RBI Guv Shaktikanta Das Has A Stern Warning For Financial Firms Relying On AI: 'Could Amplify Systemic Risks'

Das pointed out that the dominance of a few tech companies in the AI space could create concentration risks, with failures in these systems potentially causing widespread disruption.

Das pointed to the divergent monetary policies across countries as a potential cause of volatility in capital flows and exchange rates.

Source : PTI

RBI Governor Shaktikanta Das has raised concerns about the increasing reliance on artificial intelligence (AI) in the financial sector, warning that it could lead to cyber risks and data breaches, potentially undermining India's financial stability. Speaking at the RBI@90 High-Level Conference in New Delhi, Das highlighted the double-edged nature of AI, noting that while it boosts business opportunities, it also presents risks that could disrupt the sector.

“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,” Das said.

Lack Of Transparency Could Complicate Audits

Das pointed out that the dominance of a few tech companies in the AI space could create concentration risks, with failures in these systems potentially causing widespread disruption across financial institutions. AI's lack of transparency also complicates efforts to audit or interpret the algorithms, leading to unpredictable consequences, he added. Financial institutions, he emphasised, must adopt risk mitigation measures to safeguard against these risks.

Das also addressed the growing digitalisation of financial services, warning that misinformation can spread quickly through social media, causing liquidity stress in the banking system. “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.

The RBI has already proposed an additional 5 per cent liquidity buffer for banks with high levels of digitally-linked deposits to manage the risks of quick withdrawals. While banks have requested more leniency, final regulations are still pending.

Divergent Policies Cause Of Volatility

Discussing global financial stability risks, Das pointed to the divergent monetary policies across countries as a potential cause of volatility in capital flows and exchange rates. He referred to the sharp appreciation of the Japanese Yen in August as an example of how such volatility can ripple through global markets.

Additionally, the governor flagged concerns over the rapid growth of private credit markets, which remain lightly regulated and have not been tested in a downturn. He cited the RBI's recent warnings about excessive growth in unsecured loans, particularly in sectors like gold, mortgage, and microfinance.