RBI highlights risks of third party dependence in digital lending

MUMBAI: Financial companies utilizing digital outsourcing and their reliance on “third-party dependencies” experience advantages, but also face risks, stated M Rajeshwar Rao, deputy governor at the Reserve Bank of India, on Monday.

“Poor management of third-party relationships can lead to customer dissatisfaction, reputational harm, and potential regulatory and supervisory actions,” he noted.

Regulated entities must assess the reliability and security of third parties and ensure they meet required standards, stated M Rajeshwar Rao. He emphasised concerns about the selection of outsourcing agencies or digital lending service providers.

“Third-party dependencies and digital outsourcing are now integral to financial service entities. With rapid technological evolution, regulated entities are increasingly relying on third-party agencies and outsourcing digital operations to enhance efficiency, reduce costs, and improve customer experience,” he said at ‘CareEdge Conversations BFSI – Navigating Growth and Risk’.

“However, while third-party dependencies offer numerous benefits, they also present certain risks and challenges.”

He said a key concern is the selection of outsourcing agencies or, for digital lending, the lending service providers. “Regulated entities must evaluate the reliability, security, and regulatory compliance of third parties to ensure they meet the necessary standards. For instance, lending guidelines require regulated entities to ensure that the lending service providers they engage have appropriate grievance redressal mechanisms on their websites or apps,” he explained.