Outsourcing

OUTSOURCING IN BANKING
AND FINANCIAL SECTOR
CHAPTER -1:- INTRODUCTION OF BANK
1.1 INTRODUCTION
The development of 'Banking' is evolutionary in nature. There is no single answer to the
question of what is banking, because a bank performs a multitude of functions and services
which cannot be comprehended into a single definition. For a common man, a bank means a
storehouse of money, for a businessman it is an institution of finance and for a worker it may be
a depository for his savings. It may be explained in brief as "Banking is what a bank does." But it
is not clear enough to understand the subject in full. The Oxford Dictionary defines a bank as "an
establishment for the custody of money which it pays out on a customer's order ". But this
definition is also not enough, because it considers the deposit accepting and repayment functions
only. The meaning of the bank can be understood only by its functions just as a tree-is, known by
its fruits. As any other subjects, it has its own origin, growth and development. Let us briefly
trace the evolution of Banking.
1.2 EVOLUTION OF BANK

It is interesting to trace the origin of the word 'bank' in the modern sense, to the German word
"Banck" which means, heap or mound or joint stock fund. From this, the Italian word "Banco"
meaning heap of money was coined. Some people have the opinion that the word "bank" is
derived from the French words bancus" or "banque" which means a bench. Initially, the
bankers, the Jews in Lombardy, transacted their business on benches in the market place and the
bench resembled the banking counter. If a banker failed, his' banque' (bench) was broken up by
the people, hence the Word "bankrupt" has come. In simple term, bankrupt means a person who
has lost all his Money, wealth or financial resources.
DEFINITION OF BANK
Section 5(b) defines bank as accepting for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, and
order or otherwise. Section 49A of the Act prohibits any institution other than a banking
company to accept deposit money from public withdrawal by cheque. Students may note that the
essence of banking business is the function of accepting deposits from public with the facility of
withdrawal of money by cheque. In other words, the combination of the functions of acceptance
of public deposits and withdrawal of the money by cheques by any institution cannot be
performed without the approval of Reserve Bank. A bank is an institution which deals in money
and credit. Thus, bank is an intermediary which handles other people's money both for their
advantage and to its own profit. But bank is not merely a trader in money but also an important
manufacturer of money. In other words, a bank is a factory of credit.
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Crowther defines a bank as, "one that collects money from those who have it to spare or who
are saving it out of their income and lends the money so collected to those who require it".
Dr. L. Hart, says that the bankers are "one who in the ordinary course of business; honors
cheques drawn upon him by persons from and for whom he receives money on current
accounts".
Sir John Paget says that, "no person or body corporate otherwise can be a banker who does not,
(i) take deposit accounts, (ii) take current accounts, (iii) issue and pay cheques, and (iv) collect
cheques, for his customers".
Sir Kinley, "A bank is an establishment which makes to individuals such advances of money as
may be required and to which individuals entrust money when not required by them for use".
1.3 ORIGIN OF BANKING IN INDIA:
Banking in India is indeed as old as Himalayas. But, the banking functions became an effective
force only after the first decade of 20th century. Banking is an ancient business in India with
some of oldest references in the writings of Manu. Bankers played an important role during the
Mogul period. During the early part of the East India Company era, agency houses were
involved in banking. Modern banking (i.e. in the form of joint-stock companies) may be said to
have had its beginnings in India as far back as in 1786, with the establishment of the General
Bank of India. Three Presidency Banks were established in Bengal, Bombay and Madras in the
early 19th century. These banks functioned independently for about a century before they were
merged into the newly formed Imperial Bank of India in 1921.
The Imperial Bank was the forerunner of the present State Bank of India. The latter was
established under the State Bank of India Act of 1955 and took over the Imperial Bank. The
Swadeshi movement witnessed the birth of several indigenous banks including the Punjab
National Bank, Bank of Baroda and Canara Bank. In 1935, the Reserve Bank of India was
established under the Reserve Bank of India Act as the central bank of India. In spite of all these
developments, independent India inherited a rather weak banking and financial system marked
by a multitude of small and unstable private banks whose failures frequently robbed their
middle-class depositors of their lifes savings. After independence, the Reserve Bank of India
was nationalized in 1949 and given wide powers in the area of bank supervision through the
Banking Companies Act (later renamed Banking Regulations Act). The nationalization of the
Imperial bank through the formation of the State Bank of India and the subsequent acquisition of
the state owned banks in eight princely states by the State Bank of India in 1959 made the
government the dominant player in the banking industry. In keeping with the increasingly
socialistic leanings of the Indian government,
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1.4 FEATURES OF BANKING:
From the views of above authorities, we can derive the following basic characteristics of
Banking:
(i) Dealing in money: The banks accept deposits from the public and advancing them as loans to
the needy people. The deposits may be of different types current, fixed, saving etc. accounts.
The deposits are accepted on various terms and conditions.
(ii) Deposits must be withdraw able: The deposits (other than fixed deposits) made by the
public can be withdraw able by cheques, draft on otherwise, i.e. the bank issue and pay cheques.
The deposits are usually withdraw able on demand.
(iii) Dealing with credit: The banks are the institutions that can create i.e., creation of additional
money for lending. Thus, creation of credit is the unique feature of banking.
(iv) Commercial in nature: Since all the banking functions are carried on with the aim of
making profit, it is regarded as commercial institutions.
(v) Nature of agent: Besides the basic functions of accepting deposits and lending money as
loans, banks possess the character of an agent because of its various agency services.
1.5 CLASSIFICATION OF BANKS:
Today is the age of specialization and we can find specialization in all fields including banking.
The banks have specialized in a particular line of finance. Various types of banks have developed
to suit the economic development and requirements of the country. The principal banking
institutions of a country may be classified into following types:
(1) Central Banks
(2) Commercial Banks
(3) Industrial or Development Banks
(4) Exchange Banks (authorized dealers in foreign exchange)
(5) Co-operative Banks
(6) Land-mortgage Banks
(7) Indigenous Banks
(8) Savings Banks
(9) Supranational Banks
(10) International Banks Central Banks
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Central Banks:
Central Bank is the bank of a country a nation. Its main function is to issue currency known as
Bank Notes. This bank acts as the leader of the banking system and money market of the
country by regulating money and credit. These banks are the bankers to the government, they are
bankers banks and the ultimate custodian of a nations foreign exchange reserves. The aim of
the Central Bank is not to earn profit, but to maintain price stability and to strive for economic
development with all round growth of the country.
Commercial Banks:
A bank, which undertakes all kinds of ordinary banking business, is called a commercial bank.
Industrial Banks or Financial Institutions: An Industrial Bank is one which specializes by
providing loans and fixed capital to industrial concerns by subscribing to share and debenture
issued by public companies.
Exchange Banks (Authorized Dealers in Foreign Exchange):
These types of banks are primarily engaged in transactions involving foreign exchange. They
deal in foreign bills of exchange import and export of bullion and otherwise participate in the
financing of foreign trade.
Co-operative Banks:
They are organized on co-operative principles of mutual help and assistance. They grant short-
term loans to the agriculturists for purchase of seeds, harvesting and for other cultivation
expenses. They accept money on deposit from and make loans to their members at a low rate of
interest.
Land-mortgage Banks (Presently known as Agriculture and Rural Development Banks):
They are agriculture development banks. The Land-mortgage banks supply long-term loans for a
period up to 15 years for development of land to improve agricultural yields. They grant loan for
permanent improvements in agricultural lands. The National Bank for Agriculture and Rural
Development (NABARD) was constituted by the Government to promote rural development.
Indigenous Banks:
The Central Banking Enquiry Commission defined an indigenous banker as an individual or film
accepting deposits and dealing in indigenous lending of money to the needy. They form
unorganized part of the banking structure, i.e., these are unrecognized operators in receiving
deposits and lending money.
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Savings Banks:
These are institutions which collect the periodical savings of the general public. Their main
object is to promote thrift and saving habits among the middle and lower income sections of the
society.
Supranational Banks:
Special Banks have been created to deal with certain international financial matters. World Bank
is otherwise known as International Bank for Reconstruction and Development (IBRD) which
gives long-term loans to developing countries for their economic and agricultural development.
Asian Development Bank (ADB) is another Supranational Bank which provides finance for the
economic development of poor Asian countries.
International Banks:
International Banks are those which are operating in different countries. While, the registered
office/head office is situated in one country, they operate through their branches in other
countries. They specialize in Banking business pertaining to foreign trade like opening of letters
of credit, providing short-term finance in foreign currency, issue of performance guarantee,
arranging foreign currency credits, etc. They are the main traders in International Currencies like
US 'dollars', Japanese 'Yen', the new-born European Currency 'Euro', etc.
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CHAPTER 2:- OUTSOURCING OF BANKS
2.1. INTRODUCTION
1.1 The banking industry has witnessed an all-round expansion and Growth fundamentally
driven by heightened competition, rapid Technological advancements, financial inclusion,
changing regulatory environment and consolidation etc. etc. This rapid expansion and the growth
in the industry, centralization and penetration of I.T system, the need to focus on core services
and introduction of new services have influenced the need of outsourcing in the banking
industry. Apart from cost savings and accessing specialist expertise not available internally, for
achieving strategic aims and efficient delivery mechanism, outsourcing remains preferred
destination for enabling perfection in selective business processes.
. However, this outsourcing has resulted the banks being exposed to various risks.
Recognizing the need for outsourcing some of the selected activities by the banks, Reserve Bank
of India has put in place comprehensive guidelines for addressing the risks that the banks would
be exposed to on account of engaging any outsourcing agency.
The outsourcing policy of our bank based on RBI guidelines has been devised to ensure
safeguarding the interest of the bank and the customers by adopting sound and responsive
management practices through due diligence and management of risks arising from outsourcing
activities.
The guidelines are applicable to outsourcing arrangements entered into by the banks with the
service provider located in India.
Scope of the Policy

The policy incorporates the criteria for selection of the activities that may be outsourced, risks
arising out of outsourcing, management of these risks, delegation of powers, etc.
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2.2 Definition of Outsourcing

For the purpose of this policy, Outsourcing shall refer to banks use of a third party (either an
affiliated entity within a corporate group or an entity that is external to the corporate group) to
perform activities on a continuing basis (including agreements for a limited period), that would
normally be undertaken by the bank, now or in the future. The activities shall refer to
outsourcing of financial services and shall l not be applicable to technology related issues and
activities not related to banking services like usage of courier, catering of staff, housekeeping and
senatorial services, security of the premises, movement and archiving of records etc. Moreover,
audit related assignments to Chartered Accountant firms will continue to be governed by the
instructions/policy as laid down by the Department of Banking Supervision of RBI.
Indicative list of activities that can be outsourced.

Financial services that can be outsourced by the bank may include application processing (loan
origination, credit card), document processing, marketing and research, supervision of loans, data
processing and back office related activities. An indicative list of activities that may be
considered for outsourcing shall be as under:
Opening, settlement and closing of accounts.
Issue and processing of Chques.
Managing of Customer queries (Call Centers).
Recruitment, Selection and Training of Personnel.
Administration of Payroll and Taxation.
Marketing of bank products.
Cross Selling of Bank Products like Insurance and Mutual Funds.
Credit Card and Debit Card customer acquisition / queries the above list is indicative only
and not exhaustive.
2.3Activities that should not be outsourced.

Core management functions including Internal Audit, Compliance Function and Decision-
making functions like determining compliance with KYC norms for opening deposit accounts,
according sanction for loans (including retail loans) and management of investment portfolio
shall not be outsourced by the bank.
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2.4 Activities outsourced by the bank:

Presently the following services activities have been outsourced by the bank.
A) Credit Card acquisition issuance and the reconciliation:

The bank has an agreement with Venture InfoTech Global Pvt. Ltd. Mumbai now M/s ATOS
world line. The outsourced activities include debit card, credit card issuance management
functions and merchant acquiring point of sale management functions. The concerned
department monitoring and managing outsourced business process is our card section.
B) Engagement of business correspondence for financial inclusion: For implementation of

financial inclusion plan for 1260 unbanked villages approved by the B.O.Ds on 28th February
2011 through B.C model engaging VLEs as CCSs as BCs.
C) Engagement of FINO for transaction management for smart cards The services covered
are creations of Smart Cards, supply of POT machines maintaining of transactions generated
through the operation of smart cards at the FINO server and then redirecting these transaction to
technical support team of FID for upload on Finacle. The bank has an agreement with FINO for
the above service Functions. The concerned Department monitoring and managing the
outsourced function at B&C is our Financial Inclusion Department.
D) Asset Management & Salvage Solutions (ATMA) The bank has an agreement with M/s
Asset Management & Salvage Solutions (ATMA) for recovery and resolution of NPA and
stressed assets for the State of Jammu and Kashmir. Asset Monitoring and Information
Department (AMID) is monitoring and managing this business process.
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CHAPTER 3:- RISK ARISING OUT OF

OUTSOURCING
3.1 Outsourcing of financial services-Exposes a bank to a number of risks which need to

be evaluated and effectively managed & mitigated. The key risks that may arise due to
outsourcing are:
Strategic Risks: The service provider may conduct business on its behalf, which is
inconsistent with the overall strategic goals of the bank.
Reputation Risk - Poor service from the service provider, its customer interaction may
not be consistent with the overall standards of the bank.
Compliance Risk - Privacy, consumer and prudential laws may not be adequately
complied with by the service provider.
Operational Risk - Arising due to technology failure, fraud, error, inadequate financial
capacity of service provider to fulfill obligations and/or provide remedies.
Legal Risk includes, but is not limited to, exposure to fines, penalties or punitive
damages resulting from supervisory actions, as well as private settlements due to
omissions and commissions of the service provider.
Exit Strategy Risk - This could arise from over-reliance on one firm, the loss of relevant
skills in the bank itself preventing it from bringing the activity back in-house and
contracts entered into wherein speedy exits would be prohibitively expensive.
Counter Party Risk - Due to inappropriate underwriting or credit assessments.
Country Risk - Due to political, social or legal climate of country where the service
provider is located.
Contractual Risk - This risk arises from inability or degree of ability of the bank to
enforce the contract with the service provider.
Concentration and Systemic Risk - Due to lack of control of the bank over a service provider,
more so when overall banking industry has considerable exposure to one service provider. The
failure of the service provider in providing the desired services covered by the terms of
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agreement or any noncompliance of any legal / regulatory requirements by the service provider
can lead to reputational or financial loss for the bank which can trigger a systematic risk in the
banking system as such. The imperative therefore will be securing effective management by the
bank for mitigation of this risk
Management of risks
To enable sound and responsive risk management practices for effective oversight, due diligence
and management of risks arising from outsourcing activities, all concerned departments who
decide to outsource a financial activity /service shall follow the below mentioned principles
applicable to arrangements entered into by the bank with the service provider. A well-defined
structure of roles &responsibilities discussed hereinafter shall be in place to decide on the
activities to be outsourced, selection of service provider, terms &conditions of outsourcing and
monitoring mechanism etc.
3.2. General Appraisal:

Prior approval from RBI shall not be required, whether the service provider is located in India or
outside India.
While outsourcing a financial activity, Bank shall consider all relevant laws, regulations,
guidelines and conditions of approval, licensing or registration.
In respect of outsourced services relating credit cards, RBIs detailed instructions

contained in its circular on credit card activities vide DBOD.FSD.BC.
49/24.01.011/2005-06 dated 21st November 2005 & any future modifications in it would
remain applicable.
Bank shall retain ultimate control of the outsourced activity, as outsourcing of any
activity by the Bank does not diminish its obligations, and those of its Board and Senior
Management, who have responsibility for the outsourced activity. Bank shall therefore
remain responsible for the actions of its service provider including Direct Sales Agents/
Direct Marketing Agents and recovery agents and the confidentiality of information
pertaining to the customers that is available with the service provider.
Outsourcing arrangements shall neither diminish the Banks ability to fulfill its
obligations to customers and RBI nor impede effective supervision by RBI. Bank shall
therefore, ensure that the service provider employs the same high standard of care in
performing the services as would be employed by the Bank, if the activities were
conducted within the Bank and not outsourced.
Bank shall not engage in such outsourcing that would result in its internal control,
business conduct or reputation being compromised or weakened.
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Bank shall ensure that the service provider does not impede or interfere with the ability of
the Bank to effectively oversee and manage its activities nor does it impede the RBI in
carrying out its supervisory functions and objectives. Therefore, the right of the Bank and
the RBI to access all books, records and information available with the service provider
should remain protected.
Bank shall continue to have a robust grievance redressal mechanism, which shall not be
compromised on account of outsourcing. Outsourcing arrangements shall not affect the
rights of the customer against the Bank, including the ability of the customer to obtainer
dress as applicable under relevant laws. Since the customers are required to deal with the
service providers in the process of dealing with the Bank, Bank shall incorporate a clause
in the product, literature/ brochure etc. stating that they may use the services of agents in
sales/ marketing etc. of the products.
While outsourcing a related party (i.e. party within the Group/ Conglomerate), Bank
shall adopt the identical risk management practices as in case of service providers
external to the Corporate group.
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CHAPTER 4:- APPRAISAL OF SERVICE

PROVIDER
While outsourcing or renewing contract of outsourcing of an activity with a service provider,

Bank shall take into consideration:
That the Service Provider, if it is not a subsidiary of the Bank, is not owned or
controlled by any Director or Officer/ Employee of the Bank or their relatives having the
same meaning as assigned under Section 6 of the Companies Act, 1956.
The capability of the service provider to comply with obligations in the outsourcing
agreement such as:
Qualitative, quantitative, financial, operational and reputational factors;
Compatibility with their own systems;
Ability to develop and establish a robust framework for documenting, maintaining and
testing business continuity and recovery procedures so that the service provider shall
periodically test the Business Continuity and Recovery Plan and occasional joint testing
and recovery exercises with its service provider and jointly conducted by the Bank;
Ability to isolate the Banks information, documents and records, and other assets. This
is to ensure that in adverse conditions, all documents, records of transactions and
information given to service provider, and assets of the Bank, can be removed from The
possession of the service provider in order to continue its business operations, or deleted,
destroyed or rendered unusable or on the other hand, where service provider acts as an
outsourcing agent for multiple banks, care shall be taken to build strong safeguards so
that there is no commingling of information/ documents, records and assets.
4.1. Examination & Evaluation:

In order to examine the capability on the above points an evaluation shall be conducted
of all available information about the service provider, including but not limited to:-
O Past experience and competence to implement and support the proposed activity over the
contracted period;
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O Financial soundness and ability to service commitments even under adverse conditions;
O Business reputation and culture, compliance, complaints and outstanding or potential

litigation;
O Standards of performance including in the area of customer service;
O Security and internal control, audit coverage, reporting and monitoring environment, Business
continuity management;
O External factors like political, economic, social and legal environment of the jurisdiction in
which service provider operates and other events that may impact service providers operations
And other events that may impact service performance;
O Where ever possible, the Bank shall obtain independent reviews and market feedback on the
service provider to supplement its own findings.
Bank shall avoid undue concentration of outsourcing arrangements with a single service
provider.
Public confidence and customer trust in the Bank is a pre-requisite for the stability and
reputation of the Bank. Hence the bank shall seek to ensure the preservation and
protection of the security and confidentiality of customer information in the custody or
possession of the service provider. As such, 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.
4.2. Materiality of outsourcing
During Annual Financial Inspections (AFI), RBI will review the implementation of the
outsourcing policy guidelines to assess the quality of related risk management systems,
particularly in respect of material outsourcing. Material outsourcing arrangements are those,
which if disrupted have the potential to significantly impact the business operations, reputation
or profitability. Keeping in view the above, once the financial activity to be outsourced and its
service provider is selected; Bank shall assess its materiality of outsourcing
based on:
The level of importance to the Bank of the activity being outsourced;
The potential impact of the outsourcing on the Bank on various parameters such as
earnings, solvency, liquidity, funding capital and risk profile;
The likely impact on the Banks reputation and brand value, and ability to achieve its
business objectives, strategy and plans, if the service provider fails to perform the
service;
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The cost of the outsourcing as a proportion of total operating Costs of the Bank;
The aggregate exposure to that particular service provider, in cases where the Bank
outsource various functions to the same services provider.
4.3 Post Outsourcing Appraisal
In order to mitigate the risk of unexpected termination of the outsourcing agreement or

liquidation of the service provider, Bank shall:
Retain an appropriate level of control over its outsourcing and the right to intervene with
appropriate measures to continue its business operations in such cases without incurring
prohibitive expenses and without any break in the operations of the Bank and its services
to the customers.
Establish a viable contingency plan to consider the availability of alternative service

providers or the possibility of bringing the outsourced activity back-in-house in an
emergency and the costs, time and resources that would be involved.
Review and monitor the security practices and control processes of the service provider
on a regular basis and require the service provider to disclose security breaches.
Immediately notify RBI in the event of any breach of security and leakage of confidential
customer related information. In these eventualities, the Bank would be liable to its
customers for any damage.
The Outsourcing Agreement.

The terms and conditions governing the contract between the bank and the service provider shall
be carefully defined in written agreements and vetted by banks legal counsel on their legal effect
and enforceability. Every such agreement shall address the risks and risk mitigation strategies.
The agreement should be sufficiently flexible to allow the bank to retain an appropriate level of
control over the outsourcing and the right to intervene with appropriate measures to meet legal
and regulatory obligations. The agreement should also bring out the nature of legal relationship
between the parties i.e. whether agent, principal or otherwise. Some of the key
Provisions of the contract would be:
The contract should clearly define the activities that are being outsourced, including
appropriate service and performance standards.
The bank must ensure that it has the ability to access all books, records and
information relevant to the outsourced activity available with the service provider.
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The contract should provide for continuous monitoring and assessment of the
service provider by the bank, so that any necessary corrective measures are taken
immediately.
A termination clause and minimum periods to execute a termination provision, if

deemed necessary, should be included.
Controls to ensure customer data confidentiality and service providers liability in case
of breach of security and leakage of confidential customer related information.
Contingency plans to ensure business continuity.
The outsourcing agreement should :

o Provide for the prior approval/consent by the bank of the use of sub-contractors by the
service provider for all or part of an outsourced activity.
o Provide the bank with the right to conduct audits on the service provider whether by its
internal or external auditors, or by agents appointed to act on its behalf and to obtain copies of
any audit or review reports and findings made on the service provider in conjunction with the
services performed for the bank.
o Include clauses to allow the Reserve Bank of India or persons authorized by it to access the
banks documents, records of transactions, and other necessary information given to, stored or
processed by the service provider, within a reasonable time.
o Include clause to recognize the right of the Reserve Bank of India to cause an inspection to
be made of a service provider of the bank and its books and account by one or more of its
officers or employees or other persons.
o Provide that the confidentiality of customers information shall be maintained even after the
contract expires or gets terminated.
o Provide for the preservation of documents and data by the service provider in accordance
with the legal/regulatory obligation of the bank in this regard.
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CHAPTER 5:-ROLES AND RESPONSIBILITY
5.1 Board of Directors

The Board of the Bank, or a Committee of the Board to which powers have been delegated shall
be responsible, inter alia, for:-
Approving a framework to evaluate the risks and materiality of all existing and
prospective outsourcing and the policies that apply to such arrangements.
Laying down appropriate approval structure for outsourcing depending on risks and
materiality.
Undertaking regular review of outsourcing strategies and arrangements for their

continued relevance, safety and soundness, and
Senior Management
The Senior Management of the Bank shall be responsible for:-
Evaluating the risks and materiality of all existing and prospective outsourcing, based
on the framework approved by the Board.
Developing and implementing sound and prudent outsourcing policies and

procedures commensurate with the nature, scope and complexity of the outsourcing.
Reviewing periodically the effectiveness of policies and procedures.
Communicating information pertaining to material outsourcing risks to the Board in a

timely manner.
Ensuring that contingency plans, based on realistic and probable disruptive scenarios,
are in place and tested.
Ensuring that there is independent review and audit for compliance with set policies.
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5.2. (Departments at CHQ that intend to outsource/ have outsourced an
activity)
Finalize the service activity to be outsourced. Inputs from S&BD Division, CHQ
should be sought to ascertain about whether the activity that intended to be outsourced is
allowed under regulatory norms, also whether it is covered under the outsourcing
activities as defined in the Banks outsourcing policy.
Defining terms & conditions of outsourcing taking into account the risk and materiality
involved.
Selection/ Short listing of the Service provider/s after carrying out due diligence of
service providers.
Putting up Outsourcing proposal to Risk Management Department for evaluation of

risk and materiality.
Putting up the proposal to Operational Risk Management Committee for approval.
Providing information to Compliance Department, S&C Department, KYC /AML

Department, Risk Department & S&BD Division CHQ about all the activities
outsourced by them.
Implementation of agreement with service providers of activities outsourced by them.
Informing S&BD Division and all other concerned Departments in case of

termination of an outsourced arrangement along with reasons thereof.
5.3 Roles of individual Divisions / Departments at CHQ.
S&BD Division:
Developing Banks Outsourcing policy
Putting up the policy for review of the Board at specified timelines.
Providing inputs to individual Divisions / Departments, who want to outsource any

activity, about whether the activity is allowed to be outsourced under regulatory norms/
Banks policy & also whether it is covered under the outsourcing activities as defined in
the Banks outsourcing policy.
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Informing IBA, along with reasons, about termination of any outsourcing agreement. The
Division shall also ensure that Corporate Communication Department publicizes the fact
of termination for information of general public.
Risk Management Dept.
Evaluating the risks and materiality of all existing and prospective outsourcing activities,
based on the Banks outsourcing policy.
Communication of information pertaining to material outsourcing risks to the Board in a

timely manner.
Ensuring that contingency plans, based on realistic and probable disruptive scenarios, are
in place and tested.
Undertaking periodic review of outsourcing arrangements to identify new material

outsourcing risk as they rise.
S&C Department:
All Divisions/ Departments at CHQ outsourcing a financial activity shall inform about
the performance of the outsourced financial activity to S&C Dept on half yearly basis in
April & October. S&C Department shall place a consolidated note before the Board.
Audit the financial activities being outsourced by the Bank and put up findings to Board
of Directors on annual basis.
Submit compliance certificate to RBI about outsourced activities by any department of

the bank after its approval/vetting by the Board of Directors.
Submit Board approved consolidated Compliance Certificate to RBI on annual basis

giving the particulars of outsourcing contracts, the prescribed periodicity of audit by
Internal/ External Auditors, major findings of the audit and action taken through Board.
Customer Care Department:

To designate one of their officers as Grievance redressal officer for outsourcing and
ensuring that one officer is designated as Grievance redressal officer at each of the Zonal
offices of the Bank. The Department shall also be responsible for publicizing name,
location and contact number of all Grievance redressal officers.
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Law Dept.: Responsible for vetting of outsourcing agreements to be signed / executed by the
bank with the service provider. Also legal counseling in case of any disputes with the service
provider
Compliance Department
Maintenance of central database of all financial activities outsourced by the Bank.
KYC/ AML Department:

Reporting Currency Transactions and Suspicious Transactions to FIU or any other
competent authority in respect of the banks customer related activities carried out by the
service providers.
Corporate Communication Department: Corporate Communication Department Shall be
responsible for giving due publicity through print media about the fact of termination of any
outsourced arrangement for the information of the General Public.
7) Accounting & expenditure:

The expenditure incurred on outsourcing the financial activity shall be debited to the
relevant sub Head of the General Ledger (outsourcing of financial services).
The concerned department outsourcing the activity shall in consultation with Finance
Department (BST) take up this issue with T&ISD for opening of the relevant P&L Head.
The sub-code so created shall also be intimated to S&C Department.
The Procedure shall be adopted for all existing and fresh financial activities.
8) Delegation of Powers for approving Outsourcing Activities: Delegation of powers for

approving outsourcing activities and reviewing the same shall remain with the Board of
Directors (this is in compliance to the directions of Board, Board resolution No.7date June
15, 2010) the expenditure / cost to be incurred on any activity of outsourcing shall be as per the
existing powers on cost / expenditure for such type of activity.
9) Responsibilities of DSA/DMA/Recovery Agents. Code of conduct for Direct Sales Agents

formulated by the Indian Banks Association (IBA), b banks own codes for Recovery Agents,
banks code for collection of dues &extant RBI instructions on Fair Practice Code for lending
should be strictly enforced by the Bank. The Bank shall ensure that the Direct Sales
Agents/Direct Marketing Agents/Recovery Agents are properly trained to handle with care and
sensitivity, their responsibilities, particularly aspects like soliciting customers, hours of calling,
privacy of customer information and conveying the correct terms and conditions of the products
on offer etc.
19
The bank and its agents shall not resort to intimidation or harassment of any kind either verbal or
physical against any person in their debt collection efforts, including acts intended to humiliate
publicly or intrude the privacy of the debtors family members, referees and friends, making
threatening and anonymous calls or making false and misleading representations.
Concerned Departments shall ensure that list of all recovery agents is displayed on the Banks
website.
10) Redressal of Grievances related to Outsourced services.

An official in Customer Care Depar tent, CHQ shall be designated as Grievance
Redressal Officer for outsourced activities. Similarly an officer at each Zonal Office shall
also be designated as Grievance Redressal Officer for outsourced activities.
The name and contact number of the designated Grievance Redressal officers shall be
made known and widely published. Customer care Department, CHQ shall ensure that
these officers are designated at each Zonal Office and their names/ contact numbers
widely publicized.
The designated officer shall ensure that genuine grievances of customers are forwarded to
concerned Department and follow-up on remedial actions taken in this regard.
Generally, a time limit of 30 days shall be given to the customers for preferring their
complaints/grievances. The grievance redressal procedure of the bank and the time frame
fixed for responding to the complaints shall be placed on the banks website.
If a complainant does not get satisfactory response from the bank within 60 days from the
date of lodging the complaint, the complainant will have the option to approach the office
of the concerned Banking Ombudsman for redressal of his/her grievance/s.
11) Centralized List of Outsourced Agents.

If the service providers services are terminated by the bank, IBA will be informed with
reasons for termination. IBA would be maintaining a caution list of such service
providers for the entire banking industry for sharing among banks.
The concerned Department which terminates an outsourced arrangement shall inform

S&BD Division & other concerned Departments about the termination of the
arrangement along with
Reasons thereof. S&BD Division shall forward the information to IBA.
12) Off-shore outsourcing of Financial Services.
20
The engagement of service providers in a foreign country exposes a bank to country risk
- economic, social and political conditions and events in a foreign country that may
adversely affect the bank. Such conditions and events could prevent the service provider
from carrying out the terms of its agreement with the bank. To manage the country risk
involved in such outsourcing activities, the bank shall take into account and closely
monitor government policies, political, social, economic and legal conditions in
countries where the service provider is based, during the risk assessment process and on
a continuous basis, and establish sound procedures for dealing with country risk
problems. This includes having appropriate contingency and exit strategies.
In principle,
arrangements shall only be entered into with parties operating in jurisdictions generally
upholding confidentiality clauses a n d agreements The governing law of the arrangement shall
also be clearly specified.
The activities outsourced outside India shall be conducted in a manner so as not to hinder
efforts to supervise or reconstruct the India activities of the bank in a timely manner.
The outsourcing related to overseas operations of t h e bank would be governed by both

these guidelines and the host country guidelines. Where any differences arise, the more
stringent of the two would prevail. However, where there is any conflict, the host
country guidelines would prevail.
13) Outsourcing within a Group/Conglomerate. The risk management practices to be adopted

by the bank while outsourcing to a related party (i.e. party within the Group/Conglomerate)
would be identical to those specified in these guidelines.
14) Self-Assessment of Existing / Proposed Outsourcing Arrangements. The concerned

Departments, which have outsourced any activity, shall conduct a self-assessment of t h e
existing/ proposed outsourcing agreements within a time bound plan and bring them in line with
the guidelines expeditiously. Similarly all other Departments shall undertake immediate action
with regards to the roles/ responsibilities assigned to them vis--vis the existing/ proposed
outsourced activities.
15). Review of the Policy. The policy will be reviewed at yearly intervals or as and when
considered necessary by the Board of Directors of the Bank.
21
CHAPTER 6:- BANKING CUSTMER AT O21
6.1 Additional banking services by Outsource2india
22
Apart from bookkeeping services, we also provide a range of banking services covering specific
business areas like:
1. Credit card and loan processing

2. Payroll processing
3. Mortgage processing
4. Securities processing
5. Check collections
6. Accounts analysis
7. Check imaging and conversion
8. Payment verification
9. Financial Analysis
10. Tax preparation
6.2 Bookkeeping services and banking services partner
Outsource2india understands that needs are unique and immediate. We have always emphasized
on understanding business objectives as much as your project requirements. This has allowed us
to build long standing relationships with our customers. Some more reasons why we can be your
partner in bookkeeping services and finance & accounting services:
Faster closure of books every time means you can invest this time in strategic tasks
such as growing customer relationships
Specific operational focus on US based banking and financial institutions
We are proficient with the bookkeeping standards of different countries and can meet
your exact needs
We can offer other lateral finance and accounting services you can save on finding
multiple vendors if you decide to outsource more than one service
Our banking services support team is made up of highly skilled professionals with
experience in handling bookkeeping for banks
23
Open and short channels of communication lets you to quickly and clearly exchange
information among people involved in a project
Reduced operating and administrative costs
Outsource Financial Analysis Services for Banks
Financial statements for banks have a different set of challenges and require a different output
when compared to financial analysis for manufacturing or service companies. Banks have unique
risks in their financial dealings and the analysis must take this into consideration.
Outsourcing Banking and Finance & Accounting Services streamlines operational processes,
reduces cost and complexity and maximizes revenue for banks. In addition to these benefits,
banks also get a local perspective by understanding the specific needs of customers in different
locations. They can use this data to differentiate products and get ahead of the competition.
Outsource2india provides- back-end number crunching and basic analysis to enable US based
banks to carry out credit analysis for its customers. We provide real-time, 24x7 processing of
finance and accounting services for banks offering accurate and cost-effective banking analysis
services. This enables banks to maintain focus on core operations while achieving flexibility and
increased responsiveness to customers.
6.3 Stages in Financial Analysis for Banks
Step 1: Collate and Review Data
In the first step of the financial analysis, our analysts at O2I collate and review source data.
These are the source documents that we review:
Personal financial statement of guarantor

Tax Return of each guarantor
Credit report of each guarantor
Credit Score / Lien info
24
Management resume of each guarantor

Business tax returns for 3 years
Tax returns of Affiliate entities
Interim financial statements
Cash Flow Statement
AR Ageing Report, Appraisal Report etc.
Forms 1003, 413, 4506T etc.
Step 2: Perform Credit Financial Analysis
Once all the data has been reviewed, the experts analyze all the data that has been collected.
Perform Ratio Analysis

Spread Financials
Perform Financial Analysis of Guarantors
Analyze Repayment Capacity
Step 3: Prepare and Review Credit report
In this stage, the financial analysts at Outsource2india prepare the credit report and share it with
the banks.
Enter Credit Analysis Summarized info

Enter customer information
Enter loan details
Review and finalize credit report
Offshoring / Outsourcing Banks Trade Services

- Senath Radhakrishnan, Head-FI Trade Outsourcing, ABN AMRO, London. Executive
Summary Ever since offshoring and outsourcing in the services sector began to evolve, the
banking industry has been in the fore-front to take advantage of this trend. While it started with
noncore activities in the periphery, as capabilities and confidence grew, it has progressed to
25
business enablers such as IT and then to critical back-office processes and pre-sales/post-sales
support activities. Trade Services, such as letters of credit, offered by Banks is a critical
business activity that has been considered for offshoring/outsourcing by major banks in recent
times. Interestingly, as we shall show, the need here is not just because of cost, but due to other
multiple interlinked business factors. As banks are regulated entities, the offshoring of banking
services has received the attention of central banks. The Basel Committee on Banking
Supervision (which is a global central banks organization) through a Joint Forum has identified
key risks in outsourcing and offshoring of the banking services and has provided
recommendations on how central banks and banks should address these risks. We will go
through the highlights of this consultative document in this paper.
CHAPTER 7:- MARKET SCENARIO FOR TRADE

SERVICES
BANKS
7.1 INTRODUCTION
International trade grew by 6.5% during 2005. The corresponding growth for world GDP and
world production (aggregation of the worlds output in the agricultural, mining and
manufacturing sector) are 3.3% and 2.6%.1 this trend is not new. For several years now, the
growth of world trade has outpaced the growth of world production. This reflects the nature of
many goods and services that are transshipped for value addition in several countries before
they reach the ultimate consumer. In turn, this raises the need for supporting commercial
services. A significant part of this comes from the banking industry in the form of Trade
Services, which is formally defined as any banking activity that supports an enterprise in
completing a global trade. It includes letters of credit, collection services, trade finance and
payment services. The products under Trade Services are traditionally products that facilitate
exchange of documents for payment or payment commitment by the buyers bank and the
sellers bank acting on behalf of their respective clients. As banks are regulated entities they act
as trusted intermediaries between the buyer and the seller, who may be in different geographies
and time-zones. Payment Services are provided when a bank executes a payment on behalf of
its client to the sellers bank, to pay the seller for the goods received or to be received. Banks
provide pre-shipment and post-shipment finances to help produce goods and to sell or buy the
26
produced goods. The Paradox The trade landscape is changing rapidly today. Large
manufacturers have realized that as critical parts of the manufacturing processes are being
procured from sources across the globe and inventory management is a key driver, they no
longer can adopt a transaction based, buyer-vendor approach, even if the vendor or the supplier
could be an SME in an emerging market. Hence the emergence of the relationship based Supply
Chain approach with shared goals and objectives between the partners in the chain.
7.2 Capabilities required to delivering trade services

1. Front-end Electronic Channel
A corporate customer conducting trade business with the banks requires an internet based front-
end system so that it and its suppliers can stay connected with the bank, from various locations
(offices), to send, and query on, their transactions. This is a relatively new product for a bank
which calls for additional resources in product development and technology
2. Local Customer Service
Staff Even though the commercial process has become easier today than in the past, compliance
to various countries regulations and optimizing the opportunities necessitate corporates to seek
advisory services from banks from time to time and in many cases in their own local language.
Appropriate and adequate staff, to be able to leverage on a positive customer experience for
business benefits, is an important need.
3. Back-end Processing Platform
A back-end system is required to process trade transactions and generate accounting entries to
the banks book-keeping system and also pass credits and debits to the customer accounts. This
system has to be capable of handling multi-locational, multi-entity situations to drive down the
investment in hardware and implementation time-frames and also be flexible enough to be
27
accessed from various locations. As new technologies emerge on the front-end side, the back-
end system also has to be compatible with them.
4. Back-end Technical Operations

Staff Trade technical expertise is a key requirement to process transactions in line with
international and local regulatory requirements, International Chamber of Commerce guidelines
and banks own internal policies and procedures. With the banks overall trade business
shrinking, it has put a serious limitation on availability of new talent to backfill the retiring staff
in developed markets.
As can be seen from the above, the banks are facing a comprehensive business problem
as opposed to just a cost and/or service problem.
It can be, as summarized as below.
(a) Value Proposition
(b) Technology Investment
(c) Operating Cost
(d) Technical Expertise Hence, only extending the key-board to a low-cost location does not
provide a sustainable, optimum solution to their problem.
2. Offshoring/Outsourcing from a Compliance Perspective

The Joint Forum of the Basel Committee on Banking Supervision established a working group
to develop high-level principles about outsourcing. The key issues and risks and the principles
are contained in the Joint Forum Publication, February 2005
The following are the extracts of the key risks identified in this publication:
Strategic Risk
28
The third party may conduct activities on its own behalf which are inconsistent with the overall
strategic goals of the regulated entity. Failure to implement appropriate oversight of the
outsource provider. Inadequate expertise to oversee the service provider.
Reputation Risk
Poor service from the third party. Customer interaction is not consistent with overall standards
of the regulated entity. Third party practices not in line with stated practices (ethical or
otherwise) of regulated entity.
Compliance Risk
Privacy laws are not complied with. Consumer and prudential laws not adequately complied
with. Outsource provider has inadequate compliance systems and controls.
Operational Risk
Technology failure. Inadequate financial capacity to fulfil obligations and/or provide remedies.
Fraud or error. Risk that firms find it difficult/costly to undertake inspections.
Exit Strategy Risk
The risk that appropriate exist strategies are not in place. This could arise from over-reliance on
one firm, the loss of relevant skills in the institution itself preventing it bringing the activity
back in-house, and contracts which make a speedy exit prohibitively expensive. Limited ability
to return services due to lack of staff or loss of intellectual history.
The Joint Forum developed the following high-level principles for a bank (a regulated
entity), which is considering outsourcing, and their regulators to bear in mind:
1. A Comprehensive Policy to guide the assessment of whether and how those activities can be
outsourced. The Board of Directors or equivalent body retains responsibility for the outsourcing
policy and related overall responsibility for activities undertaken under that policy.
2. A Comprehensive Outsourcing Risk Management Programmed to address the outsourced

activities and the relationship with the service provider.
29
3. The Outsourcing arrangements should neither diminish its ability to fulfil its obligations to
customers and regulators, nor impede effective supervision by regulators.
4. Appropriate Due Diligence in selecting third-party service providers should be conducted.
5. Outsourcing relationships should be governed by written contracts that clearly describe all
material aspects of the outsourcing arrangement, including the rights, responsibilities and
expectations of all parties.
6. Both the regulated entity (the bank) and its service providers should establish and maintain
contingency plans, including a plan for disaster recovery and periodic testing of backup
facilities.
7. Appropriate steps should be taken to ensure that the service providers protect confidential
information of both the regulated entity and its clients from intentional or inadvertent disclosure
to unauthorized persons.
8. Regulators should take into account outsourcing activities as an integral part of their ongoing
assessment of the regulated entity (bank). Regulators should assure themselves by appropriate
means that any outsourcing arrangements do not hamper the ability of the regulated entity to
meet its regulatory requirements.
9. Regulators should be aware of the potential risks posed where the outsourced activities of
multiple regulated entities are concentrated within a limited number of service providers.
3. Case Study: ABN AMROs Offshoring/Third Party Experience

ABN AMRO responded to the market situation by taking the following steps:
1. Invest in Technology
2. Create an Offshore Low Cost Knowledge Centre
30
3. Restructure and Consolidate captive business

4. Create White-labelling capabilities
5. Provide Insource business from other banks (third-party services)
Taking into account the need to maintain local touch points and at the same time to reduce cost
and create a pool of expertise, ABN AMRO converted the trade business into a globally
integrated business but with a local and regional content.
The trade operations jobs were split into three components: Front Office, Client Services and
Back Office Operations. The trade offices in the countries were re-designated as Customer
Offices to provide the Front-Office (advisory services) to the clients. The routine (linear) client
service requirements were moved to a Regional Service Centre which was staffed with multi-
lingual people with abilities to serve more than one country in the region.
In order to link-up the various offices, the in-country/regional back office systems were
migrated to a global platform with a view of the work across the globe. A new web-based front-
end system was created with additional supply chain products.
The Back-office operations were Offshored to a banks subsidiary (ACES ABN AMRO Central
Enterprise Services Pvt Ltd) created in India with the ability to operate on a 24 x 7 basis and to
become a center of trade expertise.
Initial Challenges Send Side:
As is the case with many such projects, the pilot phase was a crucial and challenging one. For
strategic reasons, migration of five countries processes into India within the first year (on a lift
and drop approach) was required to be achieved in the first year. With no prior offshoring
experience and only centralization experience, this was not going to be easy. Added to this, is the
fact that in many countries offshoring of banking services required conformance to specific
guidelines from the central banks, which in some case had the potential to extend the pilot phase
beyond the first year. The offshoring of services was also linked to headcount rationalization in
these countries which included discussions with various trade union bodies. Trade Services has a
strong linkage to Credit and Cash processes and systems.
It was hence essential to ensure that all the stake-holders buy-in was received before the process
from a country could be migrated. As the work required images to be transferred to the offshored
location, the bandwidth of the telecommunication network had to be augmented to ensure
smooth transfer.
Initial Challenges - Receive Side:
31
Offshoring and providing banking services at 3 am in the morning was something that was not
widely heard of in the year 2000. Hence, to find appropriate and adequate staff willing to work at
odd shifts, with the buy-in of their families, was an important task. Training new staff on a
significantly complex process (example Checking Commercial Documents against Letters of
Credit in line with International Chamber of Commerce regulations) was a daunting task. As
certain customer/physical documentary process steps were left behind in the countries (see
sample model), offshoring presented with new risks which had to be identified and addressed
suitably.
As ABN AMRO in Chennai did not have adequate space to accommodate this expanded service,
a new office facility of floor space of about 20,000 sqft had to be built-up in just 45
Challenges in Outsourcing Banking Services
A thorough understanding the inter-dependency of the processes being outsourced with the other
business units processes and the buy-in of all stake-holders who touch the outsourced processes
is a key success factor.
To understand this let us try to express two banks, the outsourcing bank (Bank A) and the
insourcing bank (Bank B) through a simple first order algebraic equation, only with two other
business processes/units, as variables).
As we introduce a new variable in any mathematical equation the result changes, the structure of
the organization, however small it may be, changes. It is also generally presumed that
outsourcing affects only the organisation that is outsourcing and not the organisation that is
insourcing. This is not true as can be seen from the emphasis that has been placed by the Basel
Committee paper discussed earlier.
ABN AMROs Insourcing Experience (Third Party Services)
The market was now, for reasons mentioned above, looking for opportunities to offshore their
processing and lower their cost base.
After migrating a large percentage (around 60%) of the banks business offshore, ABN AMRO
was in a position to create white-labelled capabilities on the technology side and offer offshore
back office capabilities to other banks who did not either have scale or had a strategic objective
to offshore.
To enable clients of ABN AMROs trade services outsourcing business to choose their most
efficient portfolio, ABN AMRO broke the trade services process into sub-components to be able
to customize the needs of a bank and their immediate and long term goals. Based on this
approach, the outsourcing bank could choose the components and the degree of outsourcing that
they were comfortable with.
What do Outsourcing Banks look for?

Feedback from clients suggests the following:
32
Drivers for Outsourcing: Operating Model, Cost Reduction, Service Improvement and
Partnership Opportunities. Selection Criteria Used: Country Risk, Supplier Risk, Knowledge of
the business, Service Standards, Price, Quality of Staff, Relationship, Migration Approach and fit
with the Target Operating Model.
Estimated Quantifiable Benefits Achieved by Outsourcing Trade Services
Realizing the full potential when offshoring takes place to a country in a different time-zone, the
time difference between the two centers needs to be exploited to the advantage of the ultimate
customer, with a longer time-window and revised priorities.
Cost advantage can be derived by not only leveraging the labor cost arbitrage, but also by
intelligently stretching the business day, utilizing the infrastructure multiple times and by
servicing the customers and their counter-parts differently. Example: Our clients based in
Western Europe have quite a number of LCs to be issued on behalf of their importer clients to
exporters in Asia.
As ABN AMROs offshore center was in India and working on a 24 x 7 basis, they could have
people start processing the transaction earlier in the day and have the LC sent across to Asia
during Asias working hours (which is 7-8 hours ahead in terms of time-zone). Also, where the
LC on the exporters side was going via ABN AMROs branch say in Hong Kong, because ABN
AMRO had offshored its operation to the same Centre, a few process steps could be eliminated
and the processing time crashed.
Value Added Partnership approach
The Key to Success Going beyond the contract, building a partnership approach and adding extra
value to the clients business is what will make an outsourcing relationship work.
Two examples from ABN AMROs experience that were appreciated by the clients were the
following: Due to a high number of staff with analytical background, ACES could provide new
value-added services to the countries that had offshored their trade processing to them.
One of them is analyzing the discrepancies in the documents submitted by large exporters under
the letters of credit and finding a pattern in them.
An analysis of this nature helps the corporate clients to fix their process for clean submissions in
the future. A document without any discrepancy ensures quicker payment for the exporters and
lower service charges.
33
CHAPTER 8:- ISSUES AND CHALLENGES IN

OUTSOURCING OFFINANCIAL
SERVICES
8.1 INTRODUCTION
Outsourcing has become the latest mantra for companies to stay ahead of competitors in this
highly competitive business environment. Banks too are not lagging behind in this latest mania.
There has been a drastic change in the way banks operate in recent years. The growing
competition in the banking sector has forced banks to outsource some of their activities to
maintain their competitive edge. Of late Indian banks have also started outsourcing their non-
core services to safeguard themselves from the increasing competition. The outsourcing services
include maintaining of hardware and software, hosting, managing data centers, software
application support, disaster management and management of ATM networks across the country.
This chapter also opines that decision to outsource arises from the fact that many banks do not
have the required human and personnel resources that can cater to these activities. The increasing
competition in the banking sector has forced banks to protect their eroding margins by retaining
their customers by providing value-added services through outsourcing. Outsourcing helps in
attaining strategic objectives by reducing cost and increasing the efficiency through the
unburdening of the non-core service activities.
In effect, the outsourcing of banking activities is accelerating at:
In order to have a competitive edge, banks have started outsourcing huge volumes of their non-
core services. A recent study by Deloitte revealed that about $356 bn worth of US financial
services will be outsourced to offshore locations in the coming years.1 Most of the banks creates
in-house working center known as Captive BPOs. The term 'Captive" means "In captivity".
34
Hence, A Captive BPO signifies "A BPO Owned and Managed by Parent Company. Captive
BPO is like Company, creating their own delivery Centre in-house which is a captive (fixed) cost
for them. However, there are numerous risks involved in the process of outsourcing to a third
party, as it requires a complete security mechanism to deal with the voluminous amount of data
that they have with them. Relying too much on the third party may also lead to certain risks such
as complying with regulations, loss of control over the business, leakage of important data, etc.
The Raison dtre The key driving force behind outsourcing activities by any firm, irrespective
of its nature and business is cost saving. Initially, foreign banks were involved in outsourcing
their activities in order to leverage Indias significant cost advantages. Companies like GE,
American Express, Standard Chartered, ANZ Grind lays, HSBC, ABN Amro, and Fidelity, to
name a few, have been outsourcing their Information Technology Outsourcing (ITO)/Business
Process Outsourcing.
8.2 Some Key Risks in Outsourcing Strategic Risk: - *

The third party may conduct activities on its own behalf, which are inconsistent with the overall
strategic goals of the regulated entity.
Failure to implement appropriate measures/oversight from the part of the outsourcing service
provider.
Inadequate expertise to oversee the service provider. 2. Evans, R.: Outsourcing: The
regulatory challenge for financial services firms. Journal of Investment Compliance, 6(3), 52-
58, 2005. Chapter: V Issues and Challenges in Outsourcing of Financial Services
Reputation Risk:-
Poor service from third party.
Customer interaction is not consistent with overall standards of the regulated entity.
Third party practices not in line with stated practices (ethical or otherwise) of regulated entity.
Compliance Risk:-
Privacy laws are not complied with
Consumer and prudential laws not adequately complied with
Outsourcing service provider has inadequate compliance systems and controls Operational
Risk: - Technology failure
Inadequate financial capacity to fulfill obligations and/or provide remedies
Fraud or error
Risk that firms find it difficult/costly to undertake inspections.
35
Exit Strategy Risk
The risk that appropriate exit strategies are not in place. This could arise from over-reliance on
one firm, the loss of relevant skills within the institutions, preventing them from bringing the
activity back in-house, and contracts, which make a speedy exit prohibitively expensive.
Chapter: V Issues and Challenges in Outsourcing of Financial Services
Limited ability to return services to home country due to lack of staff or loss of intellectual
history.
Counterparty Risk: - *
Inappropriate underwriting or credit assessments *
Quality of receivables may diminish Country Risk: -
* Political, social, and legal climate may create added risk.
* Business continuity planning is more complex
Contractual Risk: -
* Ability to enforce contract
* For offshoring, choice of law is important
Access Risk: -
* Outsourcing arrangement hinders ability of regulated entity to provide timely data and other
information to regulators
* Additional layer of difficulty in making the regulator understand activities of the outsource
provider
Concentration and Systemic Risk; -
* Overall, industry has significant exposure to outsource provider. This concentration risk has a
number of facets including Issues and Challenges in Outsourcing of Financial Services
* Lack of control of individual firms over provider; and systemic risk to the industry as a whole.
3 Risk Management Practices for Banks that Outsource Services Banks that outsource are
exposed to many risks. They have to put in place many safe guards to protect the interest of their
customers.
36
Outsourcing does not reduce the obligation of the bank to its customer: If a bank has
decided to outsource certain financial services, it should be conscious of the fact that ultimately it
is responsible to its customers. The bank should never enter into a contract with a service
provider where a clash of interests is likely. The customer should not be compromised in the
process.
Adequate control over the service provider vital: The ability of the banks or of the
governing bank of the country to manage its matters should not be compromised. For instance,
the Reserve Bank of India (RBI) is responsible in regulating the public sector banks in the
country. Outsourcing of financial activities should in no way obstruct the RBI from carrying out
its functions and duties.
Consider relevant rules and regulations: The banks must make meticulous efforts to see
pertinent laws and regulations are not violated. 3. Levy, B: Outsourcing strategies: opportunities
and risk, Strategy and Leadership, 2004. Chapter: V Issues and Challenges in Outsourcing of
Financial Services [
Rights of the customer against the banks: A bank customer has certain rights against the
banks. These rights are inviolable and sacrosanct. They include the right of the customer to get
compensations in certain situations. The bank is obliged to its customer in this regard.
Certain activities should not be outsourced: Certain crucial activities like opening of
accounts, loan sanctioning, management of investment portfolios, and internal audit are core
management decisions. They cannot be outsourced.
The service provider should not have any stake in the bank. Any employee, officer,
director, or board member of the outsourcer bank, or their relatives should not have stakes in the
service providing company. This will ensure that there is no unwarranted influence or control of
bank activities.
The board and senior management should be responsible:
The senior management should be vested with powers to decide and evaluate the risks involved
in outsourcing while the board will be responsible for the approval of its framework. It should
periodically review the outsourcing arrangement and the strategies, and make sure they are still
relevant and safe. In addition, the senior management has to take the board into confidence by
proper communication, especially regarding the material outsourcing risks.
Correct assessment of the capabilities of the service provider: The competence and
capabilities of the service provider should be assessed accurately and they should match the
37
standard expected by the bank with regard its customer service operation, reputation, finance and
profit. Issues and Challenges in Outsourcing of Financial Services engaged after adequate
research of into its antecedents. Feedbacks may be sought from other banks. It is inadvisable to
let the concentration of outsourcing arrangements with a single service provider by a large
number of bank.
Outsourcing Agreement: The contract between the bank and the service provider has to
flexible to enable the bank to control and intervene if need arises. Due diligence is necessary in
drafting the contract with the help of the bank's legal counsel. It should be legally enforceable. It
should tackle the risks involved.
Confidentiality of the bank customer' information: The dealings of the bank with the
customers are meant to be confidential. The service provider should ensure that information like
records of assets; deposits and withdrawals are not leaked.
Code of conduct for sales and recovery agents: The sales agents working for the service
provider should be trained and sensitive especially while soliciting potential customer. They have
to convey the correct information regarding new policies and services of the bank, and make sure
that they do not inconvenience the potential customer in any way. Recovery agents should never
resort to intimidation or harassment in their debt recovery efforts.
38
CHAPTER 9:- BUSINESS PROCESS

OUTSOURCING
9.1 INTRODUCTION
Banks remain free from deployment and management of ATMs, security, currency management,
and transaction processing. It is a win-win situation for both customers and banks. Outsourcing
helps not only in focusing on the core activities, but also reduces the total cost of ownership by
reducing the capital investment in developing infrastructure. Service providers also offer
economies of scale because they cater to the whole gamut of the outsourcing services of various
banks or companies. Banking giants like SBI (State Bank of India), BOB (Bank of Baroda), etc.,
have also started outsourcing their services. SBI has outsourced.
Yes Bank, one of the private banks, has signed a seven-year outsourcing deal with Wipro
InfoTech. The imperative behind outsourcing complete IT infrastructure is to quickly set-up its
base and gain acceptance against ICICI Bank, HDFC Bank, Axis Bank, SBI, etc. Wipro InfoTech
will support the banks operations in rolling out its branches, networking, managing the data
center, and back-up support for disaster management. However, as per RBI directives, banks
have to exercise due diligence while appointing third parties to carry out banks non-core
outsourcing activities.
Challenges Ahead
Selecting the right vendor is one of the most critical aspects for any bank because of the nature
of complexities such as potential to transfer risk, management, and compliance to third parties
who may not be regulated, and who may operate offshore. Also, the legal contract should be
approved after the quantification of benefits, which can be done by analyzing financial and
infrastructure resources. The vendors domain knowledge about a particular industry is important
for customizing its IT requirements. It is because reliable service, timely delivery, data privacy
39
and security, and adherence to quality, are of strategic importance to banks while looking for
outsourcing partners.
The major concern for banks is security. Security-phobia is more perceived in public-sector
banks. Risks such as ineffective service, service providers acquiring knowledge of the banking
system and misusing it for other benefits.
Recently in India, some employees of a UK-based BPO company stole the passwords of that
particular firms customers and misused it. 8 Relying too much on the third party can also lead to
leakage of confidential information of clients. Such leakage can result in severe damage to the
banks reputation. Banks should also have realistic expectations from service providers because
overestimation of the economic benefits can put single service providers in trouble. Outsourcing
arrangements present four key challenges, which if not addressed adequately, introduce
significant risks for the Banking institutions.
9.2 Primary Concerns:

i) Selecting a qualified vendor and structuring the outsourcing arrangement
Failure to choose a qualified and compatible service provider and to structure an appropriate
outsourcing relationship may lead to on-going operational problems or even a severe business
disruption. These events may result from service provider employees not having the necessary
skills or familiarity with the industry, or from service providers lacking an adequate technical
capacity or financial stability. The contract needs to clearly articulate the structure of the
outsourcing arrangement and the expectations of both sides; otherwise excessive amounts of
management time may be consumed with dispute resolutions or with managing a contentious
relationship.
ii) Managing and monitoring the outsourcing arrangement

As management focus shifts from direct to indirect operational control over an activity, there is a
risk that undue reliance may be placed upon the service provider by the Banking institution.
Without active management and monitoring of the 8. Nair, K.: Brain Gain, the BPO Way.
Business Standard, ICE World (April 6), 2005. Chapter: V Issues and Challenges in Outsourcing
of Financial Services relationship, sub-par service may occur or, at the extreme, loss of control
over the outsourced activity. Given the customized nature of the service contracts, changing
40
service providers in the face of unsatisfactory responsiveness may not be a viable option. Even
when alternatives are available, switching service providers is likely to be a costly option that
adds to operational, legal and other risks.
iii) Ensuring effective controls and independent validation

Given the reliance on a third party for the performance of critical activities, there is the risk that
without independent validation of the control environment the institution cannot determine that
the controls have been effectively implemented. A sound control environment in an outsourcing
arrangement encompasses many of the same management concerns as when the activity is
performed in-house. However, if not independently validated, the Banking institution risks
receiving performance monitoring reports that are overly optimistic.
iv) Ensuring viable contingency planning Given the dependency on a third-party service
provider, Banking institutions face the challenge of ensuring adequate contingency planning to
avoid business disruptions. What contingency plans does the service provider have in place?
What contingency plans does the Banking institution have in the event of nonperformance by the
service provider? Recurring performance problems coupled with the absence of comprehensive
contingency plans by the service provider and the Banking institution may result in unintended
credit exposures, financial losses, missed business and reputational concerns.
The supervisory assessment of outsourcing risk at a Banking institution will depend on

several factors:
The size and criticality of the outsourced activity, how well the institution manages, monitors and
controls outsourcing risk, and how well the service provider manages and controls the inherent
risk. In principle, outsourcing may enhance or weaken an institutions overall risk profile. For
example, overall risk may be reduced when the service providers expertise is superior to that of
the financial institution and/or when prudent risk mitigating practices are utilized by the financial
institution. To cope with the challenges, RBI has proposed that the board of directors must be
held responsible for the outsourcing policy as well as activities undertaken by a bank.
Meanwhile, the government and the banking industry are taking proper initiatives to curb
unethical practices of misusing data collected by making and amending cyber laws. To curb the
lacunae in the existing outsourcing operations, RBI is going to formulate a policy of check and
balance for each bank by seeking approval of its board on outsourcing.
But did we know that outsourcing financial services has also managed to reach the banking
industry?
It was a huge risk but bank officials stood by their decision claiming that it.Reserve Bank of
India Report, Financial Sector Technology Vision, Department of Information Technology, was a
41
step in the right direction. Now, the number of customers physically heading into local bank
branches have been significantly reduced since the work load has been outsourced. The decision
wherein banks opted for outsourcing financial services hinge on two main reasons: the ability to
reduce costs and to cater to a wider range of customer base. Both of these components enable a
banking institution to gain a competitive edge in the market.
The IT-enabled banking services have now come to represent the new age of banking formats in
the industry. Despite the initial concerns, several banks have managed to handle banking and
outsourcing financial services quite well. In fact, they have been able to enjoy improved
efficiency and effectiveness using the said method. However, you cannot take it away from bank
clients to show concern over the fact that a stranger might accidentally gain access to their
account or financial information. It therefore leads one to look into main challenges and concerns
involved with banking and outsourcing financial services. The most primary concern involved
language and accent issues. And eventually, difficulty in language and communication will result
to delays in the service.
Over the initial run of banking outsourcing, many customers have opted for banks that did not
outsource to enjoy better quality service. As noted above, data security is one of the most
prominent concerns among bank clients and customers.
The possibility of BPOs gaining access to their account details poses risk of data theft. This was
exactly the case in various countries in the past, which only goes to show that there was not
enough data security provided for by outsourcing firms that offer banking and outsourcing
financial services. In the case of the bank, something bigger is at stake and that is the reputation.
But despite of the concerns indicated above, many banks still see the potential in banking and
outsourcing financial services. According to statistics, banks that opt to outsource their services
have the ability to save up to 60% in cost on an annual basis. In addition, Bank can enjoy more
productivity with more transactions being completed in an hour in comparison to traditional
banking methods. This is why banks and BPOs are working together in producing more efficient
banking services to its clients. They want to build better channels for banking that is secure and
efficient. All of these efforts are done to replace traditional branch banking with virtual
decentralized banking models. In the end, it will all turn out to be beneficial for both parties.
Customers can enjoy better service and banking experience, while the bank institutions can enjoy
cost-effectiveness and increased productivity.
The RBI has issued guidance by way of its circular dated 22 April 2009 (the Guidelines on
Managing Risks and Code of Conduct in Outsourcing of Financial Services) for banks
42
outsourcing financial services. Although Indian banks do not require prior approval from the
RBI, necessary safeguards to address risks inherent in outsourcing are detailed in these
guidelines.
A banks ability to fulfill its obligations to customers and the RBI, nor impede the effective
supervision of the RBI. Banks remain responsible for the actions of their supplier, and for
ensuring the confidentiality of customer information. Banks are advised not to engage in
outsourcing that would weaken their internal control, business conduct or reputation. The RBI
has also issued instructions concerning outsourced services relating to credit cards.
A bank that has entered into, or is planning, material outsourcing, or intends to vary any such
outsourcing arrangements, must notify the RBI of these arrangements. Banks in India are not
allowed to outsource core management functions,
for example, corporate planning, organisation, management and control and decision making
functions, such as determining compliance with know your- customer norms for opening deposit
accounts, according sanctions for loans and the management of investment portfolios. Business
process: Internally, whether through a regulator or otherwise, there are no specific laws or
regulations in respect of business process outsourcings (BPOs). .
The offence or contravention was committed without his knowledge.
He had exercised all due diligence to prevent the commission of the offence or
contravention. Telecommunications:
Companies providing telecommunications outsourcing services must be registered with the DoT
as an OSP.
This includes call Centre operators, tele-marketers, telebanking operators, network operation
centres and so on. There are some restrictions on foreign investment in the pure telecom space
that must be considered. Public sector: Public procurement guidelines apply to the procurement
of outsourced services from the private sector. Government policies dealing with public
procurement include the General Financial Rules 1963 and the Delegation of Financial Powers
Rules 1978 (both issued by the Ministry of Finance).
Further, the Directorate General of Supplies and Disposals (DGSD) Manual on Procurement, and
the Central Vigilance Commission (CVC) Guidelines, prescribe the procurement procedure to be
followed by all federal ministries. In August 2006 the Government issued three manuals
governing the procurement of goods, works and services.
43
These manuals are used as guidelines for government ministries and departments, and public
sector undertakings.
Other: The National Association of Software and Service Companies (NASSCOM), an industry
association, plays a critical role in ensuring Indias prominence in the global outsourcing space.
In addition to playing a significant leadership and lobbying role, NASSCOM also provides
industry certifications, organizes conferences and collates industry reports. The Business
Software Alliance (BSA) is also a critical player in the Indian market.
The BSA has had some success in obtaining Anton Piller orders from Indian courts and
conducting raids on distributors of pirated software.
a) Due diligence of the supplier It is important to thoroughly evaluate the Indian suppliers
facilities, credentials, information security practices and procedures.
Among others, it is advisable to:
Conduct a site visit of the facilities.
Ensure the supplier has a plan to address any identified gaps or deficiencies.
Obtain independent reviews and market feedback on the supplier.
Conduct due diligence and evaluate the suppliers:

# Expertise, past experience and competence to implement and support the proposed activity
over the contracted period;
# Financial stability and ability to service commitments even under adverse conditions market
intelligence, reputation and culture, compliance, complaints and outstanding or potential
litigation;
# internal policies and procedures, including security and control, audit coverage, reporting and
monitoring environment and business continuity management;
# locational factors including tax benefits, political, economic, social and legal factors;
# Employees, recruitment process, benefits, attrition plans, contingency plans and subcontractor
issues.
44
b) Sub-contractor issues it is not unusual for suppliers to use sub-contractors, and it is good
practice to include the following provisions in relation to sub-contracting:
* Customers consent must be obtained.
* Minimum qualifications, capabilities and so on of any subcontractor should be outlined.
* Customers right to review any sub-contracting terms.
* Suppliers liability for the actions of the sub-contractor.
* Sub-contractor IPR and liability issues should be outlined.
* Customers right to inspect a sub-contractor and his premises.
Outsourcing documentation the outsourcing agreement determines the success of the underlying
relationship. More clear, precise, detailed and carefully drafted the document, the easier it is to
allocate risks, anticipate and prevent potential problems, and set realistic expectations. Some
drafting tips include:
* Take time to understand, negotiate and finalize the document, even if there is business pressure
to close the deal.
* Clearly address risks and risk mitigation strategies, particularly those identified at the gap
analysis and due diligence stages.
* Incorporate flexibility into the agreement to cater for changed circumstances.
* Clearly state the nature of the legal relationship between the parties, whether principal to
principal or otherwise.
* Require that the supplier complies with laws, regulations and provisions that apply to the
customer in different jurisdictions.
* Include an obligation that the supplier complies with industry standards.
* Clearly document the suppliers obligations in the event of a breach, and any transition issues.
* Dont concede an important issue just to close the deal.
9.3 Key provisions include:

* The contracts scope, clearly defined. Service and performance standards should be stated.
* Audit rights: the customer must be able to access all books, records and information
.Global Outsourcing of IT and IT Enabled Services. Journal of Information Technology Cases
and relevant to the outsourced activity with the supplier. Audits can be conducted internally by
the customer or through external auditors or agents.
45
* Monitoring rights: continuous monitoring and assessment by the customer is necessary to
erase long-term issues and ensure that any necessary corrective measures are taken quickly.
* Termination: notices, procedures and consequences should be addressed.
* Policies and procedures for data privacy. The supplier should have adequate controls to ensure
customer data confidentiality and a statement of liability in the case of a breach of security
and/or any leak of confidential information.
* Business continuity.
* Sub-contractor issues: the agreement should clearly state if customer approval is required,
and how a sub-contractors suitability is to be ascertained.
* Compliance with law: both domestic and other applicable laws should be covered.
* Confidentiality of customer information. This issue cannot be overstated, and the agreement
should seek to ensure the security and confidentiality of customer information in the suppliers
custody or possession.
* Indemnities, fallback and other remedies. The agreement should contain the customers
specific non-compliance related remedies, fallback and indemnities.] Testing business continuity
and recovery procedures. The customer must ensure that the supplier periodically tests the DR
Plan. Often customers consider joint testing with the supplier. Termination and change of
supplier issues Customers tend to retain a degree of control over outsourcing to mitigate against
the unexpected termination of the agreement or the suppliers liquidation. To establish a viable
contingency plan, customers should consider the availability of alternative suppliers or the
possibility of bringing the outsourced activity back in-house in an emergency, and the costs, time
and resources involved in those activities.
The customer should continuously monitor and control its outsourced activities, either internally
or using external auditors. The customer should periodically review the suppliers financial and
operational conditions to assess its ability to continue to meet its outsourcing obligations.
Periodic audits highlight any deterioration or breach in performance standards, confidentiality
and security, and in business continuity.
Outsourcing to a third party if the foreign entity does not want to establish itself in India, it can
undertake outsourcing transactions by contracting with a supplier in India.
Even where the involvement of the foreign entity remains at the contracted level, additional care
must be taken to ensure that this involvement does not constitute a service Permanent
Establishment (PE) for the foreign entity in India.
46
If a service PE is established, the foreign entity is liable to pay taxes in India for income
that may be attributable to India. This option:
Is the most cost-effective.
Raises concerns regarding confidentiality, people and performance control.
Works best where the work is of an intermittent nature, the volumes are small, and varying
expertise is required for different pieces of work.
Provides flexibility, both in terms of the work outsourced, and allowing the work to be done by
different suppliers.
The agreement plays a very critical role in this type of outsourcing. It should cover issues
relating to data protection, security compliance, confidentiality, IPR assignment, audit rights,
reporting requirements and change control. The outsourcing relationship between a customer and
supplier can take several forms, including: Build operates transfer (BOT). The supplier sets up,
builds and operates the outsourcing unit for the customer and ultimately transfers it to the
customer at agreed date or event.
The procurement process should examine various matters, including supplier reputation,
technical specifications, expertise, pricing, updates, after-sales support and service, SLAs, and so
on. While the procurement process can vary, the following provides a general outline of the
process:
Tendering process- It is not common to undertake a Request for Proposals (RFPs) during
every tendering process for nongovernment outsourcing. However, for large projects foreign
companies do send out RFPs to a select group of suppliers. This effectively starts the
procurement process. In the event that a formal RFP is not sent out, the shortlisted suppliers are
sent a brief so that they can put forward their proposal and initiate their due diligence.
47
Supplier due diligence and evaluation-The suppliers due diligence and evaluation should
first address their technical capabilities, knowledge levels and market share. Supplier credibility
can then be checked through referral sources.
Assessing supplier capability-Infrastructure, technical capabilities, leadership, team size,

human resource management, locations, client focus, processes, tools and certifications are all
relevant in assessing the suppliers capabilities. India has many capable vendors, and it can be
difficult to select a particular supplier.
A supplier should not be selected purely because of its company name or the number of
multinationals who have outsourced work to it.
Evaluation of the people is as critical as evaluation of the company.
Referral checks on supplier reputation- This can be done simply by contacting some of the
suppliers other customers, or requesting that the supplier provides a capability statement based
on past experience. A visit to the suppliers facilities allows the customer to study their processes
and ensure they meet the customers internal quality and regulatory requirements.
Gap analysis/SLA signing- Ask the supplier to do a gap analysis so that issues can be
identified. An SLA should only be signed after a level of reassurance is established with the
supplier. The scope of the gap analysis/SLA should be clear, concise and simple. It should
contain objectives, and define the scope of work, final deliverables and any resource allocation
details.
People involved- Both the internal staff of the foreign entity planning to outsource to India and
external consultants can be used, depending on a projects requirements. When selecting external
consultants care must be taken to ensure that they have adequate exposure to India and doing
business in India.
Continuous evaluation of supplier performance- Keep evaluating the supplier even after the
agreement has been awarded to them. This can be based on both feedbacks from the people
involved and active assessments. Evaluation is particularly useful where there is a subsequent
engagement.
48
Negotiating the transaction-The team negotiating the transaction should be practiced in
negotiating with Indians. The Indian style of negotiation is quite unique, and negotiators should
be sensitive to the nuances of this style of negotiation.
Future Outlook Outsourcing in the Banking sector is in its nascent stage, but it has a promising
and bright future ahead. To make the outsourcing industry more vibrant and competitive and to
overcome the issues associated with it, proper participation is required from the government,
academic, and industry sectors. For IT, banking is considered to be the second largest segment,
next to manufacturing.
So, there is a huge potential for the third party outsourcing service providers in the banking
segment. More and more banks are embracing this growing trend of outsourcing to stave off
competition.
Indian companies need to capitalize on the size of their economy and growth potential, besides
leveraging their strong IT infrastructure and cheap labor.
The government has to speed up its infrastructure development efforts to maintain the
momentum of growth in the outsourcing industry. Besides, the industry and regulators the
government should draft proper data privacy and security norms. The industry needs to move up
the value chain, and infrastructure bottlenecks and data security issues must be resolved. All
these measures will help the banking industry to unleash its full potential for outsourcing. .
There are several actual and psychological barriers to the growth of financial BPO. Several
successful experiences and research studies are required to overcome these barriers. The barriers
to the growth include security of customer and product information, Protection of intellectual
property, Viability of providers, quality of service, Environmental and labor practices of BPO
providers, Reliability of technological infrastructure, etc.
9.4 Some of the important issues:

PSOR the principal risks are PSOR- Poaching, Shirking and Opportunistic Renegotiation.
Frequently one finds companies under committing and over delivering. These risks can crop up
when the market matures. Ownership of customer information.
The third party to whom the banks have outsourced work takes ownership of their customer
information, which greatly increases its bargaining leverage. The third party can develop a
systems to do customer information tracking and acquire the ability to take ownership of the user
firms customers. Outsourcing firms that have this information can start renegotiating prices or
contracts.18 Process level lock in The greater risk is process-level lock in. if employees of the
principal get used to seeing the same screens and doing the same things while someone supports
49
them from back office, it is a tremendous bargaining advantage for outsourcing companys 18.
Fischer, L.M. 2001. From vertical to Virtual; How Nortels Supplier Alliances extend the
enterprise [online]. Even if the outsourcing firm hikes its fees, if becomes difficult for the
principal to discontinue operations or change the way things are done.
The human level lock in of the person, the process and the information producing system is more
dangerous and costly. Disruption of those processes is usually unaffordable and that gives
outsourcing firms tremendous advantages. Lack of Control Company can lose control over the
work process an output.
Outsourcing Models
The early outsourcing models in the financial services industry involved the parent company
offshoring functions to a third party vendor (Feenstra & Hanson, 1996). The literature shows
many examples of where this model had a detrimental effect of the quality of service (Ennew et
al. 2011). This model provided large cost savings for the company but led to problems due to
misalignment of the parent and vendors goals and an over-emphasis on cost savings by the
parent. The overall performance of the companies suffered and their reputation was ultimately
damaged. This resulted in damage to relationships with clients and customers. Karmarkar (2004)
noted that firms that use simple processes to deliver standardized services can benefit greatly
from outsourcing all or some of these services.
Building Successful Relationships
The success of an outsourcing strategy is largely dependent on the strength of the client-vendor
relationship (Dad and Iqbal, 2013). Successful relationships are built on the idea that both parties
should be satisfied with the relationship and the interaction between the two parties, not just the
client (Bhardwaj & Saxena, 2009). McIvor, et al. (2009) notes that applying outsourcing
relationship management techniques can be challenging notably in aligning goals, gathering
complete information and due to 14 inadequate performance management systems. However,
cost analysis and benchmarking can aid improved performance, and reduce costs. Performance
management techniques can also be employed to remove inefficiencies from processes both prior
to and during the outsourcing relationship
Functions Outsourced
Once organizations have decided to proceed with an outsourcing model, a key decision will be
which functions they choose to outsource. Manning et al. (2008) opine that any function that is
operationally non-strategic and not a core function should be outsourced to enable the
organisation to focus on value-adding core functions. The ideal proposed model is where
functions that interact with clients and customers remain the responsibility of staff in the parent
company.
50
Outsourcing Locations
India has historically been the most utilized country for the purposes of outsourcing services in
financial services. Reasons for its popularity include its attractive taxation laws, high levels of
education and English language proficiency in addition to its low labour costs.
CHAPTER10:- IMPACT OF OUTSOURCING
10.1 INTRODUCTION
Gaitonde (2007) highlights that the long-term impact of outsourcing is that services that are
being provided cheaply in developing countries will become more costly as the level of
experience, the level of expectations of employees and the saturation of the labour market
increases.
Conversely, in Ireland, the lack of graduate level opportunities in financial services will need to
be addressed if all non-core functions are taken out of Ireland.
Ireland has built a stellar reputation for providing full financial service support to clients and has
a large workforce of qualified individuals from graduate level up to executives with over 20
years experience.
Regulatory Focus
There is an increasing focus on outsourcing by financial institutions from regulators globally
(Meyerson, et al., 2013). Stringent regulatory guidelines are continuously issued that provide
guidance on managing the risk associated with contracting third party vendors that are often
based in less regulated jurisdictions than the parent (Levis, et al., 2014).
Companies who dont comply are subject to heavy penalties and can even be prevented from
trading in certain cases (El-Rahman, 2009). These factors have an increasing bearing on what
outsourcing model the organisation employs.
Early offshoring models whereby the parent would contract with a third party gave the parent
scope to end the contract if required and gave a perceived lack of responsibility of the parent to
51
control the behavior of the vendor. Recent regulations have ensured that the parent must be fully
responsible for any action the vendor performs.
Benefits
Outsourcing strategies began as purely a cost saving exercise but has since evolved to an
approach in which cost is often a secondary consideration. Access to new labour markets
provided firms with several benefits:
Cost advantages:
Costs are usually the primary motivation behind outsourcing. The direct savings in labour cost
can alone justify outsourcing functions to a 3rd party.
Focus on core competencies:
A "core" competency is one which offers the company competitive advantage over its
competitors. Time spent on non-core functions only serve to decrease the companys competitive
advantage, so companies often chose to outsource them (Dad & Iqbal, 2013).
Quality and Capability:
Companies can outsource functions in which they dont have expertise in. This saves the
company needing to employ, train and maintain staff to perform these functions.
Outsourcing models and management:
When addressing the question of whether outsourcing has implications for companies
performance levels, the research has found that the answer is yes. Any change to companies
service model will impact upon their performance. The research has provided several instances
of where outsourcing affected companies performance negatively. The participants identified that
the issues were generally caused by poor planning, insufficient training of staff in both locations,
inadequate governance and poor management at senior levels. The research has shown that the
52
outsourcing model chosen and the manner in which the transition is managed is key to ensuring
that performance is not adversely affected.
CONCLUSION
The analysis of outsourcing in the Banking sector leads to several essential conclusions. First of
all, outsourcing is primarily understood as the reallocation of activities from banking companies
to their low-cost service providers. What is more, despite the negative image of outsourcing the
reallocation of business tasks has become a most viable, if not necessary, option for banks to
increase their operational efficiency. Costs can be decreased substantially through locating non-
core business processes with specialized third-party suppliers in low-wage countries. Additional
advantages of outsourcing include the access to a vast pool of well-trained employees, an
improved strategic focus, and the opportunity to benefit from third party suppliers economies of
scale. Furthermore, outsourcing does not only enhance the efficiency of operations through
capitalizing on wage differentials, but it also implies significant costs and several operational,
reputational, and legal risks. Banks must be particularly prudent not to lose control of certain
business tasks and suffer from their third-party service providers non-compliance with company
standards. A growing number of regulations and guidelines are put in place to mitigate the risks
associated with outsourcing.
For the purpose of outsourcing the need has been identified to carefully scrutinize the processes
of banks, and other financial services providers value chain. Managers must ask themselves
how to respond to the financial sectors present challenges. Especially large firms will find a
solution in identifying those activities that represent core competences on which a competitive
advantage can be based. Once those core competences are found, the financial firms
organizational layout needs to be redesigned accordingly. As for the activities outsourcing does
not seem to be limited to back-office functions anymore. Whole business processes or
departments are getting relocated whilst the only unsurpassable cap to outsourcing proves to be
face-to-face customer contact.
53
In the future, even knowledge intensive processes are likely to be provided by suppliers in
emerging or developing countries. In general, it can be found that financial firms are increasingly
moving up the value-chain in their outsourcing activities. In sum, this research provides an
overview of the status quo of outsourcing in the Banking sector of developing countries. A wide
spectrum of topics is covered on the basis of academic literature, data collected from banks, and
reports by large Banking companies.
Nevertheless, limitations to the results of the work can be identified. First, Results for specific
Banks or country affected by outsourcing could thus be presented only. Second, while relatively
straight-forward in nature and more or less self-explanatory, the theoretical concepts that are
used to explain outsourcing proved hard to integrate in the internal logic of the work. In addition,
outsourcing affects a wide area of academic literature, ranging from business organization,
human resource issues, management control systems, to socio-cultural considerations.
BIBLIOGRAPHY
http://www.ukngroup.com/wp-content/uploads/outsourcing-in-the-bankin-84a7.pdf
http://www.sourcingnotes.com/content/view/351/54/
https://www.gtnews.com/articles/outsourcing-in-the-banking-sector-problems-and-prospects/
http://www.bankingtech.com/296122/the-next-phase-of-outsourcing-change-the-bank-with-
digital-transformation/
https://research.everestgrp.com/Product/EGR-2014-11-R-1175/IT-Outsourcing-in-Banking-
Service-Provider-Landscape-with-PEA
54
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OUTSOURCING IN BANKING

AND FINANCIAL SECTOR

CHAPTER -1:- INTRODUCTION OF BANK

1.2 EVOLUTION OF BANK

CHAPTER 2:- OUTSOURCING OF BANKS

Scope of the Policy

2.2 Definition of Outsourcing

Indicative list of activities that can be outsourced.

2.3Activities that should not be outsourced.

2.4 Activities outsourced by the bank:

A) Credit Card acquisition issuance and the reconciliation:

B) Engagement of business correspondence for financial inclusion: For implementation of

CHAPTER 3:- RISK ARISING OUT OF

3.1 Outsourcing of financial services-Exposes a bank to a number of risks which need to

Counter Party Risk - Due to inappropriate underwriting or credit assessments.

3.2. General Appraisal:

In respect of outsourced services relating credit cards, RBIs detailed instructions

CHAPTER 4:- APPRAISAL OF SERVICE

While outsourcing or renewing contract of outsourcing of an activity with a service provider,

Compatibility with their own systems;

4.1. Examination & Evaluation:

O Business reputation and culture, compliance, complaints and outstanding or potential

O Standards of performance including in the area of customer service;

4.2. Materiality of outsourcing

The level of importance to the Bank of the activity being outsourced;

4.3 Post Outsourcing Appraisal

In order to mitigate the risk of unexpected termination of the outsourcing agreement or

Establish a viable contingency plan to consider the availability of alternative service

The Outsourcing Agreement.

A termination clause and minimum periods to execute a termination provision, if

Contingency plans to ensure business continuity.

The outsourcing agreement should :

CHAPTER 5:-ROLES AND RESPONSIBILITY

5.1 Board of Directors

Undertaking regular review of outsourcing strategies and arrangements for their

Developing and implementing sound and prudent outsourcing policies and

Reviewing periodically the effectiveness of policies and procedures.

Communicating information pertaining to material outsourcing risks to the Board in a

Putting up Outsourcing proposal to Risk Management Department for evaluation of

Putting up the proposal to Operational Risk Management Committee for approval.

Providing information to Compliance Department, S&C Department, KYC /AML

Implementation of agreement with service providers of activities outsourced by them.

Informing S&BD Division and all other concerned Departments in case of

5.3 Roles of individual Divisions / Departments at CHQ.

Developing Banks Outsourcing policy

Putting up the policy for review of the Board at specified timelines.

Providing inputs to individual Divisions / Departments, who want to outsource any

Risk Management Dept.

Communication of information pertaining to material outsourcing risks to the Board in a

Undertaking periodic review of outsourcing arrangements to identify new material

Submit compliance certificate to RBI about outsourced activities by any department of

Submit Board approved consolidated Compliance Certificate to RBI on annual basis

Customer Care Department:

KYC/ AML Department:

7) Accounting & expenditure:

The sub-code so created shall also be intimated to S&C Department.

8) Delegation of Powers for approving Outsourcing Activities: Delegation of powers for

9) Responsibilities of DSA/DMA/Recovery Agents. Code of conduct for Direct Sales Agents

10) Redressal of Grievances related to Outsourced services.

11) Centralized List of Outsourced Agents.

The concerned Department which terminates an outsourced arrangement shall inform

12) Off-shore outsourcing of Financial Services.

The outsourcing related to overseas operations of t h e bank would be governed by both

13) Outsourcing within a Group/Conglomerate. The risk management practices to be adopted