Banking Central | Time may be right for RBI to frame rules on use of AI in banking

AI adoption is expected to profoundly impact banking operations, particularly in risk assessment, fraud prevention, customer service, investment strategies, and regulatory compliance.

Did you notice that a large part of your communication with the bank these days doesn't involve a human being on the other side? Thanks to artificial intelligence (AI), human roles are shifting to make way for more automated solutions. And, the human-computer interface is widening its ambit by the day, shows a Reserve Bank of India (RBI) study of emerging trends.

Indian banks are increasingly integrating AI and machine learning (ML) technologies across various operations, from customer service to trading, reads an article in the latest RBI bulletin.

The RBI article is based on data from the annual reports of 32 Indian commercial banks over an eight-year period, from FY 2015-16 to FY 2022-23. It shows a growing adoption of AI and related technologies by the lenders. These include the deployment of AI-driven chatbots and virtual assistants, designed to enhance customer interactions and offer personalised services. With these technologies, banks are providing quicker responses to customer inquiries, streamlining account management, and delivering customised financial advice, the annual reports claimed.

AI is also reshaping trading operations. Many financial institutions now use ML algorithms on their trading desks— whether in proprietary trading, forex, or fixed-income — to develop sophisticated, real-time trading strategies aimed at boosting profitability.

A survey conducted in the report showed that approximately 83 percent of respondents believe that AI has

improved customer experience, while over 50 percent reported enhanced productivity, revenue growth, and cost reductions because of AI implementation.

In fraud detection alone, nearly 58 percent respondents reported AI usage, while 54 percent noted AI’s impact on optimising IT operations. Other areas benefiting from AI include digital marketing, risk assessment, customer personalisation, and portfolio optimisation.

This transition to technology has not come without its own set of challenges. While AI has brought in convenience, it has also produced new risks, such as cyber vulnerabilities and potential online fraud.

RBI Governor Shaktikanta Das recently highlighted such risks in his keynote at the RBI@90 High-Level Conference in New Delhi. He cautioned that an over-reliance on AI could create concentration risks, given the limited number of technology providers in the sector. He warned that a disruption in these systems could ripple across the financial landscape, potentially amplifying systemic risks.

One of AI’s limitations, as Das pointed out, lies in its opacity. Its algorithms can be difficult to audit or interpret, making outcomes potentially unpredictable. For banks, this lack of transparency presents challenges in managing both compliance and risk effectively.

The RBI bulletin noted that the AI adoption is expected to profoundly impact banking operations, particularly in risk assessment, fraud prevention, customer service, investment strategies, and regulatory compliance. The AI-driven challenges, such as potential bias, lack of transparency, and ethical concerns, warrant thorough evaluation, especially considering the broader implications for the financial sector and the economy, it said.

The RBI article pointed out that while both private and public sector banks are steadily stepping up investments in AI and related technologies, the rate of adoption is higher among private lenders, indicating the sector’s accelerated shift towards digital transformation.

The RBI chief observed that as more banking operations shift to automated technology, keeping a track on a real time basis will be even more challenging for the central bank, auditors, and other government agencies.

As of now, there are no comprehensive regulations for banks on the use of artificial intelligence. As AI takes more hold in the industry, it makes sense for the watchdog to thrash out clear regulations in the use of AI in the banking operations. The regulator could draw a line specifying which are the services and operations where banks could use the technology and where they should not.

The regulations could also throw light on how customers can seek grievance redressal in case of disputes involving the use of AI in banking transactions. This is important considering that there is a possibility for the rise in customer complaints linked to AI transactions as AI becomes more popular in banking. Clear RBI rules will help enable prudent usage of AI in banking and eliminate uncertainty in case of disputes.