Das warned that AI’s opacity could result in unpredictable market outcomes and muddle regulatory oversight. According to him, the key is for financial institutions to keep control over their AI-driven processes and be able to audit and monitor them effectively. Therefore, banks must pay attention to securing their systems and enhancing transparency in AI applications so as not to incur risks.The Reserve Bank of India (RBI) Governor Shaktikanta Das warned banks and financial institutions that they run the risk of getting too reliant on artificial intelligence (AI) and machine learning (ML). While these technologies can help businesses grow, there is a risk that over-reliance on them might pose risks to financial stability, Das said at an event in New Delhi. He added that the sector should adopt strong risk mitigation strategies to avoid possible vulnerabilities.
Das highlighted that the growing reliance on AI in general, especially on the domination of a few technology players, could amplify such concentration risks. ‘With this chance of amplifying systemic risks, these may have wide impacts if amplified by disruptions in AI systems,’ he explained. In addition, Das also reminded us that the financial sector must hold the line between technological innovations and robust governance frameworks.
Das Alerts Banks on AI Data Breach Risks
The RBI governor added that there are also concentration risks due to AI’s growing vulnerabilities, such as data breaches and cyber attacks. The increased dependence on advanced technologies in the financial sector has increased the risk with which these breaches can occur, so much so that they threaten electronic data safety. Das also worried that institutions would not know or be able to audit AI algorithms’ decisions, forcing them to operate entirely transparently.
CBDCs Key to Enhancing Global Payment Systems
Shaktikanta Das also discussed the possibility of expanding India’s real-time gross settlement system (RTGS) to allow cross-border transactions in major global currencies. He said this could be explored through bilateral or multilateral agreements to increase trade efficiency. The governor said this could benefit remittance markets by lowering costs and speeding up international money transfers.
The governor added that CBDCs can play a key role in promoting domestic and cross-border payment systems, particularly in an intuitive way. India’s readiness to materialize digital solutions for efficient payments drives the country’s launch of both wholesale and retail CBDCs. As central banks worldwide try to modernize financial systems, Das underscored that central banks globally are considering such innovations.
Rapid Credit Market Growth Raises Financial Concerns
Das warned that global monetary policy divergences could cause capital flow and exchange rate volatility at the expense of financial stability. He referred to recent events, such as the sharp appreciation of the Japanese yen, which has disrupted the global markets. Such fluctuations could create unpredictable reversals that would present new challenges for regulators.
He is also worried about the fast growth in exclusive credit markets, which have grown without controls and not entered a downturn. He said these markets aren’t subject to the stress testing that could cushion them during downturns. Also, interest rates are rising on debt to fight inflation, and debt servicing costs are wiping out much of the income in some areas, creating financial instability.
Das also warned that financial markets could be destabilized by stretched asset valuations in specific sectors, raising concerns about asset valuations overall. The correction in the prices of commercial real estate (CRE) in some areas could stress small and medium-sized banks, given their high exposure to that space, he pointed out. However, these risks could be compounded by the interlink between CRE, other nonbank financial institutions, and the broader banking system.
Financial institutions should ensure the quality of their assets when interest rates rise, as the cost of borrowing rises accordingly. The governor has advised banks to increase their liquidity buffers and prepare to meet unlikely shocks, particularly in today’s global economic environment. He concluded that financial resilience is one key to navigating these emerging challenges.
