Bangladesh Bank has, for the first time, prepared an outsourcing policy for banks using third-party service at home and abroad to help them mitigate risks and meet regulatory requirements.

Banking institutions throughout the world are increasingly turning to outsourcing as a means to reduce costs and achieve strategic aims.

When these third-party service providers handle much of banks' activity -- regulated or unregulated, it may impact their ability to manage their risks and monitor compliance with regulatory requirements, the BB said in a notice yesterday.

Subsequently, banks can mitigate the risks by: drawing up comprehensive and clear outsourcing policies, analysing the service providers' financial and infrastructure resources, negotiating appropriate outsourcing contracts and establishing effective risk management programmes.

The new policy allows banks to outsource 20 types of activities to service providers within Bangladesh, and prior approval of the central bank will not be required for using the services.

The services include mailing, storing physical records or virtual data, verification of address and documents, call centre, marketing for credit cards, among others.

Banks however cannot outsource its core management functions, any of its risk management functions or core banking operations.

But in case of foreign banks, parts of its core management functions or risk management functions can be operated by any of its offices abroad subject to fulfilling conditions, said the notice.

Any outsourcing outside Bangladesh will require prior approval of the central bank.

When engaging service providers in a foreign country, banks should closely monitor government policies and political, social, economic and legal conditions in the countries.

Moreover, an activity should not be outsourced if it impairs BB's right to assess or its ability to supervise, the notice said.

The minimum wages declared by the government of Bangladesh must be taken into consideration while determining the rate of wages, salary and compensation, to be paid against services provided by the staff employed by the service provider.

Details of such rates must be clearly stated in the contract, and banks should see through that the terms are being honoured.

Regular audits, at least annually for all outsourcing activities, should be conducted.