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 develop in India, the Reserve Bank of India (RBI) is now advising banks across the country to 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, the RBI and the banks, “addressing downside risks is critical to 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 want to highlight the importance of strong governance and management which is essential to the long-term health of the sector.”

To help continue progress, the RBI has increased its focus on data analytics as a way to assess both idiosyncratic and systemic risks for banks.

“By leveraging large amounts of data and advanced analytical techniques, it is possible to gain deeper insight into the risk profiles of banks and identify potential vulnerabilities,” said Jain. “The intention is to inform you about these initiatives so that banks can leverage their own data analytics capabilities to make data-driven risk management decisions, improve risk assessment accuracy and improve their ability to predict risk.”

Jain noted that banks now face a more challenging landscape that includes technological disruption, cyber security 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,” he said. “In fact, the pace of technological change is so high that banks will have to transform themselves as technology companies, continuously innovating and investing in technological upgrades. The risk of cyber-attacks, data breaches and operational failures has also increased.”

He went on to highlight the recent banking struggles around the world, saying some banks have adopted “inherently risky strategies with confidence that their bank has restrictive 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 taking into account the specific context and requirements of the organization can lead to unfavorable results. Therefore, boards should be aware of their business model and its potential drawbacks, both in the short term and in the future.”

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

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

The RBI is currently leveraging advanced analytics, artificial intelligence and machine learning to gain better insight into the operations of monitored entities.

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

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

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

Finally, Jain reiterated that it is the board’s responsibility in the banks to ensure sustainable growth and stability in the banking sector. “As stewards of the interests of various stakeholders, including depositors, shareholders, regulators and society at large, boards must adopt a proactive and strategic approach,” Jain said. “The board must be vigilant, adaptable and continuously assess the bank’s performance, risks and opportunities, and make timely and informed decisions.”