The Reserve Bank of India (RBI) is in the process of applying advanced analytics, artificial intelligence and machine learning to supervisory data, while taking the necessary safeguards to gain greater insight into the operations of supervised entities. said an RBI official. “These efforts reflect the Reserve Bank’s commitment to enhancing its supervision by leveraging the power of technology and a data-driven approach,” Deputy Governor MK Jain said at a meeting in February 2016. Speaking at the 25th SEACEN-FSI Asia-Pacific Economic Supervisory Board Heads Meeting, he said, Mumbai. Jain said the RBI employs various analytical tools to improve the effectiveness of its supervisory framework. These include early warning systems, stress testing models, vulnerability assessments, cyber key risk indicators, phishing and cyber reconnaissance exercises, targeted assessments of compliance with KYC/AML standards and data analysis, Jain said. said. Supervisors need to scrutinize the business models employed by banks and carefully assess whether these models are consistent with banks’ risk appetite, Jain said. “The assessment should delve into things like the level of growth projections for the business, the sustainability of the earnings potential, the degree of diversification, the coverage of provisions, and the appropriate pricing mechanisms,” Jain said. The central bank has recently cited the recent US banking crisis to warn banks to focus more on corporate governance and compliance to avoid future crisis situations. Jain argued that governance is paramount and always the root cause of supervisory concerns. Effective corporate governance and sound regulation are closely related and mutually reinforcing, he added. “Recent bank failures in advanced economies have highlighted the urgent need to address governance concerns head-on,” Jain said. IT systems need to be scrutinized The lieutenant governor added that the supervisor should look at his IT problems comprehensively. Jain said it is important to determine whether banks have the ability to develop robust IT systems in line with their business strategy. “The future-proofing of banks’ IT infrastructure has become imperative, requiring strategic investments in both capital and operational expenditures. As virtual work environments and cyber risks become more prevalent, effective IT governance is becoming more important,” Jain said. These comments are important against the backdrop of the prevalence of digital disruptions facing banks in recent years. The RBI has repeatedly asked banks to make additional investments to strengthen their information technology systems. Focus on audit He furthermore, the supervisor must focus on the effectiveness of the assurance function. RBI officials addressed risk management, compliance and internal audit. “The assurance function serves as an important safeguard that provides an independent and objective assessment of the bank’s operations, risk management practices and compliance with regulatory requirements,” Jain said. By assessing the quality of the assurance function, supervisors can identify potential vulnerabilities, assess the effectiveness of internal controls, and mitigate risks before they become significant, he added.
