Outsourcing Norms for NBFC

Narendra Kumar

31 Dec, 2020

Directions have been issued by the RBI on managing risks and code of conduct related to the outsourcing norms for NBFC.

Non-Banking Financial Companies

Non-banking financial companies (NBFCs) are those types of financial institutions that provide banking services but which are different from the banks. i.e. NBFCs do not hold a banking license.

It is the responsibility of the Reserve Bank of India^[1] to regulate and supervise the Non-Banking Financial Companies by virtue of powers vested under Reserve Bank of India Act, 1934.

NBFCs are restricted from taking public deposits however it depends upon the jurisdiction. Irrespective of the fact operations of these types of institutions are often still covered under the country’s banking regulations.

There is a restriction on the NBFCs to accept demand deposits.

NBFCs cannot issue cheques drawn on it and they also do not form part of the payment and settlement system.

Like in the case of banks, the deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to the depositors of NBFCs.

Outsourcing Norms for NBFC

Core management functions such as internal audit, strategic and compliance functions for know your customer (KYC) norms; the sanction of loans and management of investment portfolio cannot be outsourced in Non-banking financial companies (NBFCs).

According to RBI Outsourcing Guidelines for NBFCs have to ensure that service providers are able to identify the customer information, documents, records, and assets to protect the confidentiality of the information. In case of leakage of confidential information related to the customer should be reported to the central bank immediately. RBI clarified that in case of damages to customer NBFCs would be liable.

For direct sales and recovery agents, a board approved a code of conduct should also be put in place.

There will be no harassment of any kind, either verbal or physical, against any person for debt collection, for example, humiliate publicly or intrude the privacy of the debtors’ family members, friends, making threatening and anonymous calls or making false and misleading representations.

Grievance redressed machinery will be constituted by NBFCs and name and contact details of the redressed officer will be displayed prominently at their branches. It should be noted that NBFCs’ grievance redressed machinery will deal with the issues related to the services provided by the outsourced agency.

It will be a responsibility of the NBFC for making currency transaction reports and suspicious transaction reports to the Financial Intelligence Unit in relation to the activities carried out by the service providers.

In order to perform the NBFC outsourcing guidelines function, access to customer information by the service provider shall only be on ‘need to know’ basis means limited to those areas where the information is required.

Essential Facts

• In NBFCs, there is a requirement of constituting grievance redressed machinery and another requirement is that the name and contact details of the redressed officer will be displayed prominently at their branches.
• There is a clear indication that NBFCs’ grievance redressed machinery will also deal with the issues related to services provided by the outsourced agency.
• Another major responsibility of the NBFCs would be related to Financial Reporting of currency transaction reports and suspicious transaction reports with the financial intelligence unit for activities carried out by the service providers.