RBI Governor Shaktikanta Das Urges Banks to Strengthen Risk Management Amid AI Concerns

Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), emphasized the need for banks to bolster their liquidity buffers and exercise caution regarding social media and the use of artificial intelligence (AI) during his speech at the RBI@90 High-Level Conference on Monday.

"Banks have to remain alert in the social media space and strengthen their liquidity buffer to deal with any untoward situation," Das said.

He highlighted the challenges posed by technology, stating that reliance on AI could create financial stability risks. "The heavy reliance on AI can lead to concentration risks, especially when a small number of tech providers dominate the market," he noted.

Das urged lenders and financial institutions to implement effective risk mitigation strategies against these emerging risks. "In the ultimate analysis, banks have to ride on the advantages of AI and Bigtech and not allow the latter to ride on them," he explained.

He pointed out that increased AI usage brings new vulnerabilities, including a higher risk of cyberattacks and data breaches. Das also warned that the "opacity" of AI makes it challenging to audit and interpret the algorithms that guide lending decisions, potentially leading to "unpredictable consequences in the market."

Additionally, he mentioned the rapid expansion of private credit markets globally, which operate with limited regulation, posing significant risks to financial stability, especially since these markets have not been stress-tested during downturns.

Das continued his message for other emerging economies, urging them to strengthen their risk management frameworks. He explained that diverging monetary policies worldwide are causing volatility in capital flows and exchange rates. "Emerging economies are having to strengthen their policy frameworks and buffers to manage this external flux and mitigate its adverse consequences," he said.

Recently, the RBI directed banks, non-banking financial companies (NBFCs), and other regulated entities to utilize information from both internal and external sources for their risk assessments. Regulated entities must regularly conduct 'Money Laundering and Terrorist Financing Risk Assessments' to identify and mitigate risks associated with money laundering (ML), terrorist financing (TF), and proliferation financing (PF) for various clients, geographic areas, products, services, and delivery channels.

To assist in this process, the central bank has issued guidance on internal risk assessments for money laundering and terrorist financing, specifically targeting staff and practitioners involved in anti-money laundering (AML), countering the financing of terrorism (CFT), and counter-proliferation financing (CPF) activities.

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