Former RBI Official Warns Against ‘Destructive Creation’ in Fintech Innovation

Former RBI executive stresses the importance of regulating fintech innovation during a digital lending seminar.

Pune: Rapid innovation in India’s fintech ecosystem has transformed digital lending, but unchecked experimentation could harm the sector, cautioned Dr. Rabi Mishra, former Executive Director of the Reserve Bank of India (RBI). Speaking at a seminar on digital lending at the Gokhale Institute of Politics and Economics (GIPE) on Friday, Mishra stressed the need for responsible innovation backed by strong regulation.

Mishra, who currently serves as the RBI Chair Professor at GIPE, explained that creative destruction—the process by which new technologies replace old ones—can be beneficial when it enhances efficiency and expands access to credit. However, when innovation happens without oversight, it can slip into what he termed destructive creation, ultimately destabilizing the financial system.

“When progress creates harm, we must pause and reflect,” Mishra noted. “Data can empower, but it can also exploit. Unregulated platforms can create chaos. Privacy breaches can erode trust.” He emphasized that the digital lending sector must be built on transparency, consumer protection, and ethical data practices.

Digital Lending Innovation: A Double-Edged Sword

Vaibhav Chaturvedi, Chief General Manager at RBI, also addressed the seminar and highlighted how the digital lending landscape has expanded rapidly due to the combined efforts of banks, fintech startups, and digital platforms. New models of embedded finance—where credit is offered seamlessly within apps, at checkout points, and inside business workflows—have significantly improved convenience for users.

However, Chaturvedi warned that this evolution has made regulatory oversight more complex. “Keeping a regulatory sight on some entities has become challenging as many are hybrid, and the boundaries are getting blurred,” he said. “A payment app may originate a loan through an NBFC partner, or a merchant might simultaneously sell and finance goods.”

This convergence, he explained, raises questions about accountability—who is responsible for the loan, who ensures compliance, and who protects the customer when things go wrong?

Algorithm-Driven Underwriting: Opportunities and Risks

Chaturvedi also highlighted the increased use of artificial intelligence (AI) and machine learning (ML) models for credit underwriting. These algorithmic systems rely heavily on the digital footprints of individuals and businesses to determine creditworthiness.

While these models offer efficiency, speed, and cost savings for lenders—and have helped extend credit to underserved segments—they also come with risks.

“Biases in training data may lead to model outcomes that diverge from real-world outcomes,” he said. “Historical data often reflects historical biases, potentially resulting in credit models that discriminate against certain classes of people.”

He added that deficiencies in model development, inadequate supervision of digital platforms, and lack of transparency can intensify systemic risk in the financial ecosystem.

Balancing Innovation and Regulation

Despite the concerns, both Mishra and Chaturvedi agreed that digital lending remains one of the most impactful financial innovations in India. The challenge lies in balancing growth with regulatory discipline.

Responsible innovation, they noted, is crucial for ensuring that digital lending continues to expand access to credit—especially for credit-starved sectors—without compromising consumer trust or financial stability.