India (Commonwealth)_Exciting developments are underway at the Reserve Bank of India (RBI) as they embrace cutting-edge technology to enhance their supervisory functions. The RBI has partnered with two renowned consultancy firms, McKinsey and Company India LLP, and Accenture Solutions Pvt Ltd India, to revolutionize their regulatory oversight using artificial intelligence (AI) and machine learning (ML) techniques.
The RBI’s ambitious vision involves delving into their vast database using advanced analytics, AI, and ML to strengthen their oversight over banks and non-banking financial companies (NBFCs). To achieve this, the central bank has decided to tap into external expertise, marking a significant step forward. Last year in September, the RBI began the search for consultants who could help harness the power of advanced analytics, AI, and ML to enrich their supervisory inputs.
The process kicked off with an invitation for expressions of interest, drawing in a competitive field of applicants. From this pool, seven top-tier firms emerged as front-runners: Accenture Solutions Private Limited, Boston Consulting Group (India) Pvt Ltd, Deloitte Touche Tohmatsu India LLP, Ernst and Young LLP, KPMG Assurance and Consulting Services LLP, McKinsey and Company, and Pricewaterhouse Coopers Pvt Ltd. Following careful evaluation, the RBI selected McKinsey and Company India LLP and Accenture Solutions Private Limited India to take on this transformative task.
In a significant move, the contract for this venture amounts to approximately Rs 91 crore. While the RBI had already begun incorporating AI and ML into their supervisory procedures, this initiative marks a concerted effort to take their capabilities to the next level, ensuring that the Department of Supervision within the central bank reaps the benefits of advanced analytics.
The Department of Supervision has been actively engaged in developing and utilizing linear models and a select few machine-learned models for their supervisory examinations. However, their current interest lies in mining their extensive dataset to uncover attributes that can be harnessed to create new and improved supervisory inputs. This approach was underscored in the expression of interest issued in September.
The RBI’s supervisory authority extends across various financial entities including banks, urban cooperative banks, NBFCs, payment banks, small finance banks, local area banks, credit information companies, and select Indian financial institutions. Their oversight role is multifaceted, encompassing the assessment of financial soundness, solvency, asset quality, governance framework, liquidity, and operational viability. All these efforts are geared toward safeguarding the interests of depositors and maintaining financial stability.
The RBI’s commitment to continuous supervision involves a combination of on-site inspections and off-site monitoring. This well-rounded approach ensures a comprehensive view of supervised entities (SEs), helping to maintain stability and security within the financial sector.
Interestingly, the RBI is not alone in its pursuit of utilizing AI and ML to enhance regulatory activities. Across the globe, regulatory and supervisory bodies are actively exploring the potential of these technologies, often referred to as ‘suptech’ and ‘regtech’. While these applications are still in their exploratory stages, they are rapidly gaining traction and popularity for their potential to reshape regulatory practices.
AI and ML technologies are making a significant impact on data collection and analysis. Real-time data reporting, effective data management, and dissemination are all benefiting from these advancements. Furthermore, these technologies are proving invaluable in monitoring specific risks such as liquidity risks, market risks, credit exposures, and concentration risks for supervised firms. They are also being deployed for misconduct analysis and identifying instances of mis-selling financial products.
The RBI’s collaboration with McKinsey and Company India LLP and Accenture Solutions Private Limited India signals a bright future for the integration of AI and ML into supervisory functions. As these technologies continue to evolve and mature, the financial sector’s ability to maintain stability, security, and effectiveness is set to reach new heights. The RBI’s proactive approach to embracing innovation demonstrates their commitment to staying at the forefront of regulatory and supervisory practices in the modern era.
