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It is essential for financial entities to ensure that their customers are fully aware of the risks associated with leveraged products and speculative investing. Moreover, these entities must also take on the responsibility of educating consumers, as it is not solely the regulator’s duty, according to Reserve Bank of India (RBI) Deputy Governor Rajeshwar Rao, who spoke at a conference organized by the Indian Institute of Management Kozhikode (IIMK) and the National Stock Exchange (NSE).
Rao, who has been in charge of crucial departments such as regulation, risk monitoring, and enforcement since 2020, stated that while technology and digital innovations drive financial inclusion, they also increase the risk of excessive exposure and over-leveraging.
“The presence of too much light can also lead to blindness,” Rao said. “We must be aware of the risk of reckless financialization. Recently, we have seen concerns about excessive borrowing in the unsecured segment and derivative euphoria in the capital markets. The temptation of short-term gains can easily overshadow the long-term financial security of individuals.”
He also highlighted the challenges associated with using artificial intelligence (AI) and machine learning (ML) models, such as algorithmic bias, fairness, data privacy, and security, which are based on their lack of explainability.
“In the absence of explainability, human intervention can become mere rubber-stamping rather than responsible oversight, increasing the likelihood of systemic errors,” he said.
Rao noted that the continuous learning and evolution of AI models could make them susceptible to data drift and concept drift, causing them to misalign with real-world trends and risking incorrect financial decisions and instability.
“Regular human oversight and explainability are critical to preventing such risks….While algorithms can provide valuable insights and efficiency, they should be viewed as tools to support, not replace, human judgment,” Rao said.
Regulated entities must develop the necessary capabilities to implement and comply with evolving regulations. As financial institutions integrate AI, cloud computing, and API-driven finance into their operations, they must also invest in robust governance frameworks and risk management protocols to ensure compliance.
“Financial firms cannot afford to view regulation as a barrier to innovation—rather, compliance itself must become a core component of their digital strategy. A strong internal culture of risk awareness, ethical AI usage, and customer-centric innovation will be critical in navigating the evolving financial landscape effectively,” Rao said.
Financial institutions must also navigate the risks of excessive reliance on third-party technology providers, ensuring that regulatory compliance and cybersecurity, while ensuring customer protection, remain their top priorities, he said.
Rao stated that the banking sector has always emerged stronger from previous disruptions.
Banks and NBFCs will have to adapt to technological changes or risk being made obsolete. “To remain competitive, financial institutions must invest in digital infrastructure and pivot to a customer-centric, data-driven approach in this new landscape,” he said.
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