Private banks leading AI adoption in banking services, says RBI study

Private sector banks in India are taking the lead in the adoption of Artificial Intelligence (AI) in areas like fraud detection, customer segmentation, and chat automation, according to a Reserve Bank of India (RBI) study.

The asset size and capital adequacy ratio are influencing the rate of adoption.

The size and financial health had a positive influence on the banks’ focus on AI, reflecting the impact of economies of scale and the availability of investment on technological advancement, notes the study titled ‘How Indian Banks are Adopting Artificial Intelligence?’.

Private banks often cater to more financially aware and affluent customers and therefore could see higher potential for leveraging AI-based solutions like customer segmentation, robo-advisory, and robo-wealth management tools to cross-sell or provide other financial services.

Private banks, especially those with a smaller branch network, are also much more likely to adopt AI-based solutions to gain new customers or cross-sell different products, as it represents a more cost-effective solution, it said.

On the other hand, public sector banks (PSBs) already have well-established offline channels, especially in rural and semi-urban areas.

However, with the rapid advancements in AI, especially Generative AI and Large Language Models in the last two years, public sector banks also appear to be increasing their usage of AI-based solutions.

AI is expected to have the potential to reduce inefficiencies through automation by minimising errors in human decision-making and by providing cost-effective solutions.

AI is expected to make banking services accessible to the population at the bottom of the pyramid, the study said.

While the integration of AI into banking and finance offers immense opportunities, it also presents challenges such as the possibility of bias, lack of transparency, and issues surrounding the ethical use of data.

The ethical use of data requires an in-depth evaluation in view of its implications for the financial sector and the overall economy, the study added.