AI adoption in banking: India's opportunity to transform financial services

During his recent visit to India, Nvidia Chief Executive Officer Jensen Huang underscored the country’s ability to leapfrog into the era of innovation by adopting the latest in artificial intelligence (AI). AI has the power to democratise technology and empower individuals, thereby extending economy-wide benefits. One of the areas where AI can potentially improve outcomes is banking and finance. In this regard, a new paper, published in the latest Monthly Bulletin of the Reserve Bank of India, using a text-mining approach, attempted to explore the extent of AI adoption in Indian banking. By making AI accessible to everyone, India can unlock opportunities in the banking sector. The findings reveal that the extent of adoption by a bank is influenced by its ownership structure, size, and measure of financial health. Accordingly, banks with large asset sizes and capital-to-risk weighted asset ratios have a higher AI adoption score. After all, large and well-capitalised banks have capital buffers and are better positioned to take investment risks in new technologies and pursue solutions.

 

Banks with large asset sizes and those endowed with greater resources are more inclined to invest in innovation and modern technologies like AI. Owing to difficulties in coordination across verticals, they are also likely to achieve higher net gains from adopting the latest technologies and data integration. In terms of ownership structure, private banks tend to adopt AI more than their public-sector counterparts. An analysis of annual reports of banks from 2015-16 to 2022-23 shows usage of AI-related keywords increased six-fold for private-sector banks and by more than three times for public-sector banks. Surprisingly, the paper finds that return on assets, the level of non-performing assets, and the retail lending ratio are not statistically significant for explaining AI score — possibly because these are still early days. Indian banks are increasingly focusing on the deployment of AI to enhance customer experience through personalised services, improve productivity, and increase the profitability of their operations. AI is also being leveraged for regulatory compliance. Banks are increasingly employing data analytics, cloud computing, and big data in fraud detection and predictive analytics.

 

Previously, a report by McKinsey estimated the potential for value creation through AI and related technologies in global banking was around $1 trillion annually. Further, generative AI could add value worth $200-340 billion annually, largely from increased productivity. The economic impact will likely benefit all banking segments, with the greatest absolute gains in the corporate and retail sectors. Globally, JPMorgan Chase retained its leading position in AI adoption in 2024, according to the recently released “Evident AI Index”. Prioritising data and infrastructure modernisation to drive AI adoption, the bank plans to have 75 per cent of data and 70 per cent of applications migrated to cloud by the end of the year. Indian banks can also consider a similar approach to allow better management of data, increase security, and ensure the continuity of services. Better adoption of technology and the use of AI could also increase financial inclusion. It can potentially make credit more accessible and improve lending standards. AI can be used not only to improve underwriting standards but also to monitor loans and flag potential risks.