Heavy reliance on AI can lead to concentration risks, says RBI governor

Banks have to ride on the advantages of AI and Bigtech and not allow the latter to ride on them, says Das

Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday cautioned banks on increasing penetration of artificial intelligence (AI) in the financial services globally, saying that it also poses financial stability risks and warrants adequate risk mitigation practices.

“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 cautioned.

“Moreover, 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 which drive decisions. This could potentially lead to unpredictable consequences in the markets,” the governor said at at a conference organised by the RBI in Delhi. 

Das said that 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. 

Das also emphasised that in the modern world, with deep social media presence and vast access to online banking with money transfer happening in seconds, wherein rumours and misinformation can cause liquidity stress, banks have to remain alert in the social media space and also strengthen their liquidity buffers.

In a draft circular in July, the RBI has proposed to tighten norms related to liquidity coverage ratio (LCR) by increasing the run off factor for retail deposits in view of the rising number of mobile and internet banking users. 

The regulator has proposed to impose an additional run-off factor of 5 per cent on both stable and less stable retail deposits that are enabled with internet and mobile banking facilities.

Run-offs are when individuals or businesses withdraw their deposits, which are not anticipated by banks.

Stable retail deposits enabled with IMB will have a 10 per cent run-off factor, and less stable deposits will have a 15 per cent run-off factor.