RBI warns of risks of excessive reliance on external suppliers

The Reserve Bank of India has pointed out the risks associated with the growing over-reliance on external suppliers by Financial institutionsSpeaking at a convention organised by the International Association of Deposit Insurers, Reserve Bank of India Deputy Governor J Swaminathan urged banks to be careful to protect themselves against potential vulnerabilities when working with third-party vendors. He also called for deposit insurers linking insurance premiums to the level of risk posed by different financial institutions.

“Digital transformation in the banking sector has also led to a multitude of separate third-party entities being involved in the delivery of a single product or service, creating a complex web of technical and operational dependencies,” said J Swaminathan, director general of the RBI. “The impact of a failure at any link in this chain can often be catastrophic, as seen in a global IT services outage incident last month. Third parties could be intrusion points for ransomware and other cyber threats.”

Last month, C-edge Technologies, a jointly owned third-party IT provider Tata Consulting Services and State Bank of India faced a
Ransomware attack by the RansomEXX group.

The attack primarily affected Brontoo Technology Solutions, a key C-EDGE partner, and caused several cooperative banks and regional rural banks to be disconnected from the retail payments network.

Swaminathan added that financial institutions have the primary responsibility to preserve the confidentiality, integrity and availability of data.

The vice governor also highlighted that the rise of fintech companies and the entry of entities operating outside the traditional regulatory and supervisory framework have introduced new dimensions of risk to the financial sector.

“With the rapid pace of innovation, it is often observed that regulatory loopholes can be exploited, whether intentionally or unintentionally, by entities that may not be held to the same strict standards as regulated financial institutions,” Swaminathan added. “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.”

Swaminathan, addressing a meeting of deposit insurers, asked them to be vigilant in adapting to the changing risk landscape.

The deputy governor said the implementation of a risk-based premium for deposit insurance deserves consideration.

“By linking insurance premiums to the level of risk posed by individual financial institutions, deposit insurers can incentivize banks to adopt more stringent measures Risk management practices,” he said.

“This approach not only improves the overall stability of the financial system, but also ensures that institutions with higher risk profiles contribute more to the insurance fund.”