Reserve Bank of India Governor Shaktikanta Das on Monday said that growing digitalisation of financial services has enhanced the efficiency of the financial sector across the globe. However, it has also brought in several challenges which central banks have to deal with.
In his keynote address at the conference on “Central Banking at Crossroads”, Das said, “For instance, in the modern world with deep social media presence and vast access to online banking with money transfer happening in seconds, rumours and misinformation can spread very quickly and can cause liquidity stress. Banks have to remain alert in the social media space and also strengthen their liquidity buffers.”
The RBI Governor said that while most of the innovations have been at the national level focusing on retail payments, the market for cross-border payments has also expanded substantially.
“The significant volume of cross-border worker remittances, the growing size of gross flows of capital, and the increasing importance of cross-border e-commerce have acted as catalysts to this growth. 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,” he said.
Speaking about artificial intelligence (AI) and machine learning (ML), the Governor said that they have opened new avenues of business and profit expansion for financial institutions.
However, he added, these technologies also pose financial stability risks.
“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. Moreover, the growing use of AI introduces new vulnerabilities, such as increased susceptibility to cyberattacks and data breaches,” he said.
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, he warned.
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, Das said.
