utsourcing of services

Outsourcing of Services by Banks
–‘Outsourcing’ may be defined as a bank’s 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 that would normally be undertaken by the bank itself, now or in the future.
Activities that should not be outsourced
–Banks cannot outsource core management functions like corporate planning, organisation, management and control and decision-making functions like determining compliance with KYC norms for opening deposit accounts, according sanction for loans and management of investment portfolio.
The key risks in outsourcing that need to be looked into by the banks are: –
(a) Strategic Risk ? The service provider may conduct business on its own behalf, which is inconsistent with the overall strategic goals of the bank
(b) Reputation Risk ? Poor service from the service provider, its customer interaction not being consistent with the overall standards of the bank
(c) Compliance Risk ? Privacy, consumer and prudential laws not adequately complied with
(d) Operational Risk ? Arising due to technology failure, fraud, error, inadequate financial capacity to fulfil obligations and/or provide remedies
(e) 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
(f) Counterparty Risk ? Due to inappropriate underwriting or credit assessments
(g) Country Risk ? Due to the political, social or legal climate creating added risk
(h) Contractual risk ? arising from whether or not the bank has the ability to enforce the contract
I) Concentration and Systemic Risk ? Due to lack of control of individual banks over a service provider, more so when overall banking industry has considerable exposure to one service provider.

Accounting & Finance for Banking

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