RBI Deputy Governor Swaminathan Janakiraman at a global conference here on Wednesday highlighted that while the “evolving technological landscape” in the financial sector presents huge opportunities it also shows significant challenges that have to be taken care of.
He highlighted four risks against which financial institutions needed to step up their vigil. These include cyberattacks, the quick outflow of funds due to digital payments, third-party risks and the risk from fintech companies that operate outside the regulatory system.
“In an era where digital transformation is reshaping every facet of banking and finance, the integration of advanced technologies into the financial sector, brings both unparalleled opportunities and significant risks,” Swaminathan said.
“The evolving technological landscape presents both significant challenges and opportunities for deposit insurers. By adopting a proactive, risk-based approach -- including enhanced oversight, risk-based premiums, reliance on supervisory ratings, faster claim settlements, and industry collaboration -- deposit insurers can effectively manage these risks,” he observed.
In his address on the second day of the global conference of the International Association of Deposit Insurers - Asia Pacific Regional Committee (IADI-APRC), Swaminathan pointed out that by assuring depositors that their funds up to the coverage limit are protected, deposit insurance fosters confidence and stability within the banking sector. Deposit insurance stands as a key pillar of the financial safety-net system, playing a crucial role in maintaining financial stability. Deposit insurance also helps prevent bank runs that could escalate into broader financial crises, he added.
The financial sector is a prime target of frequent cyberattacks due to the vast amounts of sensitive data and capital it handles. Significant cyber incidents can cause micro-prudential risks for individual financial institutions, namely solvency, liquidity, market, operational and reputational risks.
“Therefore, protecting critical infrastructure from breaches is of paramount importance, and it requires not only advanced technical defences but also a robust culture of cybersecurity awareness across all levels of the organisation. Financial institutions therefore need to have robust business continuity preparedness by testing their systems periodically encompassing possible adverse combinations,” he said.
He said that today a significant portion of banking transactions and services are conducted through digital channels. The expansion and widespread adoption of digital payment systems has enabled rapid, low-cost transactions and easy withdrawals via online banking and mobile apps. However, this shift increases the risk to operational stability and resilience, necessitating ongoing investments in IT systems and technology to manage peak loads effectively. Additionally, the 24/7 availability of online and mobile banking can heighten vulnerabilities, potentially accelerating bank runs and liquidity crises during periods of stress, as customers may withdraw funds even outside of traditional banking hours and without having to visit a Bank branch, the RBI Deputy Governor explained.
He also highlighted the risks of the increasing dependence on third parties. The digital transformation in banking has also led to a multitude of distinct third-party entities getting involved in the provision of a single product or service, creating a complex web of technical and operational dependencies. However, the impact of failure in any link in this chain can often be catastrophic as was seen in a global IT services outage incident last month. Further, third parties could be points of intrusion for ransomware and other cyber threats.
The rise of fintech companies and the entry of entities that operate outside the traditional regulatory and supervisory framework introduce new dimensions of risk to the financial sector. While fintech innovations have greatly enhanced financial inclusion, efficiency, and customer experience, they also present challenges related to data security, consumer protection, and regulatory compliance, Swaminathan added.
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