Risk Management Practices for Banks, Risk Management Practices for Banks that Outsource Services

Risk Management Practices for Banks - Read more about risk management practices, risk management pracktices for banks, outsourcing risk management practicles for banks. Also offers various outsourcing services including articles on its advantages and disadvantages.

Risk Management Practices for Banks that Outsource Services

Banks that outsource are exposed to many risks. They have to put in place many safe guards to protect the interest of their customers.

Outsourcing does not reduce the obligation of the bank to its customer:

If a bank has decided to outsource certain financial services, it should be conscious of the fact that ultimately it is responsible to its customers. The bank should never enter into a contract with a service provider where a clash of interests is likely. The customer should not be compromised in the process.

Adequate control over the service provider vital:

The ability of the banks or of the governing bank of the country to manage its matters should not be compromised. For instance, the Reserve Bank of India (RBI) is responsible in regulating the public sector banks in the country. Outsourcing of financial activities should in no way obstruct the RBI from carrying out its functions and duties.

Consider relevant rules and regulations:

The banks must make meticulous efforts to see pertinent laws and regulations are not violated.

Rights of the customer against the banks:

A bank customer has certain rights against the banks. These rights are inviolable and sacrosanct. They include the right of the customer to get compensations in certain situations. The bank is obliged to its customer in this regard.

Certain activities should not be outsourced:

Certain crucial activities like opening of accounts, loan sanctioning, management of investment portfolios, and internal audit are core management decisions. They cannot be outsourced.

The service provider should not have any stake in the bank.

Any employee, officer, director, or board member of the outsourcer bank, or their relatives should not have stakes in the service providing company. This will ensure that there is no unwarranted influence or control of bank activities.

The board and senior management should be responsible:

The senior management should be vested with powers to decide and evaluate the risks involved in outsourcing while the board will be responsible for the approval of its framework. It should periodically review the outsourcing arrangement and the strategies, and make sure they are still relevant and safe. In addition, the senior management has to take the board into confidence by proper communication, especially regarding the material outsourcing risks.

Correct assessment of the capabilities of the service provider:

The competence and capabilities of the service provider should be assessed accurately and they should match the standard expected by the bank with regard its customer service operation, reputation, finance and profit. The service provider should be engaged after adequate research of into its antecedents. Feedbacks may be sought from other banks. It is inadvisable to let the concentration of outsourcing arrangements with a single service provider by a large number of banks.

Outsourcing Agreement:

The contract between the bank and the service provider has to flexible to enable the bank to control and intervene if need arises. Due diligence is necessary in drafting the contract with the help of the bank's legal counsel. It should be legally enforceable. It should tackle the risks involved.

Confidentiality of the bank customer' information:

The dealings of the bank with the customers are meant to be confidential. The service provider should ensure that information like records of assets, deposits and withdrawals are not leaked.

Code of conduct for sales and recovery agents:

The sales agents working for the service provider should be trained and sensitive especially while soliciting potential customer. They have to convey the correct information regarding new policies and services of the bank, and make sure that they do not inconvenience the potential customer in any way. Recovery agents should never resort to intimidation or harassment in their debt recovery efforts.

Contingency Plan:

The bank should always have an alternate plan to ensure that its service is not affected. It can be that the bank will have to change the existing service provider for a new one or even bring back the hither to outsourced activity in-house.

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