Central bank deputy governor M. Rajeshwar Rao emphasized the need for financial regulators to strike a balance between promoting innovation and ensuring systemic stability. Speaking at the DoPT Management Development Programme at IIM Kozhikode, Rao noted that while innovation has reshaped the financial landscape, it has also introduced regulatory challenges, particularly through new models and unregulated partnerships. Regulators, he said, must address these gaps by setting up frameworks that support innovation without endangering financial stability.
He highlighted tools like regulatory sandboxes and closer engagement with stakeholders to better integrate emerging technologies. However, tech-driven models raise concerns about data privacy, AI risks, and business conduct. For example, banking-as-a-service expands product access but could increase misconduct risks. Regulators face the challenge of acting proactively or reactively in such situations.
To guide AI use in finance, the RBI has formed the FREE-AI committee and adopted a principle-based framework. Rao also stressed the value of Regulatory Impact Assessments (RIA), focusing on cost-benefit analysis and stakeholder input. He called for streamlined regulations and better inter-regulatory coordination through platforms like the Financial Stability and Development Council (FSDC).
