The Hindu Business Line : Bankable outsourcing

AS A CONCEPT, outsourcing has taken firm roots in the financial services sector. Predictably, the Reserve Bank of India, as banking and financial services regulator, is concerned. A senior official of the RBI is on record saying that the central bank is considering setting guidelines on the subject in consultation with the Indian Banks Association.

Till now, foreign and private banks have used third parties to carry out activities that they themselves were doing earlier. Of course, foreign banks based in other countries have also used India as a base for "offshoring". About 25,000 jobs in the financial sector are said to have moved into the country in the past two years. And the numbers are only expected to go up further. According to a Deloitte study on the subject, an estimated $400 billion worth of financial services will be outsourced to offshore locations by 2010. It is a safe bet that a good chunk of that revenue will flow into India. The argument in favour of outsourcing is simple — cut costs, especially of manpower, and transfer the responsibility of compliance with associated risks to a willing third party. Besides it would leave the organisation free to pursue its core competencies. That would imply banks sticking to the business of taking risk, addressing asset-liability matches, managing cash-flows for clients and providing a one-stop shop for all financial services to a cross-section of users. In the Indian context, even if there are no wage differentials to be exploited, domestic players could still hope to reap some cost advantage from such a strategic choice.

The private sector banks have achieved a degree of success in their experiments with this concept — whether it is in moving their Information Technology requirements to a vendor, or having agents carry out preliminary credit appraisals or for that matter recovering dues. No doubt, vis-à-vis the last task, there have been unsavoury episodes where the agents have exceeded their brief with their strong-arm methods and put the bank's reputation at risk. The RBI has had to caution banks on more than one occasion about making the necessary due-diligence while appointing third parties to carry out related activities. The RBI has reason to be more concerned now that an increasing array of services, ranging from cleaning, security, cash movement, and credit appraisal to technology matters, is sought to be outsourced to third parties even by public sector banks. These third parties are currently outside the purview of regulation.

There is a danger of over-reliance on such parties, which may at a later date place the institution at risk. For instance, privacy laws that may be on the anvil to protect confidential information of clients can set severe penalties for any slippages or disclosure of information to unauthorised persons. The outsourcing guidelines that are being worked on are quite timely. Perhaps, the RBI ought to insist that outsourcing of activities should not be treated as an abdication of responsibility. The board of directors must be held accountable for the outsourcing policy as well as the activities undertaken under them.

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