The Hindu Business Line : No credit to RBI

TYING UP THE the banking system in knots with wordy guidelines, as that on outsourcing of financial services by banks, is getting to be something of a frightful habit with the Reserve Bank of India. It will please few, other than trade unions afraid of losing jobs. Foreign banks and insurance companies have been farming out credit-related activity to outfits in India with no damage done. Outsourcing is severally risky, says the 14-page fatwa from the RBI, while confessing to the advantages of trimmed costs and "accessing expertise."

The RBI draft effectively bans the Indian banking system from farming out certain jobs. "Banks cannot outsource core management functions like corporate planning, organisation, management and control and decision-making functions like determining compliance with KYC (know-your-customer) norms for opening deposit accounts, according sanction for loans and management of investment portfolio," says the draft categorically. World-over many of these services are leased out by banks, ironically, mainly to India. Bankers are aware of the risks and must be left to run their business as problems can anyway be spotted during offsite and onsite inspections by the RBI. Apparently, the RBI is unsure but this cannot be a sufficient reason for not allowing outsourcing as there are reports of the central bank itself thinking on those lines. The draft insists on the outsourcing agreement allowing the RBI to inspect the books of the service provider. Is not the RBI over-reaching itself? Taking outside help can often be cheaper and bring in quality service; more importantly, it can give more time and space for chairmen to think up fresh strategies for growing their banks. Job losses at banks make for gains elsewhere. For the RBI, "the underlying principles are that the regulated entity should ensure that outsourcing arrangements neither diminish its ability to fulfil its obligation to customers and the RBI nor impede effective supervision by RBI." That is hokum-pokum as bankers know their jobs; else would the public be relying on them with their money?

If the RBI still insists on curbing outsourcing, will that not trip the idea of reaching bank credit to rural areas through post offices? The Indian Banks Association is working on a plan to extend rural credit through post offices in areas without bank branches, with a start being made in Maharashtra. A semi-urban bank branch will sign an MoU with the post office for postmen to spot potential borrowers in line with the RBI's KYC. The post office will do all to help the bank release funds by cheque with the loan amount not exceeding Rs 20,000. Then there are the SHG-Banking scheme and other micro-finance strategies to reach money to the poor, which are all nothing but outsourcing. The draft says banks will require the RBI okay where the service provider is outside India or when the outsourcing is for doorstep banking. Quite clearly the guidelines represent caution taken too far.

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