RBI warns against cyber security amid financial stability

The Governor said anything that derives value based on make-believe is just speculation under a sophisticated name.

Its potential to disrupt financial stability has to be guarded against, as technology has supported the reach of the financial sector. As the financial system gets increasingly digitalised, cyber risks are growing and need special attention, Das said in the foreword to the Financial Stability Report, June 2022, by the RBI.

According to the report, the Indian financial technology industry was valued at $50 -- 60 billion in 2020 and is projected to hit $150 billion by the year 2025.

India has the highest adoption rate of fintech in the world, receiving funding of $8.53 billion in 278 deals during 2021 -- 22, according to the report.

The central bank warned that the advent of the new technology has exposed the banking system to previously unobservable risks and the central bank acknowledged the use of financial technology as a tool to promote financial inclusion.

The risks extend beyond prudential issues, and often intersect with other public policy objectives relating to safeguarding of data privacy, cyber security, consumer protection, competition and compliance with Anti Money Laundering policies, the report said.

The central bank said that big techs can cause financial stability to be affected by increased disintermediation of incumbent institutions.

Complex intertwined operational links between big tech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour. The central bank, regulators and supervisors have a difficult balance between innovation and financial stability, according to the central bank.

More engagement is needed between stakeholders, such as regulators, the financial technology industry, and academia, to work towards common principles, the RBI said in the report.

Business and revenue models, governance, conduct and risk management, and other areas that require more common engagement are areas that need more common engagement, according to the central bank.

Fintech innovations are widespread, especially in retail and wholesale payments, financial market infrastructures, investment management, insurance, credit provision and equity capital raising, and may lead to material changes in the financial landscape, the RBI said.

The RBI asked non-bank prepaid payment instrument PPI issuers not to load their wallets and cards from credit lines or pre-set borrowing limits earlier this month.

The RBI took the decision after certain financial technology firms started using lines of credit from banks or non-banking financial institutions to load funds into wallets of consumers.

The central bank is looking at buy-now pay-later services, in which adequate diligence may be missing, because of the move.