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Banks and other regulated financial institutions remain responsible for risks associated with their operations even when services such as loan sourcing, product distribution and decision-making are outsourced to fintech companies or third-party platforms, Reserve Bank of India (RBI) Deputy Governor Swaminathan J has said.
Addressing the FE Modern BFSI Summit 2026 in Mumbai on October 15, Swaminathan emphasised that outsourcing financial activities does not transfer regulatory accountability away from the institution. "A loan may be sourced through a fintech, a product distributed through an external platform, or a decision supported by a third-party model. The process may be outsourced, but the responsibility associated with the institutions licence remains with the regulated entity," he said. His remarks come amid the growing use of fintech partnerships, artificial intelligence (AI)-based underwriting and automated processes by financial institutions to expand their services and improve customer experience. The Deputy Governor cautioned that while technology can help reduce costs and speed up financial services, institutions must ensure that safeguards are not weakened in the process. "However, from a supervisory perspective, not every friction in finance is inefficiency. Some frictions perform an important control function," he said. He explained that independent verification, additional checks and cooling-off periods may slow down transactions but also help prevent fraud, errors and poor lending decisions. Swaminathan stressed that replacing manual checks with algorithms or making loan approvals instantaneous does not eliminate the underlying financial risks. "If a manual check is replaced by an algorithm, or underwriting becomes instantaneous, the underlying risk does not disappear; the control must therefore evolve with the process," he said. The remarks underline the importance of maintaining effective risk management as banks increasingly depend on external technology providers and digital platforms for financial services. He also raised concerns about whether institutions adequately assess the risks associated with removing traditional verification processes in the pursuit of faster services. "A practical question, therefore, is that whenever a step is removed or modified in the name of speed, scale or customer convenience, what risk was that step controlling, and where does that control now reside?" he said. "If the answer is not clear, process simplification may in fact be control dilution," he added. The Deputy Governor also highlighted the wider consequences of weaknesses in financial institutions' internal controls, particularly when fraud involves multiple entities. He observed that customers who lose money through fraud may not distinguish between the institution where the fraud originated, the institution through which funds moved and the institution that hosted a mule account. "Weak controls in one part of the system can therefore impose a trust cost on the whole system," he said. (ANI)
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