Excessive outsourcing of banks' core activities will lead to concentration risk: RBI executive director

Excessive outsourcing of bank’s core activities will lead to concentration risk, Reserve Bank of India executive director Ajay Kumar Choudhary warned on Saturday. While speaking at a technology conference organised by the Indian Banks association, Choudhary added that the top tier of bank management have to ensure that they don’t outsource their core activities. Rather they should focus on upgrading their own core banking activities.
“In line with our outsourcing guidelines, the board and senior management must ensure that at no point of time, the core activities of banks are outsourced,” Choudhary said. “We are observing an increase in the outsourcing of services to the banking and finance sector. The idea is that banks should concentrate on the development upgradation of their core banking solution.”

Choudhary added that development and upgradation of core banking solution could provide easy integration.

Choudhary also said that banks need to diversify while looking at tech partner.

“You need to diversify,” he said. “I am well aware that with evolution of technology it gets demanding for the industry participants to keep pace with it. Which in turn, means that constantly you have to collaborate with tech providers. This results in concentration. Diversification is perhaps the easiest way to mitigate such risk and I urge all the banks and other industry participants to explore newer options when it comes to adopting technology.”

The RBI, which has been concerned about financial institutions outsourcing various core activities such as booking fixed deposits, sanctioning buy-now-pay-later loans and credit card onboarding, is looking to ensure that contracting out of services does not lead to abuse by non-regulated entities.

Choudhary said that banks should ensure
that adequate safeguards are established to ensure the financial stability of the banking system.

“It is equally important that we all acquaint ourselves with the evolving tech and become self-sufficient to reduce the dependency and ensure effective handling of outsourcing,” he said.

Choudhary also advised banks to maintain the competitive edge by embracing digitalisation.

“Digitalisation is happening in silos,” he said. “
It is very important for the banking sector to complete digitalisation. Seamless integration across all the operations and systems.”

Choudhary said that the central bank is placing greater emphasis on the digitalisation and is exploring tech solutions that may be implemented in a way to provide faster, cheaper and simpler access to tech to the industry participants which can enable them to achieve digitalisation.

A pilot project for end-to-end digitalization of Kisan Credit Cards (KCC) has been conceptualised in association with RBI’s innovation hub. This will tap into data sources such as digitized state government land records, UIDAI, credit information companies, agritech companies, etc.