RBI Governor Warns of ‘Systemic Risks’ from AI in Banking Sector

The increasing use of artificial intelligence (AI) and machine learning (ML) in the global financial sector could pose significant risks to financial stability if not properly managed, according to Shaktikanta Das, the Governor of the Reserve Bank of India (RBI). Speaking at an event in New Delhi on Monday, Das emphasized the need for banks to adopt strong risk mitigation practices as they integrate AI into their operations.

Das highlighted that the financial sector’s growing reliance on AI could lead to concentration risks, particularly if a few technology providers dominate the market. “The heavy dependence on AI by financial institutions can amplify systemic risks. Failures or disruptions in these AI systems could ripple through the entire financial sector,” he cautioned.

In India, banks and financial service providers are increasingly using AI to enhance customer experience, reduce operational costs, manage risks, and boost growth through applications like chatbots and personalized banking services. However, this growing reliance on AI also introduces new vulnerabilities, including a heightened risk of cyberattacks and data breaches.

Das pointed out another key concern—the “opacity” of AI algorithms. The complexity and lack of transparency in AI systems make it difficult to audit or interpret the decision-making processes behind lending and other financial services. This could lead to unpredictable market outcomes, with potentially severe consequences.

In addition to AI-related risks, Das also raised concerns about the rapid expansion of private credit markets globally. These markets, he noted, are lightly regulated and have not undergone stress testing during a significant economic downturn. The unchecked growth of private credit could pose further risks to financial stability.

As the adoption of AI continues to reshape the financial landscape, Das urged banks and regulators to stay vigilant and ensure that adequate safeguards are in place to prevent systemic disruptions.

RBI hikes Repo Rate by another 50 basis points to 5.9%

  • GDP for 2022-23 projected to grow at 7.0%.
  • Internet banking facility to be started for Regional Rural Banks’ customers.
  • Regulation of offline payment aggregators proposed.

Repo Rate hiked to 5.90%

The repo rate, the rate at which RBI lends money to commercial banks, has been hiked by 50 basis points again. Considering the prevailing adverse global environment, resilience in domestic economic activity, uncomfortably high inflation level, the RBI has hiked the policy repo rate by 50 basis points, to 5.40%.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.65% and the marginal standing facility (MSF) rate and the Bank Rate to 6.15%. The Monetary Policy Committee has decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, stated RBI Governor Shaktikanta Das.

The Governor’s address can be watched here:https://youtu.be/cb1it7TU8bk

RBI

Additional Measures:

The Governor announced a series of four additional measures, as given below.

1. Discussion paper on Expected Loss-Based Approach to be released for loan-loss provisioning by banks

Banks currently follow incurred-loss approach, where provisions are made after stress has actually materialized, this is to be replaced by a more prudent approach which requires banks to make provisions based on assessment of probable losses.

2. Discussion paper on securitization of Stressed Assets Framework (SSAF) to be released.

Revised framework for securitization of stressed assets was issued in Sep 2021, it has now been decided to introduce a framework for securitization of stressed assets, this will provide alternate mechanism for securitization of NPAs in addition to existing ARC route.

3. Internet banking facility for customers of Regional Rural Banks.

RRBs are currently allowed to provide internet banking facility to customers subject to fulfillment of certain criteria, to spread digital banking in rural areas, these criteria are being rationalized, revised guidelines to be issued separately.

4. Regulation of offline payment aggregators.

Online Payment Aggregators (PAs) have been brought under the purview of RBI regulations since March 2020. It is now proposed to extend these regulations to offline PAs, who handle proximity/ face-to-face transactions. This measure is expected to bring in regulatory synergy and convergence on data standards.

Growth Projection – 7.0% for 2022-23

The Governor informed that the central bank’s growth projection for the Indian economy for 2022-23 is projected at 7.0 per cent with Q2 at 6.3 per cent; Q3 at 4.6 per cent; and Q4:2022-23 at 4.6 per cent, with risks broadly balanced.

The growth for Q1 of 2023-24 is projected at 7.2 per cent.

Against the current challenging global environment, economic activity in India remains stable, stated the RBI Governor. “While real GDP in first quarter of this year turned out to be lower than expectations, it is perhaps the highest among major global economies”, he added.

Inflation

Inflation inched up to 7.0 per cent in August from 6.7 per cent in July, stated the RBI Governor. Global geopolitical developments are weighing heavily on the domestic inflation trajectory, he said.

The RBI Governor stated that monetary policy has to carry forward its calibrated action on policy rates and liquidity conditions consistent with the evolving inflation growth dynamics. It must remain alert and nimble, he stated.

Read the full statement of the Governor here; Statement on Development and Regulatory Policies here; and Monetary Policy Statement here.

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