As artificial intelligence (AI) and machine learning revolutionize global financial services, the Reserve Bank of India (RBI) Governor, Shaktikanta Das, has issued a stern warning today, urging banks to implement adequate risk mitigation measures to avoid financial instability.
Speaking at an event in New Delhi, Das made mention the growing reliance on AI, which, while enhancing customer experience and driving growth, also poses significant risks to the financial system.
In his illustration, despite its high cost of production due to its complexity, AI includes advanced software that must be regularly updated.
“The heavy reliance on AI can lead to concentration risks, especially when a small number of technology providers dominate the market,” Das stated.
He added that AI has the potential risk for systemic disruptions, explaining that failures in these AI-driven technologies could have cascading effects across the financial sector.
Report has it that India’s financial service providers have increasingly adopted AI-driven technologies such as chatbots and personalized banking to reduce costs and improve efficiency.
However, Das stressed that this advancement introduces new vulnerabilities, notably a higher susceptibility to cyber attacks and data breaches.
“AI’s opacity makes it difficult to audit and interpret algorithms, which could lead to unpredictable consequences in the market,” he warned.
In addition, Das pointed out the risks posed by the rapid expansion of private credit markets globally, which have grown with limited regulatory oversight.
“These markets have not been stress-tested in a downturn as their unchecked growth could exacerbate financial instability if economic conditions worsen.”
In a related development, China has tightened regulations on AI in Financial Services amid global security concerns.
This move was in a bid to mitigate similar risks, as new regulations to oversee the use of AI in the financial sector have been introduced.
This regulation is meant to mandate transparency and regular stress tests for AI-driven systems.
It also reflects a growing global trend toward tighter control over AI’s role in critical financial infrastructures.