Michael Debabrata Patra: Harnessing digital technologies in central
banks - opportunities and challenges
Keynote address by Dr Michael Debabrata Patra, Deputy Governor of the Reserve
Bank of India, at the SAARCFINANCE seminar on Emerging Digital Technologies in
Central Banking and Finance, Goa, 17 January 2024.
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Introduction
Good morning and a warm welcome to all colleagues from central banks representing
the South Asian Association for Regional Cooperation (SAARC).
We are also delighted to be joined by experts on emerging technologies from the
academia, the private sector, the legal sphere, data scientists, the World Bank, the RBI
Innovation Hub and of course, my colleagues from the Reserve Bank of India (RBI).
This two-day seminar with 'Emerging Digital Technologies in Central Banking and
Finance' as its theme marks the fulfilment of the commitment made in the 44th meeting
of the SAARCFINANCE Governors' Group held at Marrakech in October 2023. Given
recent developments on the technological front globally, the seminar's theme could not
have been timelier and more relevant. We hope that it will serve as an avenue for
intensifying engagements within the SAARC through sharing of knowledge and
experiences as well as by energising person-to-person interactions.
The State of Play
New age technologies such as application programming interfaces (APIs), artificial
intelligence (AI) and machine learning (ML), biometric-based identification and
authentication (biometrics), cloud computing (CC) and distributed ledger technology
(DLT) are currently powering innovations in the financial sector worldwide.
Technological advances are also making the role of central banks more relevant and
multi-faceted. Leveraging on these technologies, central banks are re-engineering their
own work processes and procedures, building new capacities and, more generally,
rethinking their approach to their various functions. They are also adapting their
operations to new demands of citizens for more speed, convenience, and affordability.
At the same time, central banks are widening and deepening their oversight and
regulation role to deal with new products and new providers, including those like
FinTech and BigTech that operate outside the purview of the traditional financial sector.
Consequently, central banks are also confronted with the associated risks. In doing so,
they must pay heed to the fact that regulations can stifle or foster innovation in the
financial sector by the manner in which they shape the rules and standards for
cooperation, interoperability and competition. It is in this context that central banks
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cannot and should not work in isolation . More than ever, cooperation and dialogue with
other central banks and regulators as also with other stakeholders, both domestic and
international, is an imperative if they have to navigate the unresting tides of innovation.
Hence, forums like this seminar assume importance.
Opportunities
Let me spend a few minutes discussing the opportunities presented by these emerging
technologies. First, we live in an age of data-driven policy making. Central banks are
repositories of enormous volumes of data. Therefore, data quality and data governance
are of utmost importance to ensure that policy measures are apposite and effective. In
this context, digital technologies, especially the newer ones including AI and ML, help to
dive deep into existing data as well as unstructured and high-frequency information to
carry out meaningful analyses. They help to detect trends and anomalies better and
thereby provide useful insights on specific economic and financial situations as inputs
for policy formulation. In essence, the synergy between structured data, rigorous
reporting and AI amplifies the productivity of data-driven processes, reinforcing their
importance in modern central banking.
Second, central banks can use digital technologies, especially newly developed tools of
big data analytics, for economic forecasting that is vital for forward-looking monetary
policy assessments. An important development in this regard is the Billion Prices
Project (BPP) created at MIT in 2008, which experiments with retail prices that are
posted online on the websites of retailers all over the world. The objective is to improve
the computation of traditional economic indicators starting with the consumer price index
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. By 2010, the project was collecting 5 million prices every day from over 300 retailers
in 50 countries. In May 2017, the BPP began experimenting with crowd-sourcing and
mobile technologies to measure the monthly inflation rate in Venezuela where official
statistics haven't been published since 2015.
Third, in the oversight of financial markets, technological innovations can help trade
repositories (TRs) to tackle data quality issues and increase the value of TR data to
authorities and the public. Regulators need to be vigilant, however, about unexpected
forms of interconnectedness between financial markets and institutions on account of
applications of AI and ML.
Fourth, regulatory compliance is another area which can significantly benefit central
banks through RegTech and SupTech tools. With the increasing complexity of financial
regulations, automating compliance processes through such tools, conducting risk
assessments and monitoring transactions for potential violations could help sharpen
compliance and ensure that financial institutions adhere to regulatory frameworks. This
helps in reducing compliance costs for regulated entities, while improving the financial
ecosystem as a whole. Machine readable regulations could be an additional synthesis
in the usage of AI. Effective use of new technologies is expected to help to detect
fraudulent actives in the system in a complex and interconnected environment.
Fifth, emerging technologies help central banks to design new products and services to
cater to specific requirements. For instance, CBDC as a digital form of sovereign
currency offers a secure and reliable medium of exchange. Apart from enhancing
financial inclusion and improving transaction efficiency, it may also help reduce costs
and facilitate cross-border transactions.
Cross Country Experience
Central banks have been early adopters of emerging technologies. I will not attempt
complete enumeration of central bank practices; instead, present select experiences to
underscore the wide diversity of usage.
Among advanced economy central banks, the European Central Bank (ECB) has been
an early mover in applying these technologies to data collection, assessment and
interpretation, and banking supervision. The US Federal Reserve is exploring the
potential of generative AI through an 'incubator' programmme with 'responsible
innovation' at the forefront of its strategy. The Bank of England uses AI in the scrutiny of
data quality to identify potential indicators of unforeseen economic disruptions.
Similarly, the Deutsche Bundesbank employs an unsupervised ML system to identify
outliers in significant financial datasets. Meanwhile, the Banque de France's BIZMAP
initiative leverages these advanced technologies to assist small- and medium-sized
enterprises in France as they navigate global markets. Many central banks, including
the Bank of Canada, are implementing cloud adoption strategies for data analysis and
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collaboration which helps them in hassle-free upscaling of computing power .
Among emerging market economies, the Central Bank of Malaysia has developed a
SupTech tool that supports communication with supervised entities with the aim of
enhancing both the efficiency of the process and the consistency of the messages
conveyed. Bank Indonesia has been using news articles to enhance the forecasting of
labour market dynamics. The approach involves building a statistical index of
employment vulnerability computed from a corpus of around 27,000 monthly news texts
covering a period of 23 years and based on natural language processing (NLP)
techniques.
The Indian Experience
The RBI as a full-service central bank has employed emerging technologies in virtually
all its functions while also encouraging their adoption in various parts of the financial
system. This has also involved spearheading innovation and building up the digital
public infrastructure. As a result, a recent assessment has found that the usage of AI
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related keywords in Indian banks has increased sizeably . A survey conducted by the
RBI at end June-2023 revealed that almost three-fourths of Indian banks and several
non-banking financial companies (NBFCs) have developed chatbots and virtual
assistants. Increased collaboration of banks and NBFCs with FinTechs has facilitated
introduction of model-based lending.
Within the RBI, big data analytics, AI and ML have been extensively employed in
monetary policy, research and data management functions. Examples include use of AI
powered tools to refine the quality of banking statistics; building of hybrid models that
combine traditional statistical methods with ML tools for forecasting and nowcasting;
applications of natural language processing (NLP) for classification of internal audit
reports; and analyses of the textual complexity of banking regulations. The use of
unconventional data like media sentiment is undertaken for assessing the effectiveness
of central bank communication. Other applications include tracking inflation through
online food prices and assessing crop production from remote sensing data.
On the supervisory front, the Advanced Supervisory Analytics Group (ASAG) has been
set up to leverage ML models for social media analytics, know your customer (KYC)
compliances and for gauging governance effectiveness. The establishment of an
advanced off-site supervisory monitoring system-DAKSH - is helping to digitalise
supervisory processes. An Integrated Compliance Management and Tracking System
(ICMTS) and a Centralised Information Management System (CIMS) are two major
SupTech initiatives being implemented for seamless reporting by supervised entities for
enhancing data management and data analytics capabilities, respectively.
On the digital financial inclusion front, the RBI Innovation Hub has pioneered the
delivery of farm loans or Kisan Credit Card (KCC) loans in a fully digital and hassle-free
manner. The RBI has also facilitated setting up of digital banking units (DBUs) by
commercial banks, which will enable broader access to cost effective and convenient
digital financial products and services.
The RBI's innovations in payment and settlement systems have been recognised the
world over. It is now building upon the success of India's fast payment system - the
Unified Payment Interface (UPI) - by incorporating functionalities like offline payments
through near field communication (NFC) technology (UPI Lite X), payments through
feature phones (UPI123Pay), conversational payments. The UPI has been interlinked
with PayNow, Singapore's fast payment system, in collaboration with the Monetary
Authority of Singapore to enable users to make instant and low-cost cross-border
peerto-peer (P2P) payments. This is a major step towards the internationalisation of the
UPI. Similar collaborations with other jurisdictions, notably with the UAE's Instant
Payment Platform (IPP), are in the pipeline. In the development of CBDCs, both
wholesale and retail e- pilots were initiated in 2022. Going forward, the aim is to
expand the ongoing pilots by covering more locations, include more participating banks
and incorporate feedback.
On the information technology front, the RBI is working on establishing a cloud facility
for the financial sector in India. Taking cognizance of increasing geopolitical and climate
related risks, a Lightweight Portable Payment System (LPSS) is being developed to
process critical transactions during emergencies. The RBI is also developing a
state-ofthe-art greenfield data centre to address capacity expansion constraints to meet
everincreasing IT landscape needs and to avoid region specific risks.
The RBI has facilitated responsible innovation in the financial sector through initiatives
like its regulatory sandbox, which has produced practical and innovative solutions in
domains such as 'retail payments', 'cross-border payments', 'MSME lending' and
'prevention and mitigation of financial frauds'. It has also conducted hackathons to
leverage the experience and skills of the private sector, the academia, and the public to
provide innovative solutions to the problems facing digital India. The account
aggregator (AA) framework helps in secured sharing of financial data between
regulated financial institutions and also provides customers control over their data. By
promoting data portability, this framework also expands the market for lenders. While
encouraging innovation, the Reserve Bank is also proactive in safeguarding customer
interests by regulating digital lending and flagging unauthorized forex trading platforms.
Challenges
As society harnesses the benefits of emerging technologies, regulators should pay
careful attention to the underlying risks and hence to responsible use, data security and
privacy, legal compliance, and ethical questions. These aspects will also require central
banks to reskill and upskill the existing workforces and adapt to the changing digital
landscape in a sustainable way.
First, with the increasing use of AI, concerns arise about transparency, data biases,
governance, privacy and the robustness of algorithms. Hence, central banks need to
ensure that there are enough checks and balances in place. The RBI has emphasised
that data used for training of models should be extensive, accurate and diverse to rule
out any prejudices and that algorithms should be auditable.
Second, cybersecurity in banking organizations is essential for continuing public trust in
the financial system. Cyber risks also entail customers facing threats of exposing
personally identifiable information (PII). Organizations too have to bear high costs on
account of the operational impact on businesses, demand for payment of ransoms and
/or having to develop new infrastructure from scratch. Due to increasing reliance on
Software as a Service (SaaS) solutions, financial institutions can also get affected by
third-party or supply-chain attacks. Cloud computing is becoming vital for many modern
applications, but it is also associated with threats to data security and privacy, system
availability, continuity of operations, interoperability, auditability and compliance with
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legal requirements .
Third is the issue of digital financial exclusion whereby a significant proportion of the
population may feel left behind. Additionally, emerging technologies have unleashed
complex products and business models with risks, of which users may not be fully
aware. New risks include the proliferation of fraudulent apps, deep fakes, and
misselling through dark patterns.
Fourth, digital innovation can also drive fragmentation of the financial world, as differing
systems can divide user groups and countries from each other cross7 . For effective
border digital financial infrastructures, there emerges a need to discuss and promote
common protocols, standardised APIs and secure communications channels. Legacy
infrastructures in the financial system need to be upgraded in line with these common
protocols to handle new kinds of demand.
Central bankers must closely monitor developments in Quantum Computing, which is
expected to lead to a multi-fold increase in computational abilities. There is growing
concern, however, about the vulnerability of existing cryptographic methods that secure
our financial transactions as Quantum Computing can rapidly perform code-breaking
calculations.
It is imperative to strike a balance between benefits and risks by strengthening the
capacity of regulated entities (REs) and surveillance by oversight authorities, formulating
/updating relevant legal and regulatory frameworks, proactively engaging stakeholders
to identify possible risks, and expanding consumer education.
Conclusions and Way forward
There is significant heterogeneity across SAARC central banks in the use and adoption
of emerging technologies. Within the SAARC, therefore, it is important for our central
banks to learn from each other's experiences by focusing on nuances of technology,
integration with existing systems, skilling and adaptability, and the disruptive aspects of
technology.
Looking ahead, we can also envision the interlinking of technologies. A case in point is
increased outward orientation of India's UPI to citizens of other countries. The potential
is vast; to exploit it, we must gear up to participate in the new technology revolution.
Above all, we must open our minds to the power of innovation, to the cross-fertilisation
of ideas and experiences while being mindful of the inherent risks.
This seminar brings together the best minds, practices and capabilities in our region.
This fusion will surely shed light on the way forward. As I wish you every success in
your deliberations, I would like to end with a few words of caution expressed by
Stephen Hawking: "Success in creating AI would be the biggest event in human
history. Unfortunately, it might also be the last, unless we learn how to avoid the
risks."
Thank you.
Valuable comments received from Snehal S Herwadkar, Rajas Saroy, Ajesh Palayi,
Gunjeet Kaur, and editorial help from Vineet Kumar Srivastava are gratefully
acknowledged.
1
D. Delort and J. A. Garcia (2023): Central Banks and Innovation, World Bank Blogs,
April 19.
2
Cavallo, A., and R. Rigobon (2016): 'The Billion Prices Project: Using Online Prices
for Measurement and Research', Journal of Economic Perspectives, 30 (2): 151-78.
DOI: 10.1257/jep.30.2.151
3
Araujo, D. et al. (2023). 'Machine learning applications in central banking'. IFC Bulletin
57. Bank for International Settlements.
4
Reserve Bank of India (2023): Report on Trend and Progress of Banking in India
2022-23 .
5
Koh, T.Y. and Prenio, J. (2023). 'Managing cloud risk- some considerations for the
oversight of critical cloud service providers in the financial sector'. FSI Insights on policy
implementation No. 53. Bank for International Settlements.
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da Silva, L.P. 'Central banks at the crossroads'. Speech at the Asia School of
Business (ASB), Master of Central Banking, Kuala Lumpur, 19 August 2023.