RBI warns of excessive unsecured loans, euphoria over derivative products

RBI deputy governor M Rajeshwar Rao emphasises on meaning engagement beyond account opening

The Reserve Bank of India has red flagged excessive borrowing of unsecured loans and the euphoria over derivative products while asking the financial sector entities to be aware of the risk of reckless financialization.

 

Speaking at an event organised by the National Stock Exchange on Friday, RBI deputy governor M Rajeshwar Rao said, “Of late we have seen some concerns of excessive borrowing in the 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.”

 

He said financial entities have a ‘duty’ to ensure that customers fully understand the risks associated with leveraged products and ‘speculative investing’.

 

 

“The temptation of short term gains can easily overshadow the long term financial security of individuals”, he said.

 

With financial sector entities increasing relying on artificial intelligence, the deputy governor also warned about ‘Danger of Over-Reliance on AI’.

 

“A less appreciated risk of AI-based decision models is "automation complacency," where people rely too much on technology, even when situations need careful judgment,” he said, adding while algorithms can provide valuable insights and efficiency, they should be viewed as tools to support, not replace, human judgment.

 

“As the aphorism goes, “ll models are wrong, but some are useful”, he commented.

 

He said 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. Absence of financial literacy leads to people to fall prey to unscrupulous players, which erodes the trust of the people in the system”, Rao said. 

 

He said India has made significant strides in expanding financial access through the Jan Dhan Yojana, which has enabled 80% of adults to have a bank account, the usage of these accounts remains a challenge that needs to be addressed.

 

According to Reserve Bank of India’s Financial Inclusion Index, the extent of financial inclusion in the country, stood at 64.2 in March 2024, up from 60.1 in March 2023, and 43.4 in 2017. The index is based on three sub-indices, access, quality, and usage.

 

“India has made remarkable strides in expanding financial access with the success of schemes like the PM Jan Dhan Yojana, ensuring that 80 per cent of the adults now have a bank account. Till date, 54.84 crore bank accounts have been opened under the PM Jan Dhan Yojana, with a total balance of at least 2.45 lakh crores in these accounts”, he said.

 

“However, true financial inclusion goes beyond mere accounts - it requires meaningful engagement with financial services”, he said adding that a bank account should serve as an entry point for individuals to access a broader suite of financial products, including credit, insurance, pensions, and investment opportunities.

 

“Without this deeper engagement, financial inclusion remains superficial, and the true benefits of a formal financial system would not reach every individual or business”, Rao said. 

 

Rao highlighted that the improvement in the financial inclusion index in 2023-24 was largely contributed by the usage dimension, reflecting deepening of financial inclusion. 

 

“While this shows that we are moving in the right direction, there is still a long way to go, wherein most of the vulnerable population and low-income groups have access to secure and affordable finance”, he said.

 

He emphasised on increasing financial literacy which could protect customers from  fraudulent practices.

 

“Increased financial literacy will help to increase trust in the sector and its participants, whose benefits will accrue to the entities themselves, while educating customers helps protect them from fraudulent practices. Regulation plays a critical role in maintaining stability and preventing systemic failure”, Rao added. 

Meanwhile, Rao highlighted that 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”, he said, adding that financial firms cannot afford to view regulation as a barrier to innovation—rather, compliance itself must become a core component of their digital strategy.