Regulation of outsourcing finally extended to NBFCs

Outsourcing has become increasingly complex. The world over, laws and regulatory frameworks have been put in place to permit execution and management to take place outside, while ensuring that the key risks and responsibilities continue to remain within the domain of the regulated entity.

While outsourcing has been a regulated activity for banks and insurance companies in India for a long time, it has remained an unregulated activity in respect of non-banking financial companies (NBFCs).

NBFCs typically outsource financial services such as processing of loan applications and documentation, loan supervision, research and marketing, and data processing and back-office related activities. To address concerns arising on account of the reputational or operational risks associated with such activities, and to introduce a framework for regulating the outsourcing of activities by NBFCs, the Reserve Bank of India (RBI) on 9 November 2017 notified the Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Service by NBFCs.

Cyril Amarchand Mangaldas is India’s largest full-service law firm. Shruti Rajan is a partner and Rutu Gandhi is a senior associate at the firm.