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Informist, Wednesday, Aug 14, 2024

 

--RBI Swaminathan: Tech-induced systemic risk concern for fincl sector

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--RBI Swaminathan: Fincl entities must reassess crisis readiness 

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--RBI Swaminathan: Fincl cos must have strong oversight of 3rd parties 

--RBI Swaminathan: Rise of fintech cos pose new risks to fincl sector 

--RBI Swaminathan: Fintech innovations pose risks to data security 

--RBI Swaminathan: Fintech innovations pose regulatory compliance risks 

--RBI Swaminathan: Deposit insurers must adapt to withstand tech risks 

--RBI Swaminathan: Deposit insurers must work with regulators 

--RBI Swaminathan: Deposit insurers must work to boost oversight setup 

 

MUMBAI – Deposit insurers must consider the implementation of risk-based premiums for deposit insurance, Swaminathan J, Deputy Governor at the Reserve Bank of India, said today at a conference hosted by the Deposit Insurance Credit Guarantee Corp. 

 

"By tying insurance premiums to the level of risk posed by individual financial institutions, deposit insurers can incentivise banks to adopt stronger risk management practices. This approach not only enhances the overall stability of the financial system, but also ensures that institutions with higher risk profiles contribute more to the insurance fund", Swaminathan said.

 

As per the 2022-23 annual report released by the Deposit Insurance And Credit Guarantee Corp, currently the premiums are collected at a uniform rate of 12 paise. The current maximum limit is 15 paise. However, the corporation can raise the limit by taking into consideration its financial position and the interest of the banking system, with prior approval of the Reserve Bank of India.

 

He also urged deposit insurers to adapt to the evolving risk landscape and ensure that their strategies and policies are able to withstand the risks posed by the technological advancements in the system.

 

He also said that deposit insurers need to work closely with the regulators to strengthen the "oversight mechanisms". These include regularly updating the regulatory framework to incorporate risks associated with digital payments and innovations in the financial technology space.

 

Swaminathan suggested the use of technology by deposit insurers to make the claim settlement process more efficient. "By integrating digital tools and automated systems, deposit insurers can reduce the time required to process claims, ensuring that depositors receive timely compensation in the event of a bank failure," he said. He also said that these technologies can help detect fraudulent claims, thereby ensuring that the pay-outs are made to legitimate claimants. 

 

Technology-induced systemic risk has become a major area of concern for the financial sector, and the importance of risk management, adequate policy intervention and back up plans cannot be overstated, he said. While talking about the emerging cybersecurity risks, he said that protecting critical infrastructure from breaches is of paramount importance and that financial institutions must test their systems encompassing possible adverse combinations.

 

On the rising dependence on third-parties, Swaminathan said these could be points of intrusion for ransomware and other cyber threats. "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," he said.

 

He said that financial institutions have the primary responsibility to preserve the confidentiality, integrity, and availability of data, whether stored, processed or in transit within themselves or at third-party vendors’ end.

 

Lastly, he pointed out that the entry of new entities, which operate outside the traditional regulatory 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," he said.

 

He said that with such rapid innovation, it has been observed that regulatory gaps are often exploited by entities which do not fall under the regulatory framework. "This situation creates an uneven playing field and increases systemic risk, as failures or misconduct in these unregulated areas can have far-reaching consequences across the financial system," he said.

 

Swaminathan said that to mitigate such risks, regulators must adopt a more agile and forward-looking approach, such as developing regulatory sandboxes, fostering collaboration with fintech innovators, and ensuring that new entrants are integrated into the regulatory framework in a manner that preserves the stability and integrity of the financial system, he said.  End

 

Reported by Kshipra Petkar

Edited by Deepshikha Bhardwaj

 

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