The growing use of artificial intelligence and machine learning in financial services globally can lead to financial stability risks and warrants adequate risk mitigation practices by banks, the Governor of the Reserve Bank of India said on Monday (October 14, 2024).
The RBI Governor said that the use of artificial intelligence and machine learning in financial services globally can lead to financial stability risks and warrants adequate risk mitigation practices by banks
Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday warned that while artificial intelligence (AI) and machine learning (ML) have opened new avenues for business and profit expansion in the financial sector, over-reliance on these technologies could pose risks to financial stability. As a result, banks and financial institutions must implement adequate risk mitigation measures, he said.
“The heavy reliance on AI can lead to concentration risks, especially when a small number of tech players dominate the market. This could amplify systemic risks, as failures or disruptions in these systems may cascade across the entire sector,” Das said at an event in New Delhi.
The growing use of AI introduces new vulnerabilities, such as increased susceptibility to cyberattacks and data breaches, Das said. “Also, AI’s opacity makes it difficult to audit or interpret the algorithms that drive decisions, potentially leading to unpredictable market consequences,” he said.
“In the ultimate analysis, banks have to ride on the advantages of AI and BigTech, and not allow the latter (these technologies) to ride on them,” Das said.
The governor suggested that, given India’s 24×7 real-time gross settlement system (RTGS), the feasibility of expanding RTGS to settle transactions in major trade currencies, such as the US dollar, euro, and British pound, can be explored through bilateral or multilateral arrangements.
RTGS is a continuous, real-time settlement system developed by the RBI, enabling immediate, final, and irrevocable transfers between banks and financial institutions, both for customer and inter-bank transactions.
Das also highlighted efforts by India and other economies to link cross-border fast payment systems through both bilateral and multilateral modes. He noted that remittances are a key starting point for many emerging and developing economies, including India, to explore cross-border peer-to-peer payments. “There is immense scope to significantly reduce the cost and time for such remittances,” he said.
The governor mentioned central bank digital currencies (CBDCs) as an area with potential to facilitate efficient cross-border payments. India is among the few countries that have launched both wholesale and retail CBDCs.
In the modern world, with widespread social media usage and rapid online banking, where money transfers occur within seconds, Das stressed the importance of banks remaining vigilant in such space and strengthening their liquidity buffers to combat potential misinformation that could cause liquidity stress.
On emerging financial stability risks, the governor warned that the divergence in global monetary policies could lead to volatility in capital flows and exchange rates, potentially disrupting financial stability. He referenced the sharp appreciation of the Japanese yen in early August, which triggered disruptive reversals in the yen carry trade and unsettled global financial markets.
Das also raised concerns about the rapid growth of private credit markets, which have expanded with limited regulation and have not been stress-tested in a downturn, posing significant risks to financial stability. Additionally, higher interest rates aimed at controlling inflation have increased debt servicing costs, financial market volatility, and risks to asset quality.