Star Finserv and Politex India's Registration Cancelled by RBI for Violating Outsourcing Norms
Moneylife Digital Team 08 July 2024
The Reserve Bank of India (RBI) has cancelled the certificates of registration (CoR) of Star Finserv India Ltd and Polytex India Ltd, the two non-banking financial companies (NBFCs) for violating digital lending norms. Star Finserv India is based in Telangana, while Polytex India operates in Maharashtra.
According to RBI, Star Finserv outsourced critical decision-making tasks to a third-party service provider, such as credit appraisal, loan sanctioning, and know-your-customer (KYC) verification process. This outsourcing of core functions is against RBI guidelines, which require NBFCs to handle these essential tasks internally.
In addition to outsourcing critical functions, Star Finserv gave its service-provider complete access to customer data. This act violated RBI's data confidentiality and security guidelines which are designed to protect sensitive customer information and ensure it is handled appropriately.
Furthermore, Star Finserv failed to adhere to the RBI's fair practices code. The NBFC did not provide customers with copies of loan agreements and sanction letters in vernacular languages, making it difficult for customers to understand the terms and conditions of their loans fully.
Polytex India also found outsourcing essential operations, including client sourcing, KYC verification, credit appraisal, loan disbursal, loan recovery, borrower follow-ups and complaint resolution, to a service-provider. This extensive outsourcing contravenes RBI's guidelines, emphasising that the NBFC should manage these core activities.
In addition to outsourcing, Polytex India had an unclear fee structure. The NBFC received a fixed fee from the service-provider, who, in turn, earned the interest charged to the borrower. This interest was exorbitantly high in some cases, violating RBI's fair practices code. 
As a consequence of the cancellation, Star Finserv and Polytex India are prohibited from conducting business with a non-banking financial institution (NBFI), as defined in clause (a) of Section 45-I of the RBI Act.
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