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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 cannot be outsourced by an NBFC?

A Loan origination Correct Answer Incorrect Answer
B Supervision of loans Correct Answer Incorrect Answer
C Document processing Correct Answer Incorrect Answer
D Internal audit and compliance Correct Answer Incorrect Answer
E All can be outsourced Correct Answer Incorrect Answer

Solution

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. However, for NBFCs in a group/ conglomerate, these functions may be outsourced within the group subject to compliance with relevant instructions. Further, while internal audit function itself is a management process, the internal auditors can be on contract.

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