RBI’s Outsourcing Directions, 2025: Re-defining Control, Accountability and Contracting for NBFCs

Introduction

The Reserve Bank of India’s Managing Risks in Outsourcing Directions, 2025 (“Directions”) represent a fundamental re-orientation of how outsourcing is regulated in the Indian financial sector. While outsourcing has long been a feature of NBFC and banking operations, the 2025 Directions decisively move the regulatory lens from vendor management to regulatory control and accountability.

At the heart of the Directions lies a clear and unambiguous proposition: outsourcing does not dilute regulatory responsibility. Boards and senior management of regulated entities remain fully accountable for outsourced activities, irrespective of the nature, location, or sophistication of the service provider.

Outsourcing Re-conceptualised: No “Outside” the NBFC

The Directions define outsourcing as the use of a third party to perform activities on a continuing basis, expressly clarifying that even arrangements for a limited duration fall within scope. This clarification is significant. Short-term pilots, interim arrangements, proof-of-concept engagements, and temporary IT deployments are no longer outside regulatory scrutiny.

Further, the concept of material outsourcing is defined expansively. Materiality is not determined by contract value alone, but by potential impact on operations, financial position, reputation, customer interests, and dependency on the service provider. As a result, even low-cost or support-function outsourcing may attract heightened regulatory obligations if operational dependence is high.

Board Responsibility and Governance Expectations

The Directions repeatedly emphasise that outsourcing is a Board-level governance issue, not merely an operational or procurement decision.

Boards (or delegated Board Committees) are required to:

• approve comprehensive outsourcing policies,
• determine materiality thresholds,
• approve material outsourcing arrangements,
• review outsourcing risks periodically, and
• ensure submission of annual compliance certifications to RBI.

This governance framework makes it clear that outsourcing failures will increasingly be viewed as governance failures, with direct accountability attaching to senior management and the Board.

Contracts as Regulatory Instruments

One of the most consequential aspects of the Directions is the treatment of outsourcing contracts as regulatory instruments rather than purely commercial documents.

The Directions mandate that outsourcing agreements:

• be in writing,
• be legally vetted for enforceability, and
• contain specific clauses that RBI considers non-negotiable.

These clauses include, among others:

• detailed scope and service standards,
• unrestricted audit and access rights for the NBFC,
• direct inspection rights for RBI,
• strict controls on subcontracting,
• data confidentiality and security obligations,
• business continuity and disaster recovery requirements,
• termination and orderly exit mechanisms, and
• post-termination confidentiality and data preservation obligations.

Importantly, the language used by RBI (“shall include”) leaves little room for interpretation. These provisions are mandatory, not illustrative.

Audit, Inspection and Regulatory Access

A defining feature of the Directions is RBI’s insistence on direct supervisory access to service providers.

Outsourcing agreements must permit:

• audits by the NBFC’s internal and external auditors,
• access to books, records, systems and logs, and
• inspection of service providers and subcontractors by RBI or its authorised representatives.

Any contractual limitation that conditions such access on vendor consent, confidentiality constraints, or commercial feasibility risks non-compliance. From a regulatory perspective, if RBI cannot inspect the vendor, the vendor cannot be used.

Subcontracting: Addressing the Invisible Risk

The Directions demonstrate a heightened regulatory sensitivity to subcontracting and supply-chain opacity.

Service providers may not subcontract outsourced activities without prior approval of the NBFC. Further, all regulatory obligations must be flowed down contractually, and the principal service provider remains fully liable for acts and omissions of subcontractors.

This is particularly relevant in technology and fintech arrangements, where layered subcontracting is common but often insufficiently disclosed in standard vendor contracts.

Data Protection, Confidentiality and Incident Reporting

Data governance emerges as a zero-tolerance area under the Directions.

NBFCs remain fully responsible for the confidentiality, integrity and availability of customer data, even when such data is processed or stored by service providers. Contracts must ensure:

• data ownership remains with the NBFC,
• segregation of data in multi-tenant environments,
• prevention of comingling, and
• immediate reporting of data breaches.

For IT outsourcing, cyber incidents must be reported to RBI within six hours of detection. This effectively requires outsourcing contracts to prescribe tight and operationally realistic notification timelines for vendors.

Business Continuity, Exit and Reversibility

A recurring theme in the Directions is reversibility. RBI expects NBFCs to retain the ability to:

• continue operations during vendor disruption,
• migrate services to alternate providers, or
• bring outsourced activities back in-house.

Accordingly, contracts must embed robust business continuity and disaster recovery obligations, periodic testing rights, and structured exit and transition assistance provisions. Exit strategies are no longer theoretical contingency plans; they must be contractually enforceable and operationally executable.

Offshore Outsourcing and Jurisdictional Control

Where outsourcing involves offshore service providers, the Directions assert strong jurisdictional safeguards. NBFCs must ensure that:

• RBI’s access and inspection rights are preserved,
• records remain accessible in India,
• foreign regulators do not gain access to Indian customer data merely due to processing location, and
• governing law and dispute resolution mechanisms do not impede regulatory supervision.

This reflects RBI’s broader objective of maintaining regulatory sovereignty over outsourced financial and IT functions.

What RBI Is Likely to Examine

In supervisory reviews, RBI is unlikely to be satisfied by mere inclusion of standard clauses. The regulator will examine:

• whether mandatory provisions exist in substance,
• whether audits and reviews are actually conducted,
• whether incidents were reported within prescribed timelines,
• whether Boards actively reviewed outsourcing risks, and
• whether exit strategies are practically viable.

Outsourcing compliance will therefore be assessed holistically across contracts, governance records, audit trails and operational practices.

Practical Recommendations

From a risk and compliance perspective, NBFCs should consider the following immediate steps:

1. Inventory and classify all outsourcing arrangements by materiality.
2. Remediate legacy contracts through RBI-compliant addenda rather than relying on renewal cycles.
3. Standardise contractual positions through regulator-aligned master clauses.
4. Strengthen Board reporting, including periodic outsourcing risk dashboards.
5. Align legal review with regulatory enforceability, not just commercial risk.

Conclusion

The RBI’s Outsourcing Directions, 2025 signal a clear regulatory intent: outsourcing is no longer peripheral to regulation, it is central to it. NBFCs that continue to treat outsourcing as a procurement or cost-efficiency exercise risk regulatory exposure, not because vendors fail, but because governance frameworks do.

For NBFCs, the challenge is not merely contractual compliance, but the creation of an outsourcing architecture that is resilient, transparent and regulator-ready.