EMERGING NEW TECHNOLOGIES- (AI etc) AND FINANCIAL SECTOR STABILITY

Financial system enables lenders and borrowers to exchange funds. India's financial system is controlled by independent regulators in different sectors like banking, insurance, capital market and various service sectors including RBI,IRA,SEBI etc. Main constituents of Indian financial system include financial institutions, financial markets, financial instruments and financial services which do play a vibrant role in country's development especially after the onset of liberalisation and economic reforms introduced in the country. Inspite of global uncertainties and challenges currently India stands out as a fast growing major economy in the world. Indian financial system remains resilient due to stronger macro  economic fundamentals, favourable demographics,and dynamic  pace of digitalisation in financial sector etc.resulting in a favorable healthy and resilient financial sector  in India. Our capital market. is well capitalised and unchanged balance sheet indicate of higher risk absorption capacity. 

Artificial Intelligence AI refers to machine based system that can be  utilized for a given set of human defined objectives  that makes predictions, recommendations, or decisions influencing real or virtual environment. AI technologies include feeding machine learning, neural networks, big data,  self algorithms etc .In other words AI is a set of technologies that enable machines to perform cognitive tasks that are typically performed by humans.For istance Algorithimic trading can be utilized for trade execution, market making or  in any other proprietary trading  strategies. AI  has tremendous potential to reshape the world and transform industries including financial services,which may witness deep changes in market structure from net work effects to increased speed  of market functioning .Generative AI and associated developments have got  the potential to rapidly increase the efficiency of capital markets by investments, trading and asset allocations through AI assisted process automation and complex analysis of unstructured data. Several observers believe that AI can positively contribute towards achieving financia stability and can provide clear benefits to financial institutions by improving efficiency and attaining higher productivity. 

Global Data indicated that adoption of AI  in capital market is likely to increase both employment and number of Intellectual property instruments like patents filed.Moreover through high and powerful use of algorithm trading and novel trading and investment strategies  may  positively impact and consequently lead to further increase in  turnover and asset correlations at faster pace. AI may contribute to sustaining financial stability providing obvious benefits to financial institutions In terms of higher productivity and efficiency.Similarly it may be noted here that  genuine social media activity can amplify news and contribute panic like situation possibly due to manipulation. Study also suggested how First Republic Bank was targeted by online manipulation campaign. Analysis  also observed that annual financial firm losses from Cyber incidents has increased from $ 300 million in 2017 to $ 2.2 billion in 2024.Usually incidents are being tracked by multiple data bases.It remains paradoxical that despite better AI preparedness in developed countries majority of AI incidents are occurring in advanced countries of North America and Europe. 

In India banking sector comprising of commercial banks, and urban Cooperatives and further non banking financial institutions continued to show better performance. Alternative investment opportunities attractive to retail investors are becoming more popular. Emphasis on more opportunities are becoming attractive and retail customers and banks are facing the challenges. The problem of  home equity loans result in top up of housing loans. Regulatory prescriptions pertaining to loan to value ratio risks are not strictly adhered. Both banks and NBFCs are also offering top up loans on other collateral loans.It has been observed that healthy and resilient financial sector can achieve much desirable inclusive growth. Annual financial results of banks and NBFC indicate that the financial system remained sound and resilient in India.Macro stress test conducted by RBI also showed that banking sector will continue to remain resilient even under stress scenario in terms of market dynamics.  

Indian financial landscape is witnessing structural transformation driven by factors like innovations technologies, financial deepening and changing pattern of saving and investment etc.Not only the emerging new technologies have reshaped financial service industry by bringing innovative solutions and personalized products but also rising customer expectations for digital services and supply side factors relating to regulators did support emergence of fintechs.RBI has also been fostering innovation like digital currency  (CBDC),UPI,regulatory sandbox, co lending models along with mobile phone penetration, internet availability, reoriented payment systems etc.Already there is  growing concern about uptrend in digital frauds,which are largely due to various social engineering attacks on customers and rapid increase in the use of mule bank accounts perpetuation .Mule accounts refers to  bank accounts that facilitate illegal transactions  by receiving and transferring funds  from unlawful activities ,from organisations with or without the complicity of accounts .Increasing digitalisation, recurring intensity of cyber attacks et   leads to financial stability concerns. Developments in the economy like supply chain disruptions, rise in commodity prices slacknness in urban/ rural sectors and climate change etc add  severe risks to Indian financial system domestically and globally characterized by alarming levels of public debt across many countries, frequent geopolitical conflicts and increasing economic and financial fragmentation.This has necessitated urgent need for effective coordination and cooperation between law enforcement agencies and all financial regulators in the country to tackle all types of financial frauds.