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As banks' AI 'scores' surge, why the RBI is flagging concerns of systemic risks

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Last Updated04/11/2024

Dovetailing artificial intelligence (AI) and machine learning (ML) tools progressively into core operations, India’s bank sector players are leveraging AI to improve customer experience, pare costs, manage risks and drive growth through chatbots such as ‘iPal’ and ‘ILA’.

Indian banks are increasingly leveraging AI tools to streamline services, manage risks, and enhance customer engagement, with private banks leading the charge. Tools like ICICI Bank’s "iPal" and SBI Cards’ "ILA" are now integral to the customer experience, handling queries, facilitating transactions, and personalizing offers.
As AI adoption grows, however, the Reserve Bank of India (RBI) is emphasizing caution, citing potential risks associated with concentrated reliance on a limited number of technology providers.

Customer Service: Bots like "iPal" and "ILA" handle general banking queries, assist with transactions, and guide customers through application processes.
Pre-Approved Loans: AI algorithms identify eligible customers and provide instant loans through digital platforms without extensive paperwork.
Eligibility Screening: Customer transactions are analyzed for potential loan eligibility, enabling pre-approved offers and streamlined loan processes.
Early Warning Systems: AI monitors accounts for signs of financial stress, allowing banks to act early to reduce credit risk.

According to RBI's recent analysis, private sector banks have seen a nearly six-fold increase in AI mentions in annual reports from 2015-16 to 2022-23, with public sector banks also showing a three-fold rise. Larger banks, given their resources, have adopted AI faster due to benefits in data integration and efficiency gains.

RBI Governor Shaktikanta Das cautioned that heavy AI reliance could bring systemic risks, particularly if failures in dominant technology providers cascade across the financial sector. He also warned about cybersecurity risks, the opacity of AI systems, and potential algorithmic biases.
The RBI underscores that while AI provides advantages, banks must retain control over its deployment, ensuring that technological solutions are used to strengthen rather than dominate the sector.