Reserve Bank of India (RBI) Deputy Governor Swaminathan J has cautioned banks and other financial institutions against weakening internal controls in their pursuit of digital transformation, faster transactions and improved customer convenience. He emphasised that technological advancements, including artificial intelligence (AI)-driven underwriting and automated financial processes, must be accompanied by effective risk management, regulatory accountability and customer protection safeguards.
Addressing the FE Modern BFSI Summit 2026 in Mumbai on October 15, Swaminathan observed that while digitalisation offers significant opportunities to reduce operating costs, improve efficiency and expand financial inclusion, institutions must ensure that essential control mechanisms are not compromised in the process. His remarks were widely reported on October 21–22.
Digital Efficiency Must Not Come at the Cost of Risk Controls
The Deputy Governor highlighted that established banking procedures, including independent verification, maker-checker mechanisms and cooling-off periods, serve important risk mitigation functions. Although these procedures may increase processing time, they help prevent operational errors, fraudulent transactions and inappropriate lending decisions.
He cautioned that replacing manual verification with automated systems does not eliminate the risks associated with financial transactions. Instead, institutions must redesign their controls to address risks emerging from technology-enabled processes.
Banks were urged to assess the purpose of existing safeguards before eliminating or modifying them. Any simplification of procedures should preserve the effectiveness of the institution’s overall control environment.
Outsourcing Does Not Remove Regulatory Accountability
Swaminathan also drew attention to the growing dependence of banks and financial institutions on fintech companies, technology vendors and third-party service providers.
He clarified that financial institutions remain accountable for activities conducted through external partners, including digital loan sourcing, financial product distribution and automated decision-making.
The use of third-party platforms or external AI models does not transfer regulatory responsibility away from the licensed institution.
These observations reinforce the importance of robust third-party risk management frameworks, vendor due diligence, continuous monitoring and appropriate governance arrangements as financial services become increasingly interconnected.
Customer Protection, Data Governance and Mis-Selling Risks
The Deputy Governor identified customer trust as a fundamental component of sustainable financial-sector growth.
He warned that inappropriate sales incentives and excessive pressure to achieve business targets could encourage financial product mis-selling, potentially exposing institutions to regulatory penalties, litigation and reputational damage.
He also highlighted the importance of responsible customer data usage, particularly as financial institutions increasingly deploy AI and advanced analytics to personalise financial products and services.
Obtaining customer consent alone may not be sufficient to ensure responsible data governance. Banks must also consider whether their use of personal information aligns with customers’ reasonable expectations.
Customer Complaints as Early Warning Indicators
Swaminathan encouraged financial institutions to view customer complaints as valuable indicators of emerging operational and conduct risks rather than merely administrative matters requiring resolution.
Recurring complaints may reveal deficiencies in product design, internal incentive structures, digital customer journeys or third-party service arrangements.
He further highlighted the interconnected nature of financial fraud, observing that weaknesses in one institution’s controls could undermine confidence across the broader banking ecosystem.
Operational Resilience Beyond Capital and Liquidity
While capital adequacy, liquidity and provisioning remain essential foundations of financial stability, the Deputy Governor stressed that resilience must also encompass institutions’ ability to identify disruptions, assess their implications, respond effectively and restore critical services.
As financial institutions expand their digital infrastructure, operational resilience, cyber risk management, internal governance and timely incident response are becoming increasingly important components of sustainable growth.
The RBI Deputy Governor’s observations underline a central principle for India’s banking sector: digital transformation must strengthen institutional capabilities without weakening the governance, accountability and risk controls that protect customers and preserve financial stability.
