Financial activities on non-financial platforms pose challenges: RBI DG

Many financial activities are now being unbundled and delivered through non-financial platforms and arrangements involving both regulated and unregulated entities that do not fit neatly within the existing regulatory scope of the Reserve Bank of India (RBI), its deputy governor Shirish Chandra Murmu said.

 

He said that oversight of such activities is often fragmented among multiple financial and non-financial regulators, with no single authority having a comprehensive, end-to-end view of the entire activity chain and risk transmission pathways.

 

Hence, regulatory actions taken within individual mandates may be sound in isolation yet collectively may not fully address such cross-cutting risks, Murmu said in a speech delivered on January 9 and released by the RBI on Tuesday.

 

Murmu cautioned that the increasing use of models, algorithms, and code across the financial industry is reshaping how outcomes are generated. However, their limitations, such as explainability, embedded bias, and model drift may not be immediately apparent and may emerge only as these technologies gain scale.

 

Separately, he also highlighted that digital innovations like usage of cloud and decentralised finance have introduced new and potentially systemic risks, owing to increased interconnectedness with unregulated entities like technology providers.

 

“As systemic fragility can emerge without any single entity appearing vulnerable, regulators are required to look beyond entity-level soundness to systemic effects of concentration, limited substitutability, and the potential for disruption when widely relied-upon services are impaired,” Murmu said.

 

According to Murmu, while prescriptive regulations become misaligned as technologies and business models evolve, principle-based regulation introduces scope for interpretation and uneven application.

 

“The challenge of regulators, especially with respect to digital technologies, lies in calibrating regulation to have clarity without rigidity and flexibility without ambiguity,” he said.

 

He further emphasised that with data becoming a core asset in today’s financial system, financial institutions collect and process vast amounts of sensitive personal and transactional information, and they have become increasingly attractive targets for cyberattacks.

 

“The use of technologies for fraudulent activities like impersonation, fabricated identities, and synthetic content is reducing the reliability of traditional checks dependent on stable identity and familiar patterns,” he said, adding that another emerging challenge for regulators is the veracity of information, as digital platforms enable information, whether accurate or distorted, complete or incomplete, to circulate rapidly.

 

The distorted information can influence consumer behaviour and market sentiment, potentially amplifying stress and contagion. In such an environment, a clear, targeted, and timely regulatory communication assumes greater significance for anchoring stakeholders’ confidence, he added.