RBI issues detailed norms for outsourcing of IT services by banks, NBFCs

The Reserve Bank of India (RBI) has come out with detailed norms for outsourcing of IT services by banks, NBFCs and regulated financial sector entities to ensure that such arrangements do not undermine their responsibilities and obligations to customers. In its 'Master Direction on Outsourcing of Information Technology Services', RBI said that Regulated Entities (REs) have been extensively leveraging IT and IT-enabled Services (ITeS) to support their business models, products and services offered to their customers.

In February last year, the central bank proposed the issuance of suitable regulatory guidelines on outsourcing of IT services with an aim to ensure effective management of attendant risks. Later, draft norms were issued. According to RBI, the underlying principle of the directions is to ensure that outsourcing arrangements neither diminish REs' ability to fulfil its obligations to customers nor impede effective supervision by the central bank.

With a view to provide REs adequate time to comply with the requirements, the norms will come into effect from October 1, 2023. A RE shall take steps to ensure that the service provider employs the same high standard of care in performing the services as would have been employed by the RE, if the same activity was not outsourced. As per the central bank, a RE should not engage an IT service provider that would result in reputation of RE being compromised or weakened.

It stated notwithstanding whether the service provider is located in India or abroad, REs should ensure that outsourcing should neither impede nor interfere with the ability of the RE to effectively oversee and manage its activities. Further, REs have been told to evaluate the need for outsourcing of IT services based on comprehensive assessment of attendant benefits, risks and availability of commensurate processes to manage those risks.