MUMBAI The absence of financial literacy leads people to fall prey to unscrupulous players which erodes the trust of the people in the system, RBI Deputy Governor M. Rajeshwar Rao said here on Friday.
Increased financial literacy will help increase trust in the sector and its participants, whose benefits will accrue to the entities themselves. While educating consumers helps protect them from fraudulent practices, regulation plays a critical role in maintaining stability and preventing systemic failure.
Financial services are regulated because their stability is crucial for the broader economy—failures in the financial sector have severe real-world consequences, often requiring costly taxpayer-funded bailouts.
The 2008 global financial crisis, Rao said, is a reminder of how lax regulation and excessive risk-taking can lead to widespread economic distress, job losses, and prolonged recessions. |
The 2008 global financial crisis, Rao said, is a reminder of how lax regulation and excessive risk-taking can lead to widespread economic distress, job losses, and prolonged recessions. The cost of restoring financial stability in such scenarios is often much higher than the cost of preventive regulation.
Riding With Tech, While Eluding Risks
While strong regulation is essential to prevent such crises, determining the optimal level of regulations remains a delicate balance—too little regulation may increase systemic risk, while excessive regulation can stifle innovation, limit credit availability, and raise costs. Thus, regulating finance in an era of fast-paced technological innovation is a delicate balancing act.
At the same time, 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 invest in robust governance frameworks and risk management protocols to ensure compliance and customer appropriateness.
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.
While technology and digital innovations are driving financial inclusion and access, they also bring with them the risk of excessive exposure and over-leveraging, which can create significant vulnerabilities for both individuals and the broader financial system. However, as it is said that presence of too much light can also lead to blindness, we must be aware of the risk of reckless financialization.
A quarter century back, the issue was examined in the light of disruptive financial innovation of those times such as securitisation which was touted as evidence enough for erasing the need of banks as financial intermediaries,” Rao added. | Representative Image
Of late we have seen some concerns of excessive borrowing in unsecured segment and from derivative euphoria in the capital markets. The temptation of short-term gains can easily overshadow the long-term financial security of individuals. Financial entities have a duty to ensure that customers fully understand the risks associated with leveraged products and speculative investing.
Banking and The Future
While RBI along with other financial sector regulators is taking progressive steps to educate the customers, financial sector entities also need to shoulder part of the responsibility.
“To remain competitive, financial institutions must invest in digital infrastructure, and pivot to a customer-centric, data-driven approach in this new landscape. At the same time, institutions must 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. The challenge is ensuring a balanced and resilient financial ecosystem for the future. The key is to harness the benefits while managing the risks,” deputy governor said.
“As an ancient Greek philosopher said, “Change is the only constant,” and yet change can appear daunting, destabilizing, even threatening. So, will the technological changes lead to “creative destruction” and really replace the traditional financial institutions like banks? The spectre of banks being ‘dead’ has been raised in the past also. A quarter century back, the issue was examined in the light of disruptive financial innovation of those times such as securitisation which was touted as evidence enough for erasing the need of banks as financial intermediaries,” Rao added.
