RBI warns of financial risks from surging unsecured debt, speculative trading

India’s rapid digital financial expansion is fuelling both opportunity and risk, with rising unsecured debt and speculative trading posing new challenges for the financial system, Reserve Bank of India (RBI) deputy governor M. Rajeshwar Rao warned Friday.

While technology has deepened financial inclusion, Rao said, concerns have emerged over unchecked borrowing and speculative investments that could leave individuals and institutions vulnerable.

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“(Just as) the presence of too much light can lead to blindness, we must be aware of the risk of reckless financialization,” Rao said at the Indian Institute of Management Kozhikode-National Stock Exchange’s annual conference on macroeconomics, banking, and finance. “(The) temptation of short-term gains can easily overshadow long-term financial security.”

Financial literacy is crucial in protecting consumers from fraud, but regulation plays an even bigger role in preventing systemic failures, he said. “The cost of restoring financial stability in such scenarios is often much higher than the cost of preventive regulation.”

In response to a surge in unsecured personal loans and credit card debt, the RBI raised risk weights on certain lending categories by 25 percentage points in November 2023. Since then, it has cracked down on banks and non-bank financial companies (NBFCs) over risky practices in digital lending, unsecured loans, small-ticket loans against property and gold, and aggressive deposit mobilization.

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Regulated financial firms must share the burden of financial education, Rao said, warning that a lack of literacy leaves people vulnerable to predatory lenders.

Regulated entities must develop the necessary capabilities to implement and comply with evolving regulations. They must invest in robust governance frameworks and risk management protocols while integrating artificial intelligence (AI), cloud computing, and API-driven finance into their operations to ensure compliance and customer appropriateness.

“Financial firms cannot afford to view regulation as a barrier to innovation—rather, compliance itself must become a core component of their digital strategy. A strong internal culture of risk awareness, ethical AI usage, and customer-centric innovation will be critical in navigating the evolving financial landscape effectively,” he said.

Rao said a major gap in financial inclusion remains access to credit, particularly for the informal sector. Traditional models reliant on collateral-based lending fail to accommodate first-time borrowers and small businesses with limited credit histories, often pushing them toward informal, high-cost lenders.

Financial institutions must leverage digital transformation to expand access, using infrastructure such as the Unified Payments Interface (UPI), the account aggregator (AA) framework, and the formalization of MSMEs, Rao said. The recently launched Unified Lending Interface (ULI) has already disbursed over 600,000 loans worth ₹27,000 crore as of 6 December, including ₹14,500 crore to MSMEs, with 36 banks and NBFCs onboarded.

Adapt or become obsolete

Rao warned that financial firms must upgrade governance and operational standards while continuously adapting to technological shifts.

“The potential disruption from this wave of innovation is bigger than ever. While predicting the future of banking is difficult, the message is clear—adapt or risk becoming obsolete,” he said.

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To stay competitive, financial institutions must invest in digital infrastructure and customer-centric, data-driven models, while managing risks from over-reliance on third-party technology providers. He said that regulatory compliance, cybersecurity, and customer protection must remain top priorities.