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Question

Read the following passage and answer the next 2 question Outsourcing' is defined as the NBFC’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 NBFC itself, now or in the future. NBFCs have been outsourcing various activities and are hence exposed to various risks Further, the outsourced activities are to be brought within regulatory purview to protect the interest of the customers of NBFCs and to ensure that the NBFC concerned and RBI have access to all relevant books, records and information available with service provider. Some key risks in outsourcing are Strategic Risk, Reputation Risk, Compliance Risk, Operational Risk, Legal Risk, Exit Strategy Risk, Counterparty Risk, Country Risk, Contractual Risk, Access Risk, Concentration and Systemic Risk. It is therefore imperative for the NBFC outsourcing its activities to ensure sound and responsive risk management practices for effective oversight, due diligence and management of risks arising from such outsourced activities.

Which of the following financial activity can be outsourced by an NBFC?

A Core management functions Correct Answer Incorrect Answer
B Sanctioning of loans Correct Answer Incorrect Answer
C Data processing Correct Answer Incorrect Answer
D Management of investment portfolio Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

Typically outsourced financial services include applications processing (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back office related activities, besides others. NBFCs which choose to outsource financial services shall, however, not outsource core management functions including Internal Audit, Strategic and Compliance functions and decision-making functions such as determining compliance with KYC norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio.

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