UNDERSTANDING THE CONCEPT OF OUTSOURCING- ENVISAGING A TOUGH ROAD AHEAD FOR THE SERVICE PROVIDERS

By Saloni Mathur (finserv@vinodkothari.com)

INTRODUCTION

Mr. Le Kuan Yu, Singapore’s founding father once said, “If you are depriving yourself of the outsourcing business and your competitors do not, you are putting yourself out of the business.” These words reflect upon the importance of outsourcing as a function that has become a necessity for the business organizations in the current scenario, to manage their core as well as ancillary functions through the specialized services of the third parties. This business process re-engineering can reap bundle of benefits to the organizations and its inevitability can be based on the fact that these activities can help organizations to access skilled expertise, reduce overhead, offer flexible staffing, increase efficiency, enhance technological know-how, reduce turnaround time, and eventually generate more profits for the business houses.

SOURCE– KPMG INSTITUTES.COM, “THE RADICAL NEW
WAY OF OUTSOURCING FOR TECHNOLOGY RELATED SERVICES

According to a report of the Boston consulting group ‘21st annual analysis of the outsourcing industry’, the average number of functions outsourced by the organizations across the world has risen by 225% over the past 5 years and are expected to keep on growing. Outsourcing has been moving from the peripheral activities to the core ones. The recent survey report of the ‘Statistita on Global market size of the Outsourced services from 2000-2016, March 2017’ says that  the use of outsourcing in the Indian financial services sector is projected to increase by 36% in the next 3 years, with a CAGR of 7.6%.[1]

Suffice it to say, that the competition between banks, financial institutions in India have increased significantly in the last decade and the consumers now have even higher expectations than in the past when it comes to customer experience and service for which they are using the services of specialised entities. However, such rampant outsourcing of key functions are coming at the cost of loss of managerial control, threat to security and confidentiality and the quality problems, owing to the fact that these institutions are responsible for the funds of the general public. Therefore, it is the need of the hour to have a robust regulatory mechanism which shall ensure appropriate norms for the outsourcing, in order to safeguard the interest of both the customers and the organization.

WHAT IS OUTSOURCING OF FINANCIAL SERVICES?

The transferring of financial services to the third parties for using their specialised services, which otherwise could be performed by them itself, would amount to outsourcing. However, using the services of the third parties for actions that could not be taken in-house would not be considered as outsourcing. For example, statutory audits of the companies cannot be conducted in house itself, thereby keeping them out of the purview of the concept, outsourcing. Similarly, the payment gateway services and agreements would not constitute to outsourcing because these cannot be taken by the companies itself and require the services of the third parties for a speedy and an efficient process.

Thus, the agreements in the nature of debt recovery and repossession agreements, the agreements with the direct selling agents, the agreements related to cash management with the third party would constitute to outsourcing.

Hence organizations have to clearly demarcate between what is outsourcing and what is not,  thereby applying this code of conduct only to the key areas of outsourcing.

AN OVERVIEW OF THE RBI’S MASTER DIRECTIONS ON OUTSOURCING BY NBFC’S

The RBI’s master directions [2]on the outsourcing norms have put stringent compliances on the service providers while discharging their functions, and increased responsibility and monitoring on the part of the non-banking financial companies. The RBI has come up with more tougher norms, where the new directions prohibits the NBFC’s to outsource the core management functions to the third parties including the internal audit, the strategic and compliance functions, and the decision-making functions. However, they can be outsourced within the same group/conglomerate subject to the compliance and instructions in para 6 of the master directions, which states that the NBFC’s shall have a board approved policy and service level arrangements with the group entities prior to entering into such transactions with them.

Further the scope of these directions and new code of conduct applies only to the ‘outsourcing of the financial services’ keeping, general IT related services, and management services like janitorial services, housekeeping, catering of staff out of the purview of this code. Further the code requires NBFC’s strict compliance and monitoring of the activities of the service providers, where the service providers shall not impede or interfere with the RBI during the monitoring of its functions.

RATIONALE BEHIND THE NEW NORMS

The RBI is of the view that over the years, increased outsourcing in the financial sector have posed major risks to the organizations in terms of strategy, reputation, compliance operational, legal, concentration and the country risk. As we could see the rapid outsourcing in different sectors of the services, the underlying principles behind these directions emphasise that the regulated entity shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and RBI nor impede effective supervision by RBI. NBFCs, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as is expected to be employed by the NBFCs, if the activities were conducted within the NBFCs and not outsourced.

REGULATORY IMPACT ANALYSIS OF THE NEW MASTER DIRECTIONS

ANALYSING MATERIAL OUTSOURCING

The  board of directors and the senior management shall have to observe the materiality while outsourcing the key functions in terms of the business operations, reputability, profitability and customer service. The materiality would be based and assessed on the following parameters.

Thus, companies board first need to determine the materiality of the activities being outsourced. For example, an agreement with the direct selling agents, direct marketing agents, debt recovery agents, to market the company’s products would be material outsourcing, because here the brand value of or the reputation would be at stake if the service provider fails. Further such kind of outsourcing would be material in nature because of the huge operational costs in direct marketing and high DSA’s pay-outs.

CONCLUDING REMARKS

The new directions on outsourcing can be envisaged as careful and robust approach by the RBI in safeguarding the NBFC’S from certain risk exposures with the service providers. Initiatives like a holistic code of conduct for the direct selling agents, the setting up of the internal and the external audit committees to monitor the outsourcing activities, the increased role of RBI to have a close eye on the operations, substantially drafted service agreements that deal with all the risks that could arise and the subsequent clauses to address them,  set up of a grievance redressal mechanism, could pave a way for a better regulatory environment and protection of the interests of the public, the NBFC’S and the service providers.

  1. http://www.kpmg.institutes.com/content/dam/kpmg/sharedservicesoutsourcinginstitute/pdf/2015/spps-it-outsourcing-infographic-2014-15.pdf
  2. ttps://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT87_091117658624E4F2D041A699F73068D55BF6C5.PDF

 

NHB introduces Aadhaar based OTP for HFCs

By Mayank Agarwal (finserv@vinodkothari.com)

Introduction

The National Housing Bank (NHB) has introduced various reforms to the existing Aadhaar based e-KYC procedure vide Circular No.85[1] issued on 8th December, 2017. Bringing certain modifications to Circular No. 72[2] issued on 23rd April, 2015 which recognizes E-Aadhaar as an Officially Valid Document (OVD) under the PML Rules, NHB has further introduced an option of Aadhaar based One Time Pin (OTP) for carrying out e-KYC  of the prospective customer.

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By Mayank Agarwal ( finserv@vinodkothari.com )

Introduction

The ever-increasing volume of Non-Performing Assets has paralyzed the Indian banking sector, with the gross NPA figures reported to be around Rs. 8.4 lakh crores at the end of September 2017.[1] Forming around 12% of the total banking advances, the distressed Indian banking situation should have provided the Indian Asset Reconstruction Companies (ARCs) with a vast share of market to cater to and thus yield impressive results. However, the past few years have resulted in the contrary, with the Indian ARCs failing to live up to its expectations.

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By Mayank Agarwal (finserv@vinodkothari.com )

Capital market is the one-stop solution for both companies and investors looking to utilize idle money in the most financially sound manner. While money markets provide short-term (generally less than one year) route of raising money, capital markets provide a much broader avenue. Although businesses rely upon money market sources to address liquidity issues, capital markets are explored with the intention of improving the solvency situation of the businesses.

A healthy and booming capital market is a clear-cut indication that the domestic people have confidence in the financial ecosystem of the country and that they trust the government and financial institutions with their money. Strong capital market volume aids economic growth by mobilization of savings and providing funds to those in need, thus increasing productivity.

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By Mayank Agarwal & Anita Baid, ( finserv@vinodkothari.com)

The Reserve Bank of India (RBI), on the 9th of November, 2017 released a notification bringing out the Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Non-Banking Financial Companies (NBFCs).[1] (“Directions”) These Directions are a much awaited outcome of the draft guidelines[2] which had been issued long back, in the year 2015. The Directions come in the wake of ever-increasing need to outsource ancillary activities such as applications processing (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back office related activities in order to provide the customers best possible services associated with the core business of the company. The Directions have been issued to ensure that there exists no possibility of discrepancy or fallibility that could affect the customer as well as the NBFC in an adverse manner.

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RBI revamps FDI Regulations

By CS Vinita Nair

corplaw@vinodkothari.com

RBI vide notification No. FEMA 20(R)/ 2017-RB dated 7th November 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017[1] (hereinafter referred as ‘Regulations, 2017’) in supersession of Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB both dated May 3, 2000, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (hereinafter referred as ‘Regulations, 2000’). The Regulations, 2017 will be effective from 8th November 2017 (Date of publication in the Official gazette) except proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations and proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations, reproduced hereunder as Annexure 1, which will come into effect from a date to be notified. Read more

RBI revamps FDI Regulations, revisits definitions of FDI

By CS Vinita Nair & Chahat Jain

corplaw@vinodkothari.com

10.11.2017

RBI vide notification No. FEMA 20(R)/ 2017-RB dated 7th November 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (hereinafter referred as ‘Regulations, 2017’) in supersession of Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB both dated May 3, 2000, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (hereinafter referred as ‘Regulations, 2000’). The Regulations, 2017 will be effective from 8th November 2017 (Date of publication in the Official gazette) except proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations and proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations, reproduced hereunder as Annexure 1, which will come into effect from a date to be notified. Read more

LEI becomes mandatory for Large Corporate Borrowers

By Mayank Agarwal (finserv@vinodkothari.com)

 

Overview

The global financial crisis of 2007-08 underlined the importance of maintaining a common global database that facilitates identification of parties to a financial transaction. Ambiguity of the dealing parties and a shortage of information led to a breakdown in the financial ecospace, contributing to the downfall of established stalwarts such as Lehmann brothers as well. In light of such crisis, establishing a universal identity of all entites engaged in a financial transaction was seen as imperative. This led to the establishment of Global Legal Entity Identifier Foundation (GLEIF) in the year 2014, the Central Operating Unit for registration for a Legal Entity Identifier. Read more