RBI release new outsourcing norms for NBFCs

12/11/2017 275 Economic Affairs | Financial System | View Recent Current Affairs

  • The Reserve Bank of India (RBI) proposed tough guidelines for outsourcing of work by NBFCs (non-banking financial companies) to safeguard borrowers from intimidation or harassment, either verbal or physical, by recovery agents.

Important highlights of the directions:

  • To safeguard against risks, RBI proposed that NBFCs should not outsource core management and decision-making functions, including internal audit and KYC (know your customer) compliance.
  • Financial institutions, including NBFCs are increasingly outsourcing some of their operations as a means to access specialist expertise, not available internally, and to reduce operational costs.
  • NBFCs should ensure that their Direct Sales Agents/Direct Marketing Agents/Recovery Agents are "properly trained to handle with care and sensitivity", their responsibilities particularly aspects like soliciting customers, hours of calling and privacy, among others.
  • The NBFC and their agents should not resort to intimidation or harassment of any kind either verbal or physical against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.
  • Further, 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.
  • An NBFC intending to outsource any of its financial activities should put in place a comprehensive outsourcing policy, approved by its Board.
  • Outsourcing of any activity by NBFC does not diminish its obligations, and those of its Board and senior management, who have the ultimate responsibility for the outsourced activity.
  • While outsourcing the NBFCs should evaluate and guard against "strategic risks", "reputation risks", "compliance risk", "operational risk" and "legal risk", among others.
  • The framework for outsourcing has been proposed after taking into consideration the need to put in place appropriate safeguards for addressing risks, and in compliance with the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC).

About NBFCs:

  • A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
  • A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company).

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