RBI release new outsourcing norms for NBFCs

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Context:

  • Non-banking financial companies (NBFCs) cannot outsource core management functions like internal audit, strategic and compliance functions for know your customer (KYC) norms, sanction of loans and management of investment portfolio. 
  • In a notification on its website RBI issued fresh directions on managing risks and code of conduct in outsourcing of financial services by NBFCs. “Access to customer information by staff of the service provider shall be on ‘need to know’ basis i.e., limited to those areas where the information is required in order to perform the outsourced function.

More facts:

  • NBFCs also have been asked to constitute a grievance redressal machinery with the name and contact details of the redressal officer displayed prominently at their branches.
  • It shall be clearly indicated that NBFCs’ grievance redressal machinery will also deal with the issue relating to services provided by the outsourced agency.
  • NBFCs would also be responsible for making currency transaction reports and suspicious transactions reports to the financial intelligence unit for activities carried out by the service providers.

NBFC:

  • Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license.
  • The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested under Reserve Bank of India Act, 1934.
  • Typically, NBFCs are restricted from taking deposits from the public depending on the jurisdiction. Nonetheless, operations of these institutions are often still covered under a country’s banking regulations.
  • NBFC cannot accept demand deposits.
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.