RBI adopting AI, machine learning to gain deeper insights into banks' operations, says deputy governor

To enhance the effectiveness of supervisory frameworks, the RBI has employed various analytical tools.

The Reserve Bank of India (RBI) is in the process of adopting advanced analytics, artificial intelligence and machine learning into supervisory data, while taking necessary safeguards, to gain even deeper insights into the operations of supervised entities, a top RBI official said.

"These initiatives reflect the Reserve Bank's commitment towards harnessing the power of technology and data-driven approaches to strengthen its supervision," said Deputy Governor MK Jain, while speaking at the 25th SEACEN-FSI Conference of the Directors of Supervision of Asia Pacific Economies in Mumbai.

To enhance the effectiveness of supervisory frameworks, the RBI has employed various analytical tools, Jain said. These include an early warning system, stress testing models, vulnerability assessments, cyber key risk indicators, phishing and cyber reconnaissance exercises, targeted evaluations of compliance with KYC/AML norms and Data Analytics, among others, Jain said.

According to Jain, supervisors must closely examine the business models adopted by banks and meticulously assess whether these models align with the institution's risk appetite.

"This evaluation should delve into the level of business growth projections, sustainability of earnings potential, extent of diversification, provisioning cover, and appropriate pricing mechanisms, etc," Jain said. In the recent past, the central bank has been warning banks to increase focus on corporate governance and compliance to avoid a crisis situation in the future, citing the recent US banking crisis.

Jain asserted that governance is of paramount importance and invariably at the root cause of supervisory concerns. Effective corporate governance and sound regulation go hand in hand, reinforcing each other, the deputy governor added.

"The recent bank failures in advanced economies have underscored the pressing need to address governance concerns head-on," Jain said.

IT systems need closer look

The deputy g0vernor further added that supervisors need to examine IT issues holistically. It is crucial to determine whether banks have the capacity to develop robust IT systems that align with their business strategies, Jain said.

"Future-proofing by banks of their IT infrastructure becomes imperative,  necessitating strategic investments in both capital and operational expenditure. As virtual work environments and cyber risks become more prevalent, effective IT governance takes on heightened significance," Jain said.

These comments are significant against the backdrop of the rampant digital outages faced by banks in recent years. The RBI has, time and again, asked banks to invest more to augment their information technology systems.

Focus audit

Further, supervisors must focus on the efficacy of assurance functions viz. risk management, compliance and internal audit, the RBI official said. "The assurance functions serve as a critical safeguard providing independent and objective assessment of the bank's operations, risk management practices, and compliance with regulatory requirements," Jain observed.

By assessing the quality of the assurance functions, supervisors can identify potential vulnerabilities, assess the effectiveness of internal controls, and mitigate risks before they become bigger, he added.