“Technology-induced systemic risk may indeed be one of the only truly global risks, that threaten the entire financial system across the world, as digital and online technology blur the boundaries between nations, industries and make the world into one entity,” stated the RBI Deputy Governor Swaminathan J while addressing an international conference hosted by DICGC at Jaipur.
The recent microsoft outage is one such example of how the world so interconnected suffered disruptions in services across the globe.
This growing web of interdependencies means that a disruption in one area can rapidly propagate through the system, affecting numerous entities and jurisdictions simultaneously, the governor added.
The RBI Deputy Governor outlined four key facets that demand immediate attention: cybersecurity, digital payments, third-party dependencies, and the rise of fintech.
Cybersecurity Risks
Swaminathan highlighted that the financial sector has become a prime target for cyberattacks, given the vast amounts of sensitive data and capital it handles.
“Protecting critical infrastructure from breaches is of paramount importance,” he stressed, calling for not just advanced technical defenses but also a robust culture of cybersecurity awareness across all levels of financial institutions.
Digital Payments
The expansion of digital payment systems has revolutionised banking, enabling rapid and low-cost transactions. However, this convenience comes with its own set of challenges.
“The shift to digital channels increases the risk to operational stability and resilience,” noted Shri Swaminathan J.
He warned that the 24/7 availability of online banking could potentially accelerate bank runs during periods of financial stress, as customers may withdraw funds outside traditional banking hours, often influenced by the fast spread of information through social media.
Dependence on Third Parties
The Deputy Governor also highlighted the risks associated with the growing dependence on third-party entities in the provision of financial services.
“The digital transformation in banking has created a complex web of technical and operational dependencies,” he observed. The failure of any link in this chain could have catastrophic consequences, as evidenced by recent global IT outages.
“Financial institutions must exercise effective oversight of third parties and safeguard against potential vulnerabilities,” he urged.
Rapid pace of FinTech growth
Swaminathan J magnified the rise of fintech companies and other entities operating outside traditional regulatory frameworks.
While these innovations have greatly enhanced financial inclusion and efficiency, they also present new risks.
“The rapid pace of innovation often leads to regulatory gaps, creating an uneven playing field and increasing systemic risk,” he explained.
To mitigate these risks, he advocated for a more agile regulatory approach, including the development of regulatory sandboxes and greater collaboration with fintech innovators.
