Ajay Kumar Choudhary, executive director, Reserve Bank of India (RBI) has said 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.

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.