Though digital transformation of financial services is inevitable, there is a need to focus on emerging risks, say experts at the concluding day of IIM Kozhikode’s week long seminar on ‘Banking Regulation, Intermediary Soundness and Systemic Stability.

Nitin Chugh, Deputy Managing Director and Head of Digital Banking, State Bank of India, said, “Financial services players are progressing up the value chain with digital offerings, but brick and mortar branches would co-exist with digital banking.”

On SBI’s strategy, he said the bank believes in investing in emerging technologies to create value for customers.

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He, however, sounded a note of caution on account aggregators using personal data for multiplying business and suggested regulators should keep a close watch on their misdoings.

Mridul Saggar, Professor and Head of the Centre for Excellence in Marco Economics, Banking and Finance and former Executive Director at RBI, raised issues about disintermediation through digital finance. While creative destruction in history has helped raise global growth rates, one needs to be cautious both on crypto currencies and CBDCs.

“Central Bank Digital Currencies (CBDCs) have potential to reduce competition in the financial space, while too many blockchains were a social waste. ‘Stable coin’ is a misnomer due to limited reserve backing, making it impossible to keep its value stable. Even if it does, it will not attract investors who are driven only by speculation,” Saggar added.

He further said the fine print of G20 summit declaration plays an important role in setting the future course and the IMF-FSB synthesis paper on the issue veers towards regulation of crypto assets when regulators have insufficient tools to do that.

Vijay Shekhawat, Chief General Manager, Department of Supervision, Reserve Bank of India, said, “Regulation is necessary to ensure financial stability even if it comes in way of some innovations. He urged banks to make increased use of data analytics to better understand risks, while staying cautious about inferences and false positives that it can throw.”

Also read: CBDC: A calibrated approach needed

Manoranjan Mishra, Chief General Manager, Department of Regulation, Reserve Bank of India, said that the scale-based regulation of NBFCs is working well and bank-like regulation of upper layer NBFCs is a necessity. Dispelling the notion that it imposed an excessive regulatory burden on those NBFCs, he clarified that such NBFCs still have some advantages over banks in meeting credit, market and liquidity risks.

Rudra Sensarma, Professor of Economics, IIM Kozhikode, suggested that banks have to operate on “phigital” model combining physical presence with adoption of digital technologies. DeFi and banks will coexist but the former has risks as they are weakly regulated. He emphasised the need to improve digital financial literacy.