The country’s central bank, the Reserve Bank of India (RBI) is planning to extensively use artificial intelligence (AI) and machine learning (ML) to analyse its database and improve the regulatory supervision of banks and non-banking financial companies (NBFCs).
According to a release on the government’s AI portal, RBI plans to leverage the benefits of advanced analytics at the Department of Supervision, which has been developing and using ML models for supervisory examinations. RBI is planning to hire external experts for the initiative.
The central bank has floated an expression of interest (EoI) for engaging consultants in the use of advanced analytics, AI, and ML to generate supervisory inputs. The selected consultants will be required to explore and profile data with a supervisory focus, among other things. The objective of this step is to enhance the data-driven surveillance capabilities of the Reserve Bank, the EoI said.
RBI’s supervisory jurisdiction covers banks, urban cooperative banks (UCB), NBFCs, payment banks, small finance banks, local area banks, credit information companies, and other Indian financial institutions. It undertakes the continuous supervision of such entities with the help of on-site inspections and off-site monitoring, the release explained.
Across the world, regulatory and supervisory authorities are using ML techniques to assist supervisory and regulatory activities. Most of these techniques are exploratory. However, they are rapidly gaining popularity and scale. To collect data, AI and ML technologies are used for real-time data reporting, effective data management, and dissemination. For data analytics, the algorithms are used to monitor supervised firm-specific risks, including liquidity risks, market risks, credit exposure and concentration risks, misconduct analysis, and the misspelling of products.
In 2018, RBI created a fintech unit in the department of regulation. In 2019, RBI came out with a framework for a regulatory sandbox to provide a structured avenue for the regulator to engage with the ecosystem and to develop innovation-enabling or innovation-responsive regulations. RBI decided to push innovation primarily to bring down the cost of financial services and boost financial inclusion. As most fintech activities then were in the area of payments, the unit was transferred to the Department of Payment and Settlement Systems (DPPS) in July 2020.
Earlier this year, RBI set up a department to help create regulations for the financial technology sector, which subsumed the DPPS. As OpenGov Asia reported, the department facilitates innovation and identifies and addresses challenges and opportunities in the field. The department deals with matters related to inter-regulatory and international coordination on fintech. It reports to the RBI’s centralised administration division.
The department provides a framework for research in the field that can aid policy interventions. In an internal circular, RBI said that the department addresses matters related to the facilitation of constructive innovations and incubations in the fintech sector if they have wider implications for the financial sector/markets and fall under the purview of the bank.
Furthermore, for enhanced financial inclusion, RBI issued the Framework for Facilitating Small Value Digital Payments in Offline Mode, which allows offline digital payments up to IN₹ 200 (US$2.65) per transaction, subject to an overall limit of IN₹2,000 (US$26.9). An offline digital payment means a transaction that does not require internet or telecom connectivity.
