Regulated entities must develop capabilities to comply with evolving rules: RBI deputy guv

Banks and NBFCs face a clear mandate: adapt or risk obsolescence, Rao said

Regulated entities must develop the necessary capabilities to implement and comply with the evolving regulations, Rajeshwar Rao, deputy governor of the Reserve Bank of India (RBI), said on February 21.

As financial institutions increasingly integrate artificial intelligence (AI), cloud computing, and API-driven finance into their operations, the need for robust governance frameworks and risk management protocols has never been greater, he said.

However, too little regulation heightens systemic risks, while excessive oversight could stifle innovation and limit credit availability, he added.

Speaking at the IIM Kozhikode-NSE 2nd Annual Conference on Macroeconomics, Banking and Finance, the deputy governor said, the challenge today, is building a financial ecosystem that is both balanced and resilient.

Rao emphasised the importance of financial regulation, underscoring lessons from past crises, most notably the 2008 global financial meltdown.

He highlighted how lax oversight and excessive risk-taking led to severe real-world consequences, forcing governments to intervene with taxpayer-funded bailouts to restore stability.

With rapid technological advancements reshaping the financial sector, institutions must ensure that compliance is not seen as a barrier to progress but rather as a fundamental component of their digital strategy, he said.

He added that "disruptive financial technologies have often raised questions about the future of traditional financial institutions."

He recalled past predictions that securitisation would eliminate the need for banks as intermediaries, yet history proved otherwise.

Banks adapted and emerged even more resilient. As fintech innovations accelerate, the debate over whether traditional banking institutions will survive or be replaced by digital-first competitors has resurfaced, he said.

However, while the current wave of disruption is significant, financial institutions have an opportunity to evolve.

Banks and NBFCs face a clear mandate: adapt or risk obsolescence, Rao said.

To stay competitive, financial institutions must invest in digital infrastructure and embrace a customer-centric, data-driven approach. However, they must also mitigate the risks of over-reliance on third-party technology providers by prioritising regulatory compliance, cybersecurity, and customer protection, he said.

The challenge lies in creating a balanced and resilient financial ecosystem: one that maximizes the benefits of digital transformation while effectively managing its risks, he added.