NEW DELHI, Oct. 3
Reserve Bank of India Governor Sanjay Malhotra on Saturday warned against complacency over India’s strong financial position, saying prolonged periods of stability could encourage excessive risk-taking and leverage while the next financial crisis might originate outside the banking system.
Speaking at the Kautilya Economic Conclave in New Delhi, Malhotra said India had experienced a long period of financial stability, with banks, other financial institutions, governments and households currently maintaining strong balance sheets.
But those conditions should not be taken as a guarantee against future shocks.
“Today’s resilience may not necessarily imply tomorrow’s immunity,” Malhotra said, stressing the need for continued vigilance across the financial system.
The RBI governor said long periods of stability could themselves create vulnerabilities by encouraging greater risk-taking and leverage.
Financial stress can also emerge quickly but take years to resolve, making early identification of vulnerabilities particularly important for regulators and financial institutions.
Malhotra cautioned that the next crisis might not originate in a bank or even within the financial sector.
A geopolitical event, cyberattack or major technological failure could trigger disruptions that spread into the financial system through multiple channels.
That changing risk environment requires regulators to look beyond traditional measures of banking stability.
Malhotra called for greater use of scenario analysis and more granular data to identify interconnected exposures, technological risks and vulnerabilities arising from cross-border financial positions.
Financial resilience, he said, must extend beyond commercial banks.
Non-bank financial companies, financial markets, payment systems, technology infrastructure providers, critical third parties and international financial networks all form part of an increasingly interconnected system.
A disruption affecting one component can potentially transmit stress elsewhere, making system-wide resilience increasingly important.
The rapid adoption of new financial technologies adds another dimension to that challenge.
Malhotra said artificial intelligence, tokenisation and new forms of financial intermediation could improve efficiency, but innovation would remain sustainable only if it preserved the fundamental foundations of trust in the financial system.
Those foundations include sound institutions, settlement finality, the singleness of money and financial integrity.
The RBI governor also reiterated the central bank’s cautious position on cryptocurrencies.
While the RBI supports the potential use of blockchain technology and tokenisation, it continues to see risks from cryptocurrencies, particularly for emerging market economies such as India.
The distinction reflects the central bank’s approach of separating potentially useful underlying technologies from concerns surrounding privately issued crypto assets.
Malhotra also addressed the economic risks arising from the conflict in West Asia.
He said India remained exposed to the consequences of the conflict but was navigating the situation from a position of economic strength.
Policymakers are simultaneously seeking to reduce vulnerability to external shocks through diversification of imports, strategic petroleum reserves, free trade agreements and greater use of local-currency settlement.
Financial markets have also been tested by changing global conditions.
Indian equities have corrected from elevated valuations in recent months, but Malhotra said the adjustment had remained orderly.
He also suggested that a correction in artificial intelligence-related valuations in advanced economies could potentially benefit India if it redirected some international capital towards Indian markets.
Private credit, another area receiving increased attention from global regulators, remains comparatively small in India and is not currently assessed by the RBI as posing a significant risk.
The domestic banking system also remains well capitalised.
Malhotra said banks’ Common Equity Tier 1 capital ratios remained comfortable even under adverse stress scenarios, providing an important buffer against potential losses.
Non-banking financial companies similarly maintain substantial capital cushions.
Average capital adequacy among NBFCs is around 25 per cent, compared with the regulatory requirement of 15 per cent.
These indicators support the RBI’s assessment that the Indian financial system currently remains resilient.
But Malhotra’s central message was that present strength should not lead regulators, financial institutions or markets to underestimate future vulnerabilities.
The nature of financial risk is evolving.
Traditional banking problems remain important, but geopolitical shocks, cyber incidents, technological failures, interconnected financial networks and emerging technologies can increasingly become channels through which instability develops and spreads.
That means financial regulation must evolve alongside the system it oversees.
For the RBI, the challenge is not simply to ensure that banks hold sufficient capital or that NBFCs meet regulatory requirements. Resilience must increasingly cover the entire ecosystem through which money, credit, payments, technology and financial information move.
India’s financial system currently enters this period of uncertainty with strong bank and household balance sheets, comfortable capital buffers and relatively limited exposure to some emerging global risks.
Malhotra’s warning, however, was directed precisely at the danger of assuming that those strengths make the system immune.
The next crisis may look very different from the last one, and preparing for it requires identifying vulnerabilities before the shock arrives.
