The Reserve Bank of India (RBI) is contemplating a measure that would prevent banks and other regulated entities from outsourcing the verification of compliance with know-your-customer (KYC) norms. A draft circular titled “Managing Risks and Code of Conduct in Outsourcing of Financial Services” has been released by the RBI, outlining this proposal.
Key Points from the Draft Circular:
- Prohibition on Outsourcing Core Functions: The draft circular states that regulated entities (REs) should refrain from outsourcing core management functions, including policy formulation, decision-making functions related to KYC compliance, investment portfolio management, compliance function, and internal audit function.
- Final Decision on Credit Extension: Regardless of whether a service provider is involved in the process or not, the REs must make the final decision regarding the extension of credit to any specific customer.
- Code of Conduct for Agents: REs are required to establish a board-approved code of conduct for direct selling agents (DSAs), direct marketing agents (DMAs), and recovery agents. These agents must commit to adhering to this code.
- Responsible Recovery Practices: When attempting to recover overdue loans, REs and their recovery agents are prohibited from contacting the borrower or guarantor before 8 am and after 7 pm. Proper training is mandated for DSAs, DMAs, and recovery agents to handle their responsibilities with care and sensitivity, including aspects such as customer solicitation, calling hours, privacy of customer information, and transparency in product terms and conditions.
- No Intimidation or Harassment: The RBI emphasizes that REs and their recovery agents must not engage in any form of intimidation or harassment, whether verbal or physical. This includes acts intended to publicly humiliate or invade the privacy of debtors, their guarantor’s family members, referees, and friends.
- Lending Decision Responsibility: If REs use a template structure for sanctioning loans through a service provider based on predetermined criteria, they must demonstrate to the supervisor that the lending decision was made solely by the RE, and the service provider’s role is that of a facilitator.
- Outsourcing Policy: REs planning to outsource financial activities must establish a comprehensive board-approved outsourcing policy. This policy should encompass criteria for activity selection, service provider selection, material outsourcing definition, delegation of authority based on risk, and monitoring and review systems for outsourced activities.
- Governance and Risk Management: RBI emphasizes that both the board and senior management bear responsibility for managing risks in outsourcing arrangements. They must establish effective governance mechanisms and risk management processes for all outsourced activities. The board or a board committee is responsible for approving a framework to assess risks and materiality in outsourcing arrangements.
In conclusion, the RBI’s draft circular aims to ensure that core functions related to KYC compliance and other crucial aspects remain within the purview of regulated entities. It underscores the need for clear codes of conduct, responsible recovery practices, and robust governance in the outsourcing of financial services to maintain compliance with regulations and uphold customer rights.
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