Banks' outsourcing norms under review

The Reserve Bank of India (RBI) is in the process of reviewing the guidelines issued on the code of conduct for outsourcing of financial services by banks.

According to sources close to the development, the review comes in the wake of recent discrepancies reported in the operations of loan recovery agents appointed by banks, which fall under the activities outsourced by them. The guidelines were issued in November 2006.

Outsourced financial services of a bank include processing of applications (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back-office-related activities.

According to the sources, outsourcing of any financial services does not in any way diminish the obligations of a bank and those of its board and senior management, which have the ultimate responsibility for the outsourced activity.

Sources added that the review might ask the banks to lay down a code of conduct for sensitive operations such as loan recovery and sensitise recovery agents accordingly.

Banks would also be told to keep the option open for customers to redress their grievances through an internal redressal system and the RBI's forum even if an activity is outsourced.

Banks have, of late, been aggressive in recovering loans since default rates on retail loans are on the rise. The default is reportedly high in unsecured loans of smaller denominations. The default rate is also rising in the credit card segment, according to a banker.

Sources added that the RBI had already scrutinised the recent cases of excesses by certain recovery agents employed by some banks.

In another event, the RBI has urged banks to expedite the process of registration of direct selling agents (DSAs) and direct marketing agents (DMAs) employed by them with the Department of Telecommunications (DoT).

This is in response to the observation that the DoT is receiving a tardy response to the registration of telemarketers even if the central bank has made it mandatory that banks should only appoint DSAs and DMAs registered with the DoT.