AI-driven predictive models can prevent 'catastrophic' incidents for financial system: M Nagaraju

Mumbai, Jan 9 (PTI) DFS Secretary M Nagaraju on Friday said the role of AI and Gen AI will be vital to improving existing tech platforms and stressed the need for AI-driven predictive models to help prevent "catastrophic" incidents in the financial system.

Speaking at the Indian Banking Association (IBA) annual banking technology conference here, he said the financial sector across the world is moving to adopt AI, Generative AI, in its processes.

"Sooner or later, these techs must be brought to the financial institutions in India, without which we will stay behind in the race to innovation," he said, adding that proper care needs to be taken to ensure that the data used to train the AI algorithm is free from any bias and collusion, thereby ensuring its effectiveness in the platform.

The traditional system can only react once the event has triggered, he said and added that "we need a strong risk framework, backed by robust corporate governance structure, solid and scalable IT platforms, including cyber risk prevention ecosystems." "We definitely need AI-driven models, which can predict the events by analyzing global and domestic market conditions, the current state of individual institutions, their strengths, their weak spots, and providing a roadmap to fill the gaps, thereby preventing incidents which can turn out to be catastrophic for the financial system," Nagaraju emphasized.

Authorities in various jurisdictions, such as Europe, Hong Kong, and Singapore, have issued guidance and frameworks on AI, along with institutional mechanisms to mitigate potential risks posed by AI systems, according to him.

The RBI is incorporating AI-specific guidance in its various master directions in recent times, and Canada has come up with PRE-AI, Framework for Responsible Antithetical Enhancement of Artificial Intelligence, which seeks to create a progressive roadmap for all stakeholders, and to leverage the potential of AI in the financial sector, he said.

A massive investment is needed to build a robust AI-generated ecosystem. "We need to build an ecosystem which could attract investors from across the globe," he added.

"Given the criticality of the financial sector for the country's growth, the regulators have always come up with an operational resilience framework to absorb shocks from pandemics, cyber incidents, technology failures, and natural disasters, which would provide additional safeguards to the financial system," Nagaraju said.

Noting that in the current world, wherein the focus is on building a sustainable future, the principle of responsible banking becomes much more vital, he said and added that proper care needs to be taken to ensure that the data used to train the AI algorithm is free from any bias and collusion, thereby ensuring its effectiveness in the platform.

"The moot point is whether the existing strategies are enough to drive the banking sector towards the emerging dynamics of responsible and resilient banking, or do we need additional elements and catalysts which could drive us towards the intended objectives of responsible and resilient banking," he said. PTI IAS DRR DRR