Outsourcing in banks- the risk of defying trust-based relationship

By: T R Bhat

On August 4, 2025, replying to a question, the union government informed the Parliament that as of end June 2025, 12 public sector banks (PSBs) had engaged over 1 lakh contractual and outsourced employees. As of March 2025, these banks had a staff count of 7.58 lakhs. 

This phenomenon of outsourcing by banks started in the 1990’s. While initially non-core services like security and upkeep of the premises of the bank  were outsourced,  now core services related to deposit taking and lending are also performed by agencies. 

In November 2006, the Reserve Bank of India (RBI) issued detailed guidelines to regulate outsourcing and mandated the banks to formulate policies on outsourcing. Most banks have today board approved policies governing outsourcing.

Why do banks outsource?

For a beginner, ‘outsourcing’ is defined by RBI as ‘a bank’s use of a third party to perform activities on a continuing basis that would normally be undertaken by the bank itself.’ The service provider is hired on a contractual basis for a limited purpose and period. The expressed logic behind the policy is two-fold: it reduces cost and expertise could be hired.

There is, however, a third angle which is not transparent. There is no employee-employer relationship between the bank and the service provider or his employee. That means there is no scope for unionizing such workers. Considering that bank unions have been well organized for years, the managements would be happier when large number of their staff are outside the union’s control.  

Key areas of concern:

Certain services do not pose risks to the bank. For example, engaging external security agencies for securing the premises is generally risk-free. Supply of currency to the ATMs by external agencies also involves low risk. 

In contrast, outsourcing bank’s core functions carry greater risks. The specific tasks connected with them merit attention: 

1. Processing applications for loan, credit card and deposit account 
2. Processing documents (related to the above)
3. Supervision of loans
4. Recovery of bad loans 

In all these tasks, precious customer data provided to the bank becomes accessible to an external agency.  It is anybody’s guess if confidentiality of such critical data is protected.

In the field of recovery of bad loans, the method adopted by the recovery agents has come for public scrutiny. There have been reports of strong-arm tactics adopted by these agents to recover the dues. 

Conventionally, while opening a new account (deposit or loan), the branch officials collect the data of the prospective client and interact with him on an ongoing basis. This helps build an enduring relationship based on mutual trust between the bank and the client. Such knowledge mitigates the risks. In contrast, outsourcing reduces the work to form filling by a representative of the agency. In the process, sanctity of a trust-based relationship gets diluted. 

There is a risk related to accountability too. While opening an account, the KYC protocol should be followed.  Accountability, if any, could be placed on the officials who complied with the protocol. When an agency does it, on whom will the bank fix accountability for failure to conform to the protocol? 

The guardrails:

Both the RBI guidelines and the banks’ policies underline the risks of outsourcing with appropriate safety valves. But the question is, how effective are the guardrails?

As banks function under trust, there is no substitute to building in-house capabilities in handling the core functions.  Bank’s human resources endowed with skills and capabilities do not depreciate in value. And as part of the bank, they could  act as guardrails against risks to the institution. 

 

TR Bhat, was Joint General Secretary of the All India Private Sector Banks Officers Federation (1995-2009) and former officer of Corporation Bank