RBI's Murmu details digital regulation challenges and opportunities

Murmu highlighted that digitalization compresses the time dimension in finance, leading to rapid scaling of operational incidents and fraud.

This demands a shift from post-facto remediation to proactive detection and agile interventions.

He noted that digitalization also blurs traditional regulatory boundaries, with financial activities unbundled across regulated and unregulated entities, challenging existing regulatory perimeters.

This fragmentation, both within and across jurisdictions, creates scope for regulatory arbitrage and uneven risk management.

Furthermore, digital innovations like cloud computing and decentralized finance introduce new systemic risks due to increased interconnectedness, single points of failure, and opacity.

The increasing use of models and algorithms also presents challenges regarding explainability, embedded bias, and model drift, requiring regulators to look beyond entity-level soundness to systemic effects.

Murmu also identified significant opportunities for regulators to adapt and improve risk observation and assessment.

Digital financial activity generates granular, high-frequency information, enabling earlier and deeper regulatory assessments of emerging issues and better-timed interventions.

This includes tools like RBI's MuleHunter.ai for tackling mule bank accounts.

Advances in data and analytical tools also provide system-wide visibility, allowing regulators to identify critical nodes and assess interconnected risks, anticipating disruptions even when individual entities appear resilient.

Furthermore, digitalization offers scope to reduce regulatory burden through structured impact assessments and digital processes like RBI's PRAVAAH portal and DAKSH supervisory application, streamlining compliance and communication.