AI in this decade is what digitsation was in the last: RBI governor

Mumbai: Banks that will win in the artificial intelligence (AI) era will not necessarily be the ones that adopt AI faster but the ones who adopt it with a good understanding of what they are deploying. He described the influence of AI to this decade what digitisation did in 2010s and liberalization held in the 1990s.

He said AI can be used efficiently to build, improve and expand exisiting projects like unified lending interface (ULI), account aggregator which are public good projects on top of which the private sector can build.

"AI, well deployed, can close existing gaps in financial inclusion faster than any preceding technological innovation. Deployed carelessly, it can at the same time entrench new forms of exclusion and instability at a pace that regulators and banks may struggle to keep up with," Malhotra told bankers in his speech at the FICCI-IBA organised conference.


The RBI plans to establish a more approved AI governance policy with clear accountability. RBI will also continue to provide a sandbox as a safe space for testing innovative use cases for banks, he said.

"We have much at stake. We need to further build on our very highly successful Jan Dhan Yojana. We have still a large, underserved MSME credit market which is estimated in tens of lakhs of crores of rupees. A retail credit culture that is only now maturing. Customer service that can be lost and improved. Implementation costs that can be further decreased. And digital frauds that need to be prevented and avoided. We need to leverage AI for this," Malhotra said.

He said the role of bank boards, risk officers, the management, and regulators lis critical as all are expected to work together.

He said AI can change the economics of credit delivery fundamentally by using AI models to use cash flows, GST filings, utility, payment bills, digital platforms and extend the frontier of bankable India.

The technology can also be used improve customer service, by presenting the right product, flag risks and serve a higher number of customers more efficiently. AI can also improve operational efficiency by reducing cost to income in some case by upto 49%.

"Every bank's playbook has to be used to own. It has to be shaped by its customer base. I would urge all banks to deliberate on their understanding of this journey of AI production and what is it that they can do to accelerate its production. You will always need to invest in technology, IT infrastructure, scaling, re-scaling. You have to forge sustainable partnerships, because you may not be able to do all of it on your own and you will have to build the right governance structures," he said adding that to implement these policies will require a deliberate, borderless strategy, backed by sustained investment, and a strong intent, rather than a series of disconnected projects.

Malhotra also touched up the risks associated with AI like lack of information why a loan is rejected, bias and exclusion from a model trained on historical lending data and concentration of a handful of financial models or technology vendors undertaking credit and trading decisions across much of the banking system.

He said banks can just be satisfied by complying with the Digital Personal Data Protection Act. He highlighted cyber and adversarial vulnerability from AI themselves.

"There was a report, I think in July, one of the leading AI firms. They gave the AI the programme to check their systems...Over months all these AI agents were able to collaborate and hack their own systems " he said cautioning banks against such cases.

"For a bank's decision, the ultimate responsibility has to lie with the bank, and not with the vendor or with the algorithm," he said.

He also cautioned banks from depending too much on third-party vendors. "I did mention that you will need to build partnerships with all banks, especially small banks, who may not be able to have their own language, non-language models in AI, you have to depend on outside vendors. And this is perfectly understandable, but then you need to manage risks because governance cannot just stop at our outer walls," he said.