The increasing adoption of artificial intelligence (AI) and machine learning in financial services globally can lead to financial stability risks, and warrants adequate risk mitigation practices by banks, Reserve Bank of India governor Shaktikanta Das said on Monday.
In his keynote address at the conference on ‘Central Banking at Crossroads’, Das said the possibility of extending real-time gross settlement to settle transactions in key trade currencies like US dollar, euro and pound could be explored through bilateral or multilateral agreements.
“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,” said Das. The growing use of AI introduces new vulnerabilities like increased susceptibility to cyber attacks and data breaches.
“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 central bank chief said.
The increasing digitalisation of financial services has globally improved the efficiency of the financial sector. However, it has also introduced new challenges that central banks must address.
“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,’’ Das said.
The private credit markets have expanded rapidly with limited regulation. They pose significant risks to financial stability, particularly since they have not been stress-tested in a downturn, he added.
India and a few other economies have already commenced efforts to expand linkage of cross-border fast payment systems both in the bilateral and multilateral modes, Das said.
Remittances are the starting point for many emerging and developing economies, including India, to explore cross-border peer-to-peer payments. “We believe there is immense scope to significantly reduce the cost and time for such remittances,” he said, adding that the Central Bank Digital Currency (CBDC) is another area which has the potential to facilitate efficient cross-border payments.
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.
