RBI Deputy Governor warns financial entities of risks in leveraged products

Deputy Governor Rajeshwar Rao warns financial entities of risks in leveraged products, urges financial literacy for investors.

Financial entities must see that their customers fully understand the risks of leveraged products and speculative investing, said Reserve Bank of India’s Deputy Governor Rajeshwar Rao, highlighting the vulnerabilities that come from “reckless financialisation.”

Mr. Rao acknowledged the role of technology in financial inclusion but warned that it could also increase the risk of exposure and over-leveraging. He cautioned that it may increase the vulnerabilities of individual investors and broader financial system.

“It is said that presence of too much light can also lead to blindness, we must be aware of the risk of reckless financialisation,” he said.

He also underlined there have been some concerns regarding the unsecured loans and derivative euphoria in the capital markets. “The temptation of short-term gains can easily overshadow the long-term financial security of individuals” Mr. Rao said.

The Deputy Governor also suggested that financial literacy was important in avoiding investors falling prey to unscrupulous players and thereby making sure the people do not lose their trust in the system.

He said that financial sector entities must shoulder some responsibilities to educate the investor despite the RBI’s “progressive steps” to do the same.