The Reserve Bank of India (RBI) on Friday said the involvement of Big Tech companies in the banking, financial services and insurance sector brings systemic risks. The banking regulator, in its annual report for 2021-22, says it is exploring a policy framework for digital banking, fintech and Big Tech.

While encouraging innovation, the central bank is also factoring in the emerging risks in the fintech segment. "Greater use of technology accentuates the concerns related to cyber security. Further, the involvement of BigTechs in the BFSI segment also brings along the systemic risks. All of the above have implications for financial stability and it is the endeavour of the Reserve Bank to mitigate such risks through careful choice of technology and frameworks," the RBI says.

To handle the above issues, the Reserve Bank's approach will have to balance innovation with regulation, without compromising on any of the principles of risk management, it adds.

With increasing impact of the fintech segment on both macro (financial stability and cyber security) and micro levels (consumer protection and financial inclusion), it becomes pertinent to keep facilitating innovation while also bringing regulatory order in the fintech space, the Reserve Bank says.

The banking regulator says it has also assumed non-conventional central banking role through its initiatives such as regulatory sandbox, establishment of the Reserve Bank Innovation Hub, and conducting hackathon among others. It has also set up a fintech department.

The traditional financial landscape has witnessed a fundamental change in its structure and way of functioning, mostly driven by the widespread adoption of technology in the last decade.

"Fintech has disrupted the banking, financial services, and insurance (BFSI) segment in its way of product structuring, back-end analytics, delivery of services, etc. As expected, such innovation first disrupts the market and once it establishes its constructive role, the regulators and authorities step in to regulate the space to nurture the innovation in a sustainable manner and to also mitigate any associated risks," says RBI.

Even though innovations claim to thrive best when free of regulations, regulations or legislations are needed for sustainable growth of a sector, it adds.

The Reserve Bank will facilitate setting up of 75 Digital Banking Units in 75 districts of the country during 2022-23.

On Central Bank Digital Currency, the Reserve Bank of India has proposed to adopt a graded approach to introduction of CBDC, going step by step through stages of proof of concept, pilots and the launch.

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