compliance with KYC norms, credit sanction and management of investment portfolio.
Issuing guidelines for managing risk in outsourcing of monetary services by cooperative banks, the financial institution said the lenders can hire experts, including former employees, on a contractual basis subject to certain conditions.
Outsourcing’ is defined as the use of a third party to perform activities on an unbroken basis that might normally be undertaken by a cooperative bank itself, now or within the future. ‘Continuing basis’ would come with agreements for a limited period.
Cooperative banks are increasingly using outsourcing as a way for reducing costs also for availing specialist expertise, where these aren’t available internally.
While it’s entirely the banks’ prerogative to require a view on the desirability of outsourcing a permissible activity having reference to all relevant factors, including the commercial aspects of the decision, such outsourcing leads to banks being exposed to varied risks, the RBI said.
Cooperative banks who usually outsource the financial facilities or services should not outsource any management functions like internal audit, formulation of policy and compliance-related work according to the guidelines.
The guidelines, the RBI said, are issued to enable the cooperative banks to place in situ necessary safeguards for addressing the risks inherent in outsourcing of activities.