The Reserve Bank of India has, of late, seen some concerns of excessive borrowing in the unsecured segment and from derivative euphoria in the capital markets, according to M Rajeshwar Rao, Deputy Governor.
The temptation of short-term gains can easily overshadow the long-term financial security of individuals, Rao said in his inaugural address at the IIMK- NSE joint Second Annual Conference on Macroeconomics, Banking and Finance in Mumbai.
The Deputy Governor emphasised that financial entities have a duty to ensure that customers fully understand the risks associated with leveraged products and speculative investing.
Rao’s observation on excessive borrowing in the unsecured segment comes even as RBI has clamped down on such borrowing.
On November 16, 2023, the RBI increased the risk weights on the unsecured consumer credit exposures of banks and NBFCs (including credit card receivables), as well as bank lending to NBFCs, other than housing finance companies.
“While RBI along with other financial sector regulators is taking progressive steps to educate customers, financial sector entities also need to shoulder part of the responsibility.
“Absence of financial literacy leads people to fall prey to unscrupulous players, which erodes the trust of the people in the system. Increased financial literacy will boost trust in the sector and its participants, whose benefits will accrue to the entities themselves,” the Deputy Governor said.
He cautioned that while technology and digital innovations drive 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, just as it is said that presence of too much light can also lead to blindness, we must be aware of the risk of reckless financialisation.” he said.
Rao observed that while strong regulation is essential to prevent crises such as the 2008 global financial crisis, 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.
The Deputy Governor emphasised that the message for banks and NBFCs is clear: adapt or risk being made obsolete.
He noted that 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 regulatory compliance and cybersecurity, while ensuring customer protection remain their top priorities.