The growing integration of artificial intelligence (AI) and machine learning (ML) in the global financial sector poses new risks that require proactive management, according to Reserve Bank of India (RBI) Governor Shaktikanta Das. Speaking at an event in New Delhi on Monday, Das highlighted the potential vulnerabilities associated with AI, particularly the concentration risks arising from reliance on a limited number of technology providers. These risks, he warned, could trigger systemic failures that may cascade across the financial sector.
AI’s Role in Financial Services
Financial institutions, both in India and globally, are increasingly using AI to streamline operations, enhance customer experience, and manage risks. From chatbots to personalized banking services, AI is driving significant advancements in the industry. However, Das emphasized that with these innovations come new challenges, such as the growing susceptibility to cyberattacks and data breaches. The complexity and opacity of AI algorithms also make it difficult to audit decisions, creating unpredictable consequences that could destabilize markets.
Concentration and Systemic Risks
A key concern raised by Das was the concentration of power within a small group of technology providers that dominate the AI space. This over-reliance on a few players increases systemic risks, particularly if one of these key providers faces disruptions or failures. Das urged banks and financial institutions to implement adequate risk mitigation strategies to address these vulnerabilities and protect the integrity of the financial system.
Expanding Remittance Capabilities
In a separate address, Das called for reducing the time and cost associated with cross-border remittances, emphasizing their importance to the Indian economy. Inflows from Indians living abroad are expected to reach Rs 10,41,922 crore ($124 billion) this year, making remittances the second-largest source of external financing for the country after service exports.
However, Das noted that while remittances from abroad are well-documented, internal remittances within India remain largely untracked. Congress general secretary Jairam Ramesh echoed this concern, pointing out that about three out of ten Indians are internal migrants, and their remittances should receive more policy attention. He suggested that reducing the time and cost of domestic remittances could benefit migrant workers sending money to their families across state lines.
Private Credit Markets and Financial Stability
Das also expressed concern over the rapid expansion of private credit markets worldwide, which operate with limited regulation. These markets, which have not been adequately stress-tested, pose significant risks to financial stability, particularly in the event of an economic downturn. Das underscored the need for better oversight and regulation of these private credit markets to mitigate potential risks.
Enhancing Cross-Border Payment Systems
The RBI is exploring ways to expand its Real-Time Gross Settlement (RTGS) system to settle transactions in major international currencies such as the US dollar, euro, and British pound. This initiative aims to provide an alternative to traditional cross-border payment systems, which often rely on multiple intermediaries, resulting in delays and higher costs.
By establishing bilateral or multilateral agreements, the RBI hopes to streamline cross-border payments and offer faster, more cost-effective solutions. Das suggested that India's experience with digital public infrastructure, including its Unified Payments Interface (UPI), could serve as a model for other countries looking to enhance their own payment systems.
The Role of Central Bank Digital Currencies (CBDCs)
In addition to expanding RTGS, Das pointed to central bank digital currencies (CBDCs) as another avenue for improving cross-border payments. India is currently testing its own CBDC, which is integrated with UPI and offers features such as programmability. According to Das, the standardization and compatibility of CBDCs across countries could pave the way for more efficient global payment systems.
However, he acknowledged the challenges of aligning different nations' systems, as each country may design its CBDC based on domestic considerations. To overcome these hurdles, Das proposed developing a "plug-and-play" system that could replicate India's digital payments success while respecting the sovereignty of other nations.
Financial Stability Challenges in Emerging Markets
Das cautioned that emerging economies are particularly vulnerable to the spillover effects of monetary policies in larger, systemic economies. Diverging monetary policies, with some countries easing while others tighten, have created volatility in capital flows and exchange rates. For these economies, strengthening policy frameworks and building liquidity buffers will be critical in managing external shocks and maintaining financial stability.
Moreover, the rise of unregulated private credit markets, combined with tightening global financial conditions, has increased the risks for financial institutions. Das urged banks to bolster their liquidity reserves and remain vigilant against the growing threat of social media rumors, which can amplify market disruptions and exacerbate financial instability.
Regulatory Measures and Risk Assessment
The RBI has recently mandated that all regulated entities, including banks and non-banking financial companies (NBFCs), conduct comprehensive risk assessments to mitigate the risks of money laundering, terrorist financing, and proliferation financing. These entities are now required to use both internal and external data sources to assess risks and implement effective countermeasures.
To guide this process, the RBI has issued detailed guidelines on internal risk assessment for money laundering and terrorist financing, aimed at helping financial institutions identify and mitigate risks related to specific clients, geographic regions, and transaction types.
This regulatory push underscores the RBI’s commitment to safeguarding the financial system amid the evolving landscape of global risks.
