Warning non-banking finance companies (NBFCs) of the risks faced when they outsource a plethora of activities, the RBI has proposed restrictions on the same and said that NBFCs cannot outsource functions such as internal auditing, compliance and those related to decision-making like sanctions and management of investment portfolio.
In draft guidelines released on Friday, the central bank said NBFCs will be held responsible for all activities whether they are outsourced or not.
“It is imperative for NBFC, when performing its due diligence in relation to outsourcing, to consider all relevant laws, regulations, guidelines and conditions of approval, licensing or registration,” the RBI said.
The central bank identified various risks associated with outsourcing ,such as strategic risk, reputation risk, compliance risk, operational risk, legal risk, concentration and systemic risk, etc.
“The failure of a service provider in providing a specified service, a breach in security/confidentiality, or non-compliance with legal and regulatory requirements by either the service provider or the outsourcing NBFC can lead to financial losses or loss of reputation for the NBFC and could also lead to systemic risks within the entire financial system,” the RBI said.