Majority of banks spend less than 10% on emerging tech: RBI survey
- RBI's survey reveals banks in India allocated under 10% of their IT budget to emerging technologies. While AI and cloud computing are crucial, cybersecurity vulnerabilities persist, prompting the need for better risk mitigation measures.
Banks in India allocated less than 10% of their information technology budget to emerging technologies this year, the Reserve Bank of India has found. This, despite emerging technologies such as artificial intelligence and cloud computing playing an increasingly significant role in financial services.
RBI, as part of its November survey for its latest Financial Stability Report (FSR), looked into the level of adoption of emerging technologies by banks and any associated risks to the domestic financial sector.
“Cloud computing and artificial intelligence/machine learning (AI/ML) were the two most widely adopted emerging technologies among banks,” RBI said in its Financial Stability Report released on Monday. “In terms of spending, 61 per cent of the respondent banks have allocated less than 10 per cent of their IT budget on such initiatives during the current financial year,” it added.
The survey also showed that 80% of the banks had fully or partially outsourced such activities owing to a dearth of IT expertise among their staff and for cost-efficiency reasons, opting to focus their resources more on their core competencies.
That said, banks have been using cloud computing to reduce the cost of financial services by enabling easier access to their infrastructure, and AI primarily for customer service, sales and marketing, risk management, and customer-verification, or know-your-customer (KYC), processes.
Mint reported on 26 December that India’s leading lender State Bank of India was scouting for an intellectual property rights firm to secure patents for innovations in AI and ML by its analytics department.
‘A hierarchy of risks’
RBI’s report highlighted opportunities for using AI and other emerging technologies in banking, but also illuminated potential risks to financial stability.
“In response to (a) specific question on threats posed by AI/ML, respondents identified third-party vendor risk, cybersecurity vulnerabilities and reputational damage as key risks,” RBI said in its report. “Quantum computing is perceived to be another emerging technology in the hierarchy of risks due to its ability to potentially break encryption algorithms,” RBI added.
While banks have shown relatively better preparedness in maintaining backup of critical data, the survey showed that larger banks have been proactive in adopting mitigation measures due to the availability of adequate resources and expertise.
Regular compliance audits and training of IT or security personnel are two important areas that require improvement, RBI said, adding that forensic preparedness and business continuity plans also need improvement to strengthen resilience against technology-related incidents.
Also read | Bajaj Finance pivots to profitability with AI
A tech framework
Last week, RBI set up an eight-member committee to study global regulatory and supervisory approaches to artificial intelligence, especially in the financial sector, and also identify potential risks.
The panel will recommend an evaluation, mitigation and monitoring framework and compliance requirements related to AI for financial institutions, including banks, non-banking financial companies (NBFCs), financial technology companies, and payment system operators (PSOs), among others.
In a speech on 14 October, former RBI Governor Shaktikanta Das had said that heavy reliance on AI could lead to concentration risks, especially when a small number of tech providers dominate the market. This could amplify systemic risks, as failures or disruptions in these systems may cascade across the entire financial sector, he had said.
“Banks and other financial institutions must put in place adequate risk-mitigation measures against all these risks. In the ultimate analysis, banks have to ride on the advantages of AI and Big Tech and not allow the latter to ride on them,” Das had said.
Banks have increased their technology budgets over the past year to keep pace with the surge in digital transactions after RBI intensified scrutiny on frequent tech-related outages. RBI’s sanctions on HDFC Bank and Kotak Mahindra Bank due to technology-related deficiencies also forced lenders to loosen their purse strings for IT.
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First Published:30 Dec 2024, 07:34 PM IST
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