The Reserve Bank of India sees the banking sector’s reliance on a small number of common technology providers as a potential risk to financial stability, according to Deputy Governor Rohit Jain.
Dependence on a relatively small number of cloud providers, technology vendors and model providers, often using overlapping datasets and similar infrastructure, “could transmit disruption or error across many institutions at the same time” if one such firm fails, Jain said in Mumbai on Wednesday.
The comments put the RBI in line with global regulators that have flagged the risks posed by financial institutions’ growing dependence on a handful of technology providers. Earlier this year, regulators in the European Union and UK moved to strengthen their oversight of “critical third parties,” including cloud services provided by Big Tech firms such as Microsoft Corp., Amazon.com Inc. and Alphabet Inc.
Jain also warned that the speed of automated systems can make errors harder to contain. “Institutions must also be able to detect problems early, contain their effects and intervene before a small mistake becomes a much larger one,” he said at the Global Fintech Fest.
“Prudence must also extend to risks that may not yet be immediate.”
The RBI official also warned about increasingly complex models used by banks that can make decisions that are difficult to explain. Greater sophistication cannot come at the expense of accountability, he said.
“An institution may outsource the computation, but it cannot outsource the consequence,” Jain warned.
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