Regulated Entities Must Enhance Capabilities to Adapt to Changing Regulations: RBI Deputy Governor

Regulated entities must cultivate the necessary capabilities to adapt to and adhere to evolving regulations, stated Rajeshwar Rao, deputy governor of the Reserve Bank of India (RBI), on February 21.

As financial institutions increasingly adopt artificial intelligence (AI), cloud computing, and API-driven finance, the demand for strong governance frameworks and risk management strategies has never been more critical, he noted.

Speaking at the IIM Kozhikode-NSE 2nd Annual Conference on Macroeconomics, Banking, and Finance, he highlighted the challenge of constructing a financial ecosystem that is both stable and adaptive. Rao also emphasized that insufficient regulation could amplify systemic risks, whereas excessive oversight might hinder innovation and restrict credit availability.

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Reflecting on past financial crises, particularly the 2008 global financial meltdown, Rao underscored the necessity of robust financial regulation. He pointed out that inadequate oversight and excessive risk-taking led to severe economic repercussions, ultimately requiring government intervention through taxpayer-funded bailouts to restore stability.

With technology rapidly transforming the financial sector, institutions must view compliance not as an impediment to progress but as an integral part of their digital strategy, he asserted.

He further remarked that disruptive financial technologies have often sparked debates regarding the future of traditional financial institutions. He recalled earlier predictions suggesting that securitization would render banks obsolete as intermediaries—an outcome that history has disproven. Instead, banks adapted and emerged stronger. As fintech innovation accelerates, discussions have resurfaced about whether traditional banks will withstand competition from digital-first challengers.

While acknowledging the significance of current disruptions, Rao stressed that financial institutions have the opportunity to evolve. Banks and NBFCs must either adapt or face the risk of becoming obsolete, he cautioned.

To remain competitive, financial entities must invest in digital infrastructure and adopt a data-driven, customer-centric approach. However, they must also address the risks associated with heavy reliance on third-party technology providers by prioritizing regulatory compliance, cybersecurity, and consumer protection.

The key challenge, he concluded, is to create a financial ecosystem that optimally leverages digital transformation while effectively mitigating its risks.

Strengthening Governance and Compliance

Rao further elaborated on the need for financial institutions to proactively develop risk assessment models that align with regulatory expectations. He stated that compliance should not be treated as a reactive measure but as a core component of strategic planning. The increasing complexity of financial transactions, driven by technological advancements, calls for enhanced monitoring mechanisms to detect potential vulnerabilities in real time.

He also emphasized the importance of collaboration between regulatory authorities, financial institutions, and technology firms to create a framework that ensures responsible innovation. By fostering an ecosystem where innovation and compliance coexist, financial institutions can maintain operational resilience while meeting consumer expectations.

Moreover, Rao highlighted the role of central banks in ensuring financial stability. He acknowledged that the RBI has been actively working to strike a balance between enabling innovation and maintaining financial discipline. He pointed to recent regulatory interventions in digital lending and cryptocurrency markets as examples of how the RBI is adapting to emerging challenges while safeguarding the financial system.

Addressing Cybersecurity and Data Privacy

With increasing reliance on digital solutions, Rao stressed the importance of cybersecurity and data privacy. He cautioned that as financial institutions migrate to cloud-based systems and leverage AI for decision-making, the risk of cyber threats and data breaches also grows. Therefore, robust cybersecurity policies, continuous vulnerability assessments, and adherence to global data protection standards must be prioritized.

He also mentioned that regulatory frameworks must evolve alongside technological advancements. Static regulations may fail to address the dynamic nature of fintech disruptions, and as such, a more agile and responsive regulatory approach is required.

The Road Ahead

Looking ahead, Rao expressed optimism about the future of India’s financial sector. He noted that by embracing digital transformation responsibly, financial institutions can enhance efficiency, expand financial inclusion, and contribute to overall economic growth. However, he reiterated that this progress must be accompanied by strong governance, ethical practices, and an unwavering focus on consumer protection.

Ultimately, the success of financial institutions in the digital era will depend on their ability to integrate innovation with sound regulatory practices, ensuring a resilient and forward-looking financial ecosystem.