Mumbai: Reserve Bank of India governor Sanjay Malhotra on Tuesday urged Indian banks to accelerate adoption of artificial intelligence (AI) by stepping up investment in technology, infrastructure and staff upskilling, while warning that broader use of the technology also brings fresh risks.
Adopt with understanding, not haste
Speaking at an industry event in Mumbai, Malhotra said banks must not only deploy AI but do so with a full understanding of the systems they introduce. He cautioned that wider use of AI could generate biased or opaque decisions and create challenges for data privacy and cybersecurity.
“We have much at stake,” Malhotra said. “The banks that will win in the AI era will not necessarily be the ones that adopt AI faster or the most. They will be the ones who adopt it with full understanding of what they are deploying.”
The governor emphasised that heavy reliance on a small number of AI models or technology vendors could leave the banking system vulnerable to correlated errors. He said banks should therefore exercise caution when depending on external vendors for critical AI capabilities.
Regulatory attention and earlier warnings
Malhotra’s remarks reflect growing regulatory concern about AI in finance. Finance Minister Nirmala Sitharaman in April had warned of unprecedented AI-related risks to banks and urged pre-emptive steps to secure IT systems, protect customer data and funds, and enable real-time sharing of threat intelligence.
Central banks globally are scrutinising the use of AI by lenders as cyberattacks, operational failures and model errors become more prominent risks. Regulators are also assessing whether widespread deployment of similar models could create system‑wide vulnerabilities.
Risks and current strengths
In addition to AI-related threats, Malhotra identified geopolitical and trade uncertainties as significant risks for the Indian banking sector. At the same time, he said banks remain well positioned to withstand these challenges, citing robust credit growth, low non‑performing assets (bad loans), healthy liquidity and profitability.
| Area | RBI governor's view |
|---|---|
| AI adoption | Must accelerate investment in tech, infrastructure and upskilling, but adopt with full understanding |
| AI risks | Biased/opaque decisions, data privacy, cybersecurity, vendor concentration |
| Sector resilience | Robust credit growth, low bad loans, healthy liquidity and profitability |
| Macro outlook | Economy expected to emerge stronger with resilient growth, contained inflation and ample foreign exchange reserves |
Malhotra noted that several macro indicators—resilient growth, contained inflation and ample foreign‑exchange reserves—point to a favourable environment for the economy and the banking system.
Implications for banks and policy
The governor’s guidance signals a twin policy thrust: encourage banks to modernise with AI while strengthening safeguards. Practical steps banks will need to consider include:
- Investing in computing infrastructure and secure data management to support AI models.
- Training and upskilling staff so human oversight can identify model errors, bias and misuse.
- Conducting third‑party due diligence and scenario testing to reduce vendor concentration risk.
- Enhancing cyber‑defences and mechanisms for real‑time threat intelligence sharing.
For regulators, the balance is delicate: excessive restriction could slow productivity gains from AI, while insufficient oversight might expose customers and the financial system to outsized harm. Central banks worldwide are exploring governance frameworks, model risk management standards and incident‑reporting norms that may inform India’s approach.
Malhotra’s call adds to a chorus from policymakers warning of novel AI vulnerabilities alongside potential efficiencies. How quickly banks move to implement secure, well‑governed AI systems will shape both competitiveness and systemic resilience in the coming years.
