While widespread adoption of digital payments has facilitated rapid, low-cost transactions and easy withdrawals through banking and mobile apps, it has also heightened risks to operational stability, requiring continuous investments in IT systems and technology to handle peak loads effectively, said Swaminathan J, deputy governor, Reserve Bank of India (RBI), on Wednesday.
Speaking at the conference of the International Association of Deposit Insurers, the deputy governor highlighted that the 24/7 availability of online and mobile banking can increase 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.
Further, these activities are amplified with the emergence of digital sources of influence, such as social media platforms, that have proved their ability to drive, disseminate financial information, adverse or otherwise, and trigger coordinated financial behaviour, he added.
Interestingly, the RBI last month proposed to tighten norms related to the liquidity coverage ratio (LCR) by increasing the run-off factor for retail deposits in view of the rising number of mobile and internet banking users. The regulator has proposed to impose an additional run-off factor of 5 per cent on both stable and less stable retail deposits that are enabled with internet and mobile banking facilities. Run-offs are when individuals or businesses withdraw their deposits, which are not anticipated by banks. The RBI had highlighted that while increased use of technology has facilitated the ability to make instantaneous bank transfers and withdrawals, it has also led to a concomitant increase in risks, requiring proactive management.
According to Swaminathan, financial institutions need to “reassess and update their crisis preparedness” to ensure they are equipped to address and mitigate the fast evolving risks introduced by technological advancements. Also, they need to regularly assess their capability and effectiveness in accessing contingency funding within specified timeframes, depending on the type of funding needs.
The deputy governor highlighted that technology-induced risks in the financial sector requires close attention since it is a global risk that threatens 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.
“This growing web of interdependencies means that a disruption in one area can rapidly propagate through the system, affecting numerous entities and jurisdictions simultaneously. Therefore, understanding the full scope of these interconnections has become essential for managing systemic risk,” he explained.
According to Swaminathan, there are four key facets of technology risks – cybersecurity risks, digital payments, dependence on third parties, and fintech and entry of entities outside the regulatory and supervisory envelope.
Cyberattacks on the financial sector – a prime target of frequent cyberattack because of the sensitive data and capital it handles – can cause micro-prudential risks for individual financial institutions, namely solvency, liquidity, market, operational and reputational risks, hence financial institutions need to have robust business continuity preparedness by testing their systems periodically encompassing possible adverse combinations, the deputy governor highlighted.
He also underscored that financial institutions must exercise effective oversight of third parties and safeguard against potential vulnerabilities, while taking other measures such as maintaining regular backups of their critical data to ensure operational resilience.
Commenting on fintechs, Swaminathan pointed out that while fintechs have enhanced financial inclusion and customer experience, they also present challenges related to data security, consumer protection, and regulatory compliance. Hence, regulators have to adopt a more agile and forward-looking approach and ensure that new entrants are integrated into the regulatory framework in a manner that preserves the stability and integrity of the financial system.
