Reserve Bank of India Governor Sanjay Malhotra said the Indian banking system remains well positioned to meet emerging challenges, with the sector robust on capital, profitability and asset quality.
Speaking at FIBAC, Malhotra said regulation making will be guided by three to four major priorities, including financial stability, customer centricity, ease of doing business and reducing the cost of intermediation.
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He said good progress is being made on each of these priorities, while the regulatory framework has been boosted by improvements in supervision. The regulatory burden on bank boards has also been reduced.
Digital Infrastructure Can Aid AI Adoption
Malhotra highlighted India's advanced digital public infrastructure, saying efforts are underway to expand the Unified Lending Interface and Account Aggregator framework.
Private-sector banks can use these tools to enhance the use of artificial intelligence (AI), he said, adding that well-deployed AI can improve accessibility across the financial system.
However, careless deployment of AI could entrench new forms of exclusion and create instability at a pace that banks may struggle to handle, Malhotra cautioned.
He said AI and machine learning can be used to identify doubtful transactions and counter frauds, urging banks to deliberate on where they stand on AI adoption.
Banks must build the right governance structures around AI, with the effort requiring a board-driven strategy, sustained investment and strong intent. Fairness in AI, he said, is a design requirement from day one.
Malhotra also flagged heightened vendor dependence as a third-party risk and said compliance with the Digital Personal Data Protection Act is a must. Cyber vulnerability remains another key risk.
High Global Debt, Valuations Among Key Risks
On global risks, Malhotra said public debt levels in advanced economies are high, while growing interconnectedness between NBFCs and the unregulated space globally remains a concern, although it is not much of a concern in India.
He also flagged elevated equity valuations, saying any correction could have spillover effects. Geopolitical uncertainties, cyber risk and interconnectedness remain key risks.
Despite these risks, Malhotra said the Indian banking system is well positioned to meet the challenges, with the banking sector robust on healthy capital, profitability and asset quality.
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