Growing use of AI, ML can lead to failures across the entire financial sector: RBI Governor

Concerned over the high reliance on AI and machine learning in the banking space, Reserve Bank of India Governor Shaktikanta Das on Monday said lenders ought to ride on the advantages of big tech and not the other way round.

Stressing that the latest technological advancements such as artificial intelligence (AI) and machine learning (ML) have opened new avenues of business and profit expansion for financial institutions, he said, these technologies also pose financial stability risks.

"The heavy reliance on AI can lead to concentration risks, especially when a small number of tech providers dominate the market. This could amplify systemic risks, as failures or disruptions in these systems may cascade across the entire financial sector," he said in his keynote address at a conference organised by the RBI here.

Moreover, he said, the growing use of AI introduces new vulnerabilities, such as increased susceptibility to cyberattacks and data breaches.

Additionally, AI's opacity makes it difficult to audit or interpret the algorithms that drive decisions, he said, adding that this could potentially lead to unpredictable consequences in the markets.

"Banks and other financial institutions must put in place adequate risk mitigation measures against all these risks. In the ultimate analysis, banks have to ride on the advantages of AI and Bigtech and not allow the latter to ride on them," he said.

Growing digitalisation of financial services has enhanced the efficiency of the financial sector across the globe but has also brought in several challenges that central banks have to deal with.

For instance, in the modern world with deep social media presence and vast access to online banking with money transfer happening in seconds, rumours and misinformation can spread very quickly and can cause liquidity stress. Banks have to remain alert in the social media space and also strengthen their liquidity buffers.

Talking about the risk of digitisation, the RBI Governor said in the modern world with deep social media presence and vast access to online banking with money transfer happening in seconds, rumours and misinformation can spread very quickly and can cause liquidity stress.

Banks have to remain alert in the social media space and also strengthen their liquidity buffers, he said.