The newly appointed governor of the Reserve Bank of India (RBI), Sanjay Malhotra, has signaled that the financial landscape will face significant challenges in the medium term. He pointed to the growing uncertainties caused by the rapid rise of new and emerging technologies.
“The medium-term outlook remains challenging, with downside risks from a possible intensification of geopolitical conflicts, sporadic financial market turmoil, extreme climate events and rising indebtedness. Stretched asset valuations, fragility in the less regulated non-bank financial intermediaries, and threats from new and emerging Technologies also contribute to the evolving uncertain outlook,” Malhotra said in the foreword of December 2024 edition of RBI’s Financial Stability Report.
This marks Malhotra’s first public statement on the Indian economy since taking office as RBI governor. Malhotra’s appointment comes at a time when India is struggling with slowing economic growth and inflation. In the second quarter (July-September) of the current financial year, India’s economic growth has slowed to 5.4%, falling short of market forecasts. This represents a sharp decline from the 7.6% growth recorded in the same period last year and the 6.7% growth in the previous April-June quarter.
Finance Minister Nirmala Sitharaman was quick to emphasize that the “less than expected” 5.4% growth in the September quarter, which followed the national electionsshould not be used as a basis for predicting future growth. She emphasized that the average economic growth in the last three years was 8.3%.
“Prospects for the Indian economy are expected to improve following the acceleration in the pace of economic activity in the first half of 2024-2025. Consumer and business confidence for the coming year remain high and the investment scenario is brighter than the Companies will enter 2025 with robust balance sheets and high profitability,” said Malhotra.
“We remain committed to developing a modern financial system that is customer-centric, technologically provided and financially inclusive,” Malhotra said in the Financial Stability Report.
Being an engineer myself, Malhotra recently transitioned from his position as Revenue Secretary in the Ministry of Finance for the new RBI Governor to be appointed for a three-year term from December 2024. A 1990-batch officer of the Indian Administrative Service, Malhotra brings over three decades of experience in information technology,. Finance, taxation, and public policy.
Emerging tech risks in the financial sector
In the local financial sector there was a notable Emphasis in focus on emerging technologies in the post-pandemic era. This shift is evident in the progress made, as well as in the recognition and commitment highlighted in the annual reports of major banks and non-banking financial companies (NBFCs), the Financial Stability Report said.
A recent survey conducted by the RBI in November 2024, aimed at the adoption of assessed emerging technologies and their associated risks to today’s financial sector, reveals that cloud computing and artificial intelligence/machine learning (AI/ML) were the two most widely implemented technologies among the major Indian banks.
Cloud computing helps reduce the cost of financial services by providing easier access to infrastructure and enabling economies of scale. Meanwhile, Respondents mainly use AI/ML technologies to know customer service, sales and marketing, risk management and processes related to your customer (KYC) procedures.
Spanning, banks turning more and more to outsourcing for emerging technologies, possibly driven by the need for specialized IT expertise and cost efficiency, while internal resources remain focused on core functions. In terms of spending, the report found that 61% of responding banks allocated less than 10% of their IT budget to these initiatives in the current financial year, the Financial Stability Report pointed out.
The survey respondents indicated that, in relative terms, cloud computing and AI/ML as the Technologies that carry the highest risks. Regarding the specific threats of AI/ML, the main concerns highlighted were third-party vendor risks, cybersecurity vulnerabilities and potential reputational damage. Quantum computing has also been seen as an emerging technology with significant risks, particularly due to its potential to undermine encryption algorithms. Notably, over 80% of the banks surveyed have fully or partially outsourced at least one emerging technology.
In terms of risk reduction, banks have demonstrated relatively better willingness to maintain backups of critical data. Larger banks are proactive in adopting mitigation measures due to the availability of adequate resources and expertise. However, regular compliance audits and training of IT/security personnel are two important areas that require improvement, according to the respondents. Forensic preparedness and business continuity plans also need improvement To strengthen resilience against emerging technology-related incidents.
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