RBI Expresses Concern over Outsourcing Risks in Financial Services
There is a significant increase in number of bank frauds, especially with the involvement of persons from within. Few days ago, Moneylife reported in the case of Dr Ajay Sood, a non-resident Indian (NRI), from whose account Rs1.33 crore were withdrawn using the same numbered cheques when the originals were in his possession in the US. He even found his mobile number changed and an Aadhaar number submitted in the bank. Since Dr Sood is an NRI, he is not required to submit Aadhaar. Yet there was one in the bank record along with changed mobile number. Such frauds are not possible without help or involvement from the insiders, including bank employees.
 
However, banks are increasingly outsourcing many jobs and, thus, allowing employees of outsourced agency or agencies access to its core banking solution (CBS). The Reserve Bank of India (RBI), in its Financial Stability Report December 2018, has expressed concern over this. 
 
It says, "The employees in the outsourced agency had the same access rights, both read/ write, to the bank’s CBS. Further, it was also observed that user control related activities such as password resetting, access rights to bank’s applications and change request, were handled by the outsourced agency."
 
In addition, RBI says, the service level agreements signed by banks with their outsourced agencies did not recognise the central bank's right to inspect the service-provider of the bank and their books and accounts. 
 
The RBI had conducted a thematic study on operations of the service centres or business process outsourcing subsidiaries of major foreign banks. RBI says, its study revealed that outsourcing agencies or group entities were working as per mandate given to them and no such concerns were observed, which may expose banks to reputation risk. 
 
During July 2017 to 30 June 2108, the central bank found non-compliance by banks on fraud classification and reporting. This resulted in the RBI's enforcement department taking action against 14 banks, including a payment bank and a small finance bank. The department also imposed a penalty of Rs102.4 crore (Rs1,024 million). 
 
Between 1st July and 31 October 2018, the enforcement department took action against seven banks, including a payments bank and a cooperative bank and imposed a penalty of Rs14.2 crore (Rs142 million) for non-compliance with fraud classification and reporting.
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    COMMENTS

    Dayananda Kamath

    2 years ago

    When ATM of Axis bank in Pine issued fake notes long back I have sensitized the dangers of outsourcing banking main duty's. And I was pacified by issuing a guidelines that a vigilance clearance of the outsourcing agency has been made mandatory. Even every one asking cancelled blank cheque to ensure bank account number are the reason for many of cheque frauds. Even the due deligence and vigilance verification is by out sourcing. So the Mandatory KYC norms have made third party more aware about your customers than the bank. Bank knows only the documents of the customer. So it has helped in harassing a genuine customer and driving him out and a fraudster a red carpet to achieve his object,and no one guilty.

    Govinda Warrier

    2 years ago

    I am not aware whether any serious study has happened in India about the risks associated with outsourcing work. Here, because it is about banking, occasionally, information about losses come out. Banks in India, these days outsource functions like ATM-related work, which makes it necessary to give access to certain types of information to the service providers which can be misused by individuals over whom banks will have no control. Even the service providers may not be in a position to keep a track of their own contract labour. It is desirable to commission secror-wise studies to identify and assess the risk levels of jobs that are outsourced. Perhaps, it may be necessary to disallow outsourcing in certain identified work areas in Defence, Railways, Banking etc sectors.

    REPLY

    Dayananda Kamath

    In Reply to Govinda Warrier 2 years ago

    Actually outsourcing is allowing middlemen to take a cut and some times even to share it with employer to deny the employee his rights enshrined in labour laws. And tragedy is allowing such things is branded as labour reform. There are thousands of employees in nationalised banks working as temporary sub staff for years without any increment and other retirement benefits.

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