RBI Warns of Reckless Financialization, Urges Entities to Guard Against Risks

Mumbai, Feb 21 (PTI) Amid concerns emanating from spurt in unsecured lending and an euphoria in derivatives, Reserve Bank Deputy Governor M Rajeshwar Rao on Friday asked financial sector entities to guard against "reckless financialisation".

Speaking at an event in stock exchange NSE here, Rao said the "temptation" of short-term gains can easily overshadow the long-term financial security for individuals.

"We must be aware of the risk of reckless financialisation," he said.

Rao pointed out that there have been concerns over excessive borrowing in the unsecured segment and from "derivative euphoria" in the capital market.

"Financial entities have a duty to ensure that customers fully understand the risks associated with leveraged products and speculative investing," he added.

Rao said RBI is working with other financial sector regulators to educate customers, and added that it is the absence of financial literacy due to which people fall prey to unscrupulous players.

However, when any setback happens, it is the trust of the investor in the financial system which is eroded and hence it is essential for the system to invest in education for their own good.

Days after Governor Sanjay Malhotra's assurance on paying heed to cost of regulation while setting rules, Rao said that financial regulation in a fast-paced world is a delicate balancing act.

"'...too little regulation may increase systemic risk, while excessive regulation can stifle innovation, limit credit availability and raise costs," Rao said.

He also said that financial inclusion is "superficial" if the accounts opened under the Jan Dhan Yojana are not used, and added that the UPI has created a large financial footprint for the informal sector which can be used by lenders to get such people or entities into the mainstream.

The RBI's unified lending interface has facilitated 6 lakh loans of Rs 27,000 crore as of December 6 last year, Rao said, adding that 36 lenders are active on the platform which pulls data from 50 sources.

With artificial intelligence and machine learning are being used a lot, Rao said the root of challenges for the financial system is the lack of explainability and this has the potential to undermine confidence in the system.

There is a need for regular human oversight when it comes to such applications, he said, adding that there is also a risk of "automation complacency" which can set in as staffers use more of technology inputs in their regular jobs.

The large-scale adoption of AI has a potential to increase the number of jobs, Rao said, adding that it is the nature of the jobs which will change.