Reserve Bank of India Deputy Governor Swaminathan J has called for a fundamental transformation in banking supervision, urging financial institutions to adopt continuous monitoring practices rather than relying on periodic compliance checks. Speaking at the Third Annual Global Conference of the College of Supervisors, he emphasized the critical need for banks to strengthen their operational discipline throughout the year.

Shift from Traditional Supervision Methods

The deputy governor highlighted that traditional supervisory approaches are becoming inadequate in the digital era. For decades, supervisors have been trained to read balance sheets and inspect processes using conventional methods. However, Swaminathan pointed out that a bank of india can appear perfectly healthy on paper while remaining vulnerable to severe disruption from a single incident.

"The reason is that the centre of gravity is shifting from the 'branch and product' to the 'pipes and code'," he explained. This fundamental shift means that stability now depends equally on operational resilience, data integrity, and third-party dependencies as it does on traditional metrics like capital and liquidity.

Enhanced Focus on Grievance Management

Swaminathan emphasized that grievance management systems serve as critical early warning indicators in the digital environment. He outlined several key supervisory questions that institutions must address:

Three-Pillar Supervisory Framework

The deputy governor outlined three essential shifts required for effective modern banking supervision:

• From periodic snapshots to continuous awareness: Real-time monitoring replacing quarterly assessments
• Beyond single institution focus: Taking a comprehensive view of the entire banking ecosystem
• Enhanced stress testing: Moving from simple compliance checks to evaluating resilience and recovery capabilities

"We need to move from asking only 'did you comply?' to also asking 'can you withstand stress, recover quickly, and protect customers when things go wrong?'" Swaminathan stated.

Operational Requirements for Banks

For supervised entities, the deputy governor established clear operational expectations. Compliance cannot be treated as a quarter-end activity, requiring banks to maintain stronger operational discipline and data governance throughout the year. When anomalies are flagged, the ability to explain and fix issues quickly becomes a marker of control maturity.

Third-Party Risk Management

Swaminathan stressed that third-party management must be treated as comprehensive risk management. Banks need better oversight of partners, clearer accountability for incidents, and contracts that support audit access and resilience. He emphasized that regulated entities cannot outsource their fundamental responsibilities to third parties.

AI and Analytics Supervision

As artificial intelligence and analytics become more embedded in banking operations, institutions should prepare for intensive supervisory scrutiny. Banks must be ready to address questions regarding model risk, explainability, and fairness in their AI implementations, reflecting the evolving regulatory landscape in the digital banking sector.

Reserve Bank of India Deputy Governor Swaminathan J. delivered a comprehensive framework for digital banking supervision at the third annual global conference of RBI's College of Supervisors in Mumbai. Speaking to banks and regulated entities, he emphasized that supervision in the digital era will be significantly less tolerant of episodic compliance, outsourced accountability, and opaque algorithms as the banking sector becomes more digital, interconnected, and fast-moving.

Continuous Compliance Framework

The first critical expectation centers on transforming compliance from a periodic exercise to a continuous operational discipline. Swaminathan cautioned banks against treating compliance as a quarter-end formality, arguing that faster business and risk cycles in digital banking demand year-round strong data governance and operational discipline.

In digital systems where risks can materialize within hours, supervisors will increasingly evaluate institutions based on their ability to quickly explain anomalies and implement corrective measures. The capacity for decisive response will be viewed as an indicator of control maturity rather than merely administrative compliance.

Third-Party Risk Management

The second pillar addresses the growing vulnerability associated with third-party arrangements as banks increasingly depend on cloud providers, fintech partners, and technology vendors. Swaminathan emphasized that institutions require enhanced oversight of partners, clearer accountability frameworks for incidents, and contracts supporting audit access and operational resilience.

The deputy governor stressed that regulated entities cannot outsource their fundamental responsibility, emphasizing that third-party management must be treated as core risk management. The cross-border operational nature of many global providers adds complexity, as incidents transcend jurisdictional boundaries. He referenced the July 2024 global IT outage caused by CrowdStrike's faulty software update, which affected approximately 8.50 million Microsoft Windows systems worldwide, demonstrating how third-party incidents can rapidly transmit disruption at scale to well-managed institutions.

Artificial Intelligence Governance

The third expectation addresses the expanding deployment of artificial intelligence and analytics across banking functions, from credit underwriting to fraud detection systems. As these technological tools become more deeply embedded in banking operations, Swaminathan warned that banks should prepare for intensive supervisory scrutiny regarding model risk, explainability, and fairness considerations.

Two specific issues require particular attention:

• Vendor Model Reliance: Institutions using outputs without fully understanding underlying algorithmic engines
• Fairness and Exclusion: Data proxies producing seemingly efficient outcomes that may be ethically unacceptable

The deputy governor emphasized that governance frameworks enable innovation to scale safely, highlighting the critical balance between technological advancement and regulatory compliance. Banks must ensure their AI systems maintain transparency and fairness while delivering operational efficiency.

Supervisory Evolution

The comprehensive framework reflects RBI's recognition that traditional supervisory approaches require fundamental adaptation for the digital banking landscape. The emphasis on real-time monitoring, continuous compliance, and transparent governance structures signals a significant shift in regulatory expectations. Financial institutions must now demonstrate not only compliance with existing regulations but also proactive risk management capabilities that match the speed and complexity of digital banking operations.

These supervisory standards represent the central bank's commitment to maintaining financial stability while enabling technological innovation in India's rapidly evolving banking sector.