“It is said that the presence of too much light can also lead to blindness, we must be aware of the risk of reckless financialisation. 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,” Rao said.
He also pointed out the challenges of using artificial intelligence (AI) and machine learning (ML) models like algorithmic bias, fairness, data privacy, and security, which are based on their lack of explainability.
“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 said.
Rao said the continuous learning and evolution of AI models could make them susceptible to data drift and concept drift causing them to misalign with real-world trends, risking incorrect financial decisions and instability.”Regular human oversight and explainability are critical to prevent such risks. While algorithms can provide valuable insights and efficiency, they should be viewed as tools to support, not replace, human judgment,” Rao said.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 also invest in robust governance frameworks and risk management protocols to ensure compliance.
“Financial firms can’t 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,” Rao said.
Financial institutions must also navigate the risks of excessive reliance on third-party technology providers, ensuring that regulatory compliance and cybersecurity while ensuring customer protection remain their top priorities, he said. Rao said the banking sector has always emerged stronger from previous disruptions.
Banks and NBFCs will have to adapt to the technological changes or risk being made obsolete.
“To remain competitive, financial institutions must invest in digital infrastructure, and pivot to a customer-centric, data-driven approach in this new landscape,” he said.
