RBI Governor Warns of AI Risks in Financial Sector, Calls for Caution

Careful about AI, it's legit caveat from RBI

AI has the potential to revolutionise the 21st century like the steam engine did for the 19th century. However, the technology poses risks due to its concentration in a few companies and its ability to act autonomously. Financial regulators like RBI's Shaktikanta Das have raised concerns about these dangers, stressing the need for caution.The hyperbolic buzz of a buzzword notwithstanding, AI has the potential to be what the steam engine was for the 19th century for the 21st century. However, as it stands today, AI is a locomotive with an accelerator, but no brakes. And that, understandably, worries financial markets regulators. Shaktikanta Das, who has been pushing digitisation at the central bank, has raised a red flag about the pitfalls of over-depending on AI and ML. RBI guv's caveat comes from the fact that AI and ML technologies are concentrated in a few companies, and that doth not make for a pleasant setting for financial stability. This is the concentration risk that no regulator wants. Given the head start the likes of Google and Microsoft have because of access to data and financial muscle, there is very little in sight to believe that the expertise would become widely available soon. Unlike conventional computing, AI is an animal that not only doesn't do what it has been ordered, but it can behave much like a human to decide by itself on what to do, or 'hallucinate'. And therein lies the danger. Elon Musk threatened to ban Apple products in Tesla, when Apple rolled AI into its OS in its iPhone 16 model, citing security threats. Ultimately, Apple launched iPhone 16 without AI technology. One of the three 2024 Economics Nobel winners, Daron Acemoglu, has questioned assumptions and theories about productivity gains that AI could deliver. While the benefits are still in the realm of assumptions, the dangers it poses are real. The algorithms that drive AI are opaque, and those who create them don't have control over it either. When developers like Apple and Google themselves aren't sure about control over AI, RBI's warning helps temper the expectations.

A critique of RBI Governor's remarks on AI and BigTech dominance

Disclaimer: This content generated by AI & may have errors or hallucinations. Edit before use. Read our Terms of use "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," RBI governor Shaktikanta Das highlighted at an RBI@90 High-Level Conference organised by the Reserve Bank of India in New Delhi yesterday. While acknowledging that "artificial intelligence (AI) and machine learning (ML) have opened new avenues of business and profit expansion for financial institutions," he warned that these technologies "also pose financial stability risks." More from Das on AI Das also hinted at moves to reduce the cost of cross-border remittances, saying that "Remittances are the starting point for many emerging and developing economies, including India, to explore cross-border peer-to-peer (P2P) payments. We believe there is immense scope to significantly reduce the cost and time for such remittances." A key to this might be the expansion of India's Digital Public Infrastructure, which he said, "has facilitated the development of high-quality digital financial products with enormous potential for cross-border payments." Add to this his comments on India's 24×7 Real Time Gross Settlement System (RTGS), and you have the indication of a plan: "The feasibility of expanding RTGS to settle transactions in major trade currencies such as USD, EUR and GBP can be explored through bilateral or multilateral arrangements." Das also pointed towards India's attempts at Central Bank Digital Currency, i.e. a central bank-run cryptocurrency, saying that "Central bank digital currencies (CBDCs) is another area which has the potential to facilitate efficient cross-border payments. India is one of the few countries that have launched both wholesale and retail CBDCs." "Going forward," he said, "harmonisation of standards and interoperability would be important for CBDCs for cross-border payments and to overcome the serious financial stability concerns associated with cryptocurrencies." Das said that with online banking that enables transactions in seconds and "deep social media presence," banks have to remain alert "in the social media space" because "rumours and misinformation can spread very quickly and can cause liquidity stress."

India cenbank chief warns against financial stability risks from growing use of AI

MUMBAI, Oct 14 (Reuters) - The growing use of artificial intelligence and machine learning in financial services globally can lead to financial stability risks and warrants adequate risk mitigation practices by banks, the Governor of the Reserve Bank of India said on Monday. "The heavy reliance of AI can lead to concentration risks, especially when a small number of technology providers dominate the market," Shaktikanta Das said at an event in New Delhi. Advertisement · Scroll to continue This could amplify systemic risks as failures or disruptions in these systems may cascade across the financial sector, Das added. India's financial service providers are using AI to enhance customer experience, reduce costs, manage risks and drive growth through chatbots and personalised banking. The growing use of AI introduces new vulnerabilities like increased susceptibility to cyber attacks and data breaches, Das said. Advertisement · Scroll to continue AI's "opacity" makes it difficult to audit and interpret algorithms which drive lender's decisions and could potentially lead to "unpredictable consequences in the market," he warned. Separately, Das said private credit markets have expanded rapidly across the globe with limited regulation, posing significant risks to financial stability, particularly since these markets have not been stress-tested in a downturn. Reporting by Siddhi Nayak; Editing by Eileen Soreng Our Standards: The Thomson Reuters Trust Principles., opens new tab

India cenbank chief warns against financial stability risks from growing use of AI

MUMBAI (Reuters) - The growing use of artificial intelligence and machine learning in financial services globally can lead to financial stability risks and warrants adequate risk mitigation practices by banks, the Governor of the Reserve Bank of India said on Monday. "The heavy reliance of AI can lead to concentration risks, especially when a small number of technology providers dominate the market," Shaktikanta Das said at an event in New Delhi. This could amplify systemic risks as failures or disruptions in these systems may cascade across the financial sector, Das added. India's financial service providers are using AI to enhance customer experience, reduce costs, manage risks and drive growth through chatbots and personalised banking. The growing use of AI introduces new vulnerabilities like increased susceptibility to cyber attacks and data breaches, Das said. AI's "opacity" makes it difficult to audit and interpret algorithms which drive lender's decisions and could potentially lead to "unpredictable consequences in the market," he warned. Separately, Das said private credit markets have expanded rapidly across the globe with limited regulation, posing significant risks to financial stability, particularly since these markets have not been stress-tested in a downturn. (Reporting by Siddhi Nayak; Editing by Eileen Soreng)

India Cenbank Chief Warns Against Financial Stability Risks From Growing Use of AI

MUMBAI (Reuters) - The growing use of artificial intelligence and machine learning in financial services globally can lead to financial stability risks and warrants adequate risk mitigation practices by banks, the Governor of the Reserve Bank of India said on Monday. "The heavy reliance of AI can lead to concentration risks, especially when a small number of technology providers dominate the market," Shaktikanta Das said at an event in New Delhi. This could amplify systemic risks as failures or disruptions in these systems may cascade across the financial sector, Das added. India's financial service providers are using AI to enhance customer experience, reduce costs, manage risks and drive growth through chatbots and personalised banking. The growing use of AI introduces new vulnerabilities like increased susceptibility to cyber attacks and data breaches, Das said. AI's "opacity" makes it difficult to audit and interpret algorithms which drive lender's decisions and could potentially lead to "unpredictable consequences in the market," he warned. Separately, Das said private credit markets have expanded rapidly across the globe with limited regulation, posing significant risks to financial stability, particularly since these markets have not been stress-tested in a downturn. (Reporting by Siddhi Nayak; Editing by Eileen Soreng)

AI amplifies systemic risk to banks: India Reserve Bank boss

Who also worries misinformation on social media could threaten liquidity The governor of India's Reserve Bank, Shri Shaktikanta Das, yesterday warned that AI - and the platforms that provide it - could worsen systemic risk to the nation's financial system. In a keynote address [PDF] to the RBI@90 High-Level Conference, Das noted that artificial intelligence and machine learning "have opened new avenues of business and profit expansion for financial institutions." Banks have to ride on the advantages of AI and Big Tech and not allow the latter to ride on them But in his next sentence, the central bank boss warned: "These technologies also pose financial stability risks." Das expressed concern that a small number of providers will dominate the AI market, which could lead to concentration risks. "This could amplify systemic risks, as failures or disruptions in these systems may cascade across the entire financial sector," he warned, adding his concerns that "growing use of AI introduces new vulnerabilities, such as increased susceptibility to cyber attacks and data breaches." Another concern Das expressed is that "AI's opacity makes it difficult to audit or interpret the algorithms which drive decisions." The central banker worries that could mean "unpredictable consequences in the markets." Das stopped well short of recommending the organizations he regulates ignore AI. Instead, he urged "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 Big Tech and not allow the latter to ride on them." The bank boss also urged work to speed and simplify cross-border peer-to-peer payments, suggesting India's Unified Payment Interface could play a role in doing so. He also floated the possibility that nations allow interoperability of their central bank digital currencies to improve cross-border cashflows. Social media is also on Das's mind - he observed that "rumors and misinformation" spread on such services have the potential to "cause liquidity stress." "Banks have to remain alert in the social media space and also strengthen their liquidity buffers," he advised. ®

India Central Bank Head Warns of AI 'Opacity' in Finance | PYMNTS.com

The head of India's central bank is warning about AI use in financial services. Reserve Bank of India Governor Shaktikanta Das said Monday (Oct. 14) that the increased usage of artificial intelligence (AI) and machine learning in the financial world can trigger stability risks, requiring proper risk mitigation practices by banks. "The heavy reliance on AI can lead to concentration risks, especially when a small number of technology providers dominate the market," said Das, whose comments at an event in New Delhi were reported by Reuters. He added that this could exacerbate systemic risks as failures or disruptions in these systems could spill over into the larger financial sector. As Reuters notes, financial services companies in India, like their counterparts around the world, are turning to AI to improve customer experience, cut costs, manage risks and fuel growth via things like chatbots and personalized banking. Das said that the increased use of AI presents new vulnerabilities such as a greater risk of cyberattacks and data breaches. He also warned that AI's "opacity" makes it tough to examine algorithms which help lenders make decisions and could potentially lead to "unpredictable consequences in the market." His comments echo from the U.S. Treasury Department issued earlier this year about the possibility of AI-driven fraud. A study by the Treasury found a "troubling lack of data sharing on fraud prevention, further disadvantaging smaller financial institutions," as PYMNTS wrote. Limited data holds back their ability to build effective AI fraud defenses, while bigger institutions leverage massive data troves for model training. Narayana Pappu, CEO of Zendata, a data security and privacy compliance solutions firm, told PYMNTS in an interview that the greatest barrier for smaller financial institutions in using AI for fraud detection is not model creation but quality and standardized fraud data, adding that financial institutions can serve as a node to aggregate the data. This is all happening at a moment when, as PYMNTS wrote last week, AI is reshaping finance. PwC is projecting efficiency gains in banking, FINOS launching an AI governance framework, and Devexperts introducing AI-powered trading to Discord. "These advancements underscore AI's influence across financial services, from boosting security and streamlining operations to enhancing user access and tackling governance issues," that report said.

AI risks financial stability, warns Indian central bank governor

The Reserve Bank of India (RBI) has expressed concerns about the impact of artificial intelligence on financial stability, joining other major monetary authorities in raising red flags. Speaking at an event in New Delhi on Oct. 14, RBI Governor Shaktikanta Das highlighted potential risks posed by the increasing use of AI and machine learning in financial services, according to a Reuters report. Indian central bank AI concerns Das pointed to concentration risks stemming from the dominance of a few large technology providers, which could lead to systemic risks if AI systems fail or experience disruptions across the industry. While AI helps improve customer service and reduce costs, Das warned of other new vulnerabilities, including increasing amounts of cyberattacks, data breaches and the challenge of auditing opaque AI-driven algorithms. Related: UAE stablecoin issuer gets nod from central bank Das's concerns echo those of other global financial institutions. In a July report, the European Central Bank (ECB) outlined its concerns regarding the impact of AI on financial stability. The ECB said while AI does "bring benefits to the table," when AI suppliers are too concentrated and the tools are widely used in the financial sector, "operational risk, market concentration and too-big-to-fail externalities may increase." It added: "Widespread AI adoption could heighten the potential for herd behaviour, market correlation, deception, manipulation and conflicts of interest." It also warned that widespread AI adoption could lead to herd behavior, market manipulation and inflationary pressures. One of the examples given is the inflated demand for energy worldwide due to the computational power required for sustaining AI, pushing up energy costs. AI-driven financial stability challenges More recently on Sept. 20, the Central Bank of Canada also released a brief on its concerns regarding AI and financial instability. "AI adoption could also lead to financial stability issues," it reported, particularly as "banks and financial institutions are investing in AI to improve customer service, to enhance compliance and risk management, and to better assess credit and liquidity risk." However, it also pointed to operational risks becoming concentrated in a few third-party service providers and spreading through an entire financial system: "The predictive ability of AI can deteriorate unexpectedly, suffer from hallucinations or be biased and discriminatory. And AI makes everything move faster, which could amplify severe market runs and herding behavior in times of market volatility." As AI continues to penetrate the financial sector, central banks and financial regulators globally are urging collaboration between financial institutions, regulators and tech developers to mitigate these risks and safeguard the long-term stability of the global financial system.