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The future of banking is in blockchain and AI - RBI Governor Jain

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(Kitco News) - As the digital rupee pilot continues to progress in India, the Reserve Bank of India (RBI) is now informing banks throughout the country that they should prepare to adopt innovative technologies such as AI and blockchain.

Mahesh Kumar Jain, the Deputy Governor of the RBI, made the recommendation during a speech titled, “Governance in Banks – Driving Sustainable Growth and Stability,” which he presented at a conference organized by the RBI on Wednesday.

The RBI Governor noted that while India’s banking system remains strong, stable and resilient through the collective efforts of the government, RBI and the banks, “addressing downside risks is vital for India's journey towards becoming a developed economy.”

“Banks are needed to mobilize savings, promote financial inclusion, and facilitate job creation by supporting MSMEs, among others,” Jain said. “We would like to highlight the importance of strong governance and leadership which are crucial for long-term health of the sector.”

To help continue progressing forward, the RBI has been increasing its focus on data analysis as a way to assess both idiosyncratic as well as systemic risks to banks.

“By leveraging large volumes of data and advanced analytics techniques, it is possible to gain deeper insights into risk profiles of banks and identify potential vulnerabilities,” Jain said. “The intention is to brief you on these initiatives so that banks can leverage on their own data analytic capabilities to make data-driven risk management decisions, improve risk assessment accuracy, and enhance their ability to anticipate risks.”

Jain noted that banks now face a more challenging landscape which includes technological disruptions, cybersecurity threats, evolving customer expectations, global headwinds, and the need to attract and retain talent.

“The ongoing Fintech revolution in banking is bringing a disruptive paradigm shift in banking services,” he said. “Indeed, the pace of technological changes is so rapid that banks will have to transform like technology companies continuously innovating and investing in technological upgradations. The risks of cyber-attacks, data breaches, and operational failures have also increased.”

He went on to highlight the recent banking struggles around the world, saying that some banks have adopted “inherently risky strategies with the confidence that their bank has mitigating controls.”

“It is important for banks to carefully assess their own unique circumstances and capabilities, conduct thorough analysis, and tailor their strategies accordingly,” he said. “While it can be valuable to learn from the experiences of other banks, adopting their strategies without considering the specific context and requirements of the organization may lead to unfavorable outcomes. Therefore, Boards should be cognizant of their business model and its potential downsides, both in near term and in future.”

To help address the evolving nature of the risks posed to the banking system, Jain recommended “the building up of organizational resilience to adapt to the changing landscape and stay prepared for future risks.”

This includes establishing good governance, prioritizing depositors’ interests and maintaining their trust, gathering a competent and independent board, engaging with risk oversight, establishing a risk management framework, remaining in full compliance with laws, and keeping sustainability in mind, he said.

Crypto transactions in India are now subject to AML laws

The RBI is currently in the process of harnessing advanced analytics, artificial intelligence and machine learning to gain better insights into the operations of supervised entities.

Jain said that the future of banking “is expected to be shaped by advancements in technology leading to greater business and process automation, changing customer expectations, and evolving regulatory landscapes.”

“To prepare for the future, Indian banks will need to focus on digital transformation, enhance customer experience, adopt innovative technologies such as AI and blockchain, invest in cybersecurity measures, look for opportunities to derive synergistic benefits through collaboration with other players as well as upskilling their workforce to meet the demands of the digital era.”

Prioritizing risk management, regulatory compliance, and sustainability were also cited by Jain as a way to “ensure long-term resilience and competitiveness in the evolving banking landscape.”

In closing, Jain reiterated that it is the responsibility of the Boards of Directors at banks to ensure the sustainable growth and stability of the banking sector. “As custodians of the interests of various stakeholders, including depositors, shareholders, regulators, and the wider society, Boards must adopt a proactive and strategic approach,” Jain said. “The Board must remain vigilant, adaptive, and continuously assess the bank's performance, risks, and opportunities, and take timely and informed decisions.”

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