Currently, entities regulated by the RBI use technological tools like artificial intelligence, machine learning, big data analysis for know your customer & asset liability management (KYC/ALM) purposes, regulatory reporting & management information system, payments & account aggregation. Such tools are also used to judge the creditworthiness of borrowers.
“Notwithstanding its many advantages in terms of data and privacy protection, cyber risks are a major challenge in technology adoption,” the RBI said.
The use of technology for supervision has become crucial in light of the growing number of entities, including cooperative banks and finance companies, that are directly coming under the RBI’s lens. The central bank has indicated that on-site supervision will be largely for entities that are systemically important, while for most others it will depend on technology and analytics.
“Recognising that cutting-edge technology has enormous potential for preventive compliance, transaction monitoring and automated data flows, the RBI has accorded priority to adoption of RegTech,” the central bank said in a report. This will require regulated entities to submit information in machine-readable format.
Currently, the RBI’s offsite supervision depends heavily upon pre-defined templates to collect data. These are susceptible to inaccuracies and incomplete reporting. The RBI is trying to establish mechanisms to extract specific data directly from the source system to be more proactive in its risk-based supervision.
“The use of artificial intelligence and machine learning techniques are being explored to identify anomalies in the regulatory/supervisory reporting data, which can be used for predictive analysis. These techniques should pre-emptively help in micro-prudential supervision, identifying vulnerable branches, stressed exposures, unmitigated operational risks, suspicious transactions and misdemeanours,” the RBI said.
This kind of technology, where the regulator directly accesses data from the regulated entities’ system, is known as SupTech or supervisory technology.