The Reserve Bank of India (RBI) has warned of risks from cross-border outsourcing of information technology (IT) services and recommended that regulated entities closely monitor such operations. The RBI’s observations come at a time when it is considering a mandate for domestic processing of payment transactions in order to ring-fence India’s local payment systems.
The RBI has recommended that regulated entities build appropriate contingency and exit strategies. Additionally, firms should ensure that availability of records and the supervising authority would not be affected in the event of liquidation of the service provider.
The RBI has also put forward a few norms for the outsourcing of IT services to ring-fence banks and other regulated entities from financial, operational and reputational risks. The RBI has also invited comments from stakeholders by 22nd July.
In a statement, the central bank said that regulated entities (REs) will not require prior approval from the RBI for the outsourcing of IT and IT-enabled services.
"The underlying principle of these directions is that the RE should ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers nor impede effective supervision by the supervising authority," as per the RBI's draft Master Direction on Outsourcing of Information Technology (IT) Services.
The provisions of these directions shall be applicable to:
- Scheduled Commercial Banks (excluding Regional Rural Banks)
- Local Area Banks
- Small Finance Banks
- Payments Banks
- Primary (Urban) Co-operative Banks having asset size of Rs1000 crore and above
- Non-Banking Financial Companies in top, upper and middle layers
- Credit Information Companies
- All India Financial Institutions (NHB, NABARD, SIDBI, EXIM Bank and NaBFID)
The REs would be required to put in place a comprehensive board-approved IT outsourcing policy.
"Outsourcing of any activity of the RE shall not diminish its obligations as also of its Board and senior management, who shall be ultimately responsible for the outsourced activity.
"RE shall take steps to ensure that the service provider employs the same high standard of care in performing the services as would have been employed by the RE if the same activity was not outsourced," the draft said.
The draft specifies the role of the board and senior management, besides norms pertaining to the usage of cloud computing services and outsourcing of the Security Operations Center (SOC).
The RBI has also proposed that the REs should set up a robust grievance redressal mechanism, "which in no way shall be compromised on account of outsourcing", meaning responsibility for redressal of customers’ grievances related to outsourced services would rest with them.
As per the draft, a risk management framework for the outsourcing of IT services should comprehensively deal with the processes and responsibilities for the identification, measurement, mitigation/ management and reporting of risks associated with outsourcing.
Entities regulated by the RBI should also require their service providers to develop and establish a robust framework for documenting, maintaining and testing Business Continuity Plan (BCP) and Disaster Recovery Plan (DRP).
Also, a RE could outsource any IT activity/IT-enabled service within its business group/ conglomerate, provided that such an arrangement is backed by the Board-approved policy and appropriate service level arrangements/ agreements with its group entities are in place, the draft said.
It has also proposed additional requirements for cross-border outsourcing.
In February 2022, the central bank had proposed to issue a guideline on outsourcing.
The financial system is seeing extensive leveraging and outsourcing of critical IT services by regulated entities to get easier access to newer technologies through financial technology players to improve efficiencies, it had said.
These arrangements expose them to significant financial, operational and reputational risks.
Similarly, the increasing dependence of customers on digital channels to avail banking services makes it imperative for regulated entities to focus on operational resilience, the RBI had said.