RBI Deputy Governor warns financial entities of risks in leveraged products

Financial entities must see that their customers fully understand the risks of leveraged products and speculative investing, said Reserve Bank of India’s Deputy Governor Rajeshwar Rao, highlighting the vulnerabilities that come from “reckless financialisation.”

Mr. Rao acknowledged the role of technology in financial inclusion but warned that it could also increase the risk of exposure and over-leveraging. He cautioned that it may increase the vulnerabilities of individual investors and broader financial system.

“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.

He also underlined there have been some concerns regarding the unsecured loans and derivative euphoria in the capital markets. “The temptation of short-term gains can easily overshadow the long-term financial security of individuals” Mr. Rao said.

The Deputy Governor also suggested that financial literacy was important in avoiding investors falling prey to unscrupulous players and thereby making sure the people do not lose their trust in the system.

He said that financial sector entities must shoulder some responsibilities to educate the investor despite the RBI’s “progressive steps” to do the same.

Risks of AI in banking sector

Banking is a sector where trust, accountability and regulatory compliance are paramount and the inability to explain the anomalies of AI reduces the confidence the technology, said Mr. Rao at the Second Annual Conference on Macroeconomic, Banking & Finance on Friday (February 21, 2025) at Mumbai. The conference was conducted by IIM-Kozhikode and National Stock Exchange.

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“While AI raises critical issues such as algorithmic bias, fairness, data privacy, and security, the root of these challenges and many other lies in lack of explainability” said Mr. Rao at the event which involved various leaders in the banking industry, economists and regulators. “In the absence of explainability, human intervention can end up becoming mere rubber-stamping, rather than responsible oversight, increasing the likelihood of systemic errors” he added.

He further warned of the second order effects of AI where the unexplainability can misaligment between real world trends and the models. “Regular human oversight and explainability are critical to prevent such risks” said Mr.Rao.

Mr. Rao also flagged the possibility of AI leading to “automation complacency,” he said that AI must be seen as a tool and not as a substitute human judgement.