Core activities of a bank should not be outsourced, says RBI's AK Choudhary

"While outsourcing it is very important that adequate safeguards are established to seal the situation as well as the financial stability of the banking system," Choudhary added

In order to maintain stability in the banking system, banks’ senior management and board members have to ensure that none of the core banking activities of a bank are outsourced to any third party at any point in time, said Ajay Kumar Choudhary, executive director, Reserve Bank of India (RBI).

Speaking at an Indian Banking Association (IBA) event on Saturday, Choudhary said, “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”.

“While outsourcing it is very important that adequate safeguards are established to seal the situation as well as the financial stability of the banking system," he added.

With fintechs providing innovative solutions, banks have increasingly turned to these players and outsourced a host of activities, especially customer services.

“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 and upgradation of their core banking solution in a manner to provide easy integration," said Choudhary.

With increased use of technology in banking to provide seamless services, banks are collaborating with a limited pool of tech providers, which may result in a concentration risk.

According to Choudhary, this may result in concentration which may turn severe. "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."

“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.

While banks have made progress in embracing digitalisation, the process is happening in silos.  

“As a central bank, RBI places 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 digitalization”, Choudhary said.

Meanwhile, the RBI is conducting a pilot project for end-to-end digitalization of Kisan Credit Cards (KCC) in association with its innovation hub by tapping into data sources such as digitized state government land records, UIDAI, credit information companies, agritech companies, etc.

The process entails integration of banks’ various internal systems to ensure that there is end to end loan processing at the level of banks. However, there is also need to tweak banks’ loan originating system to ensure seamless integration of different processes at any point of time, Choudhary said.  

The KCC pilot is being carried out in two states and select districts of Tamil Nadu for new KCC loans with help of Union Bank of India and Federal Bank. The central bank plans to expand this to other banks and states as well.

RBI is also working on an integrated public tech platform for finance, which can provide a standard set of tools and protocols that can represent the various components of a typical lending value chain and allow the ecosystem players to plug in lending into their current operations with banks and vice versa.

According to Choudhary, this platform will create a common language for all the entities to communicate and replace costly complex bilateral tech integration with single standard protocol. “We may thus move to frictionless credit in all segment of loans wherever rule-based lending is

possible by developing a public tech platform," he said.