SYNOPSIS

A comparative study of the use of Artificial Intelligence in Indian

Banking sector: Challenges and opportunities

TABLE OF CONTENT

TOPIC NAME: A comparative study of the use of Artificial Intelligence in Indian

Banking sector: Challenges and opportunities
INTRODUCTION TO TOPIC

Artificial Intelligence, Blockchain, and Internet of Things are emerging technologies

that are impacting various aspects of human life. These technologies have the
potential to disrupt the way we interact with each other, operate our businesses, and
even how governments work for their citizens.

Amongst these, AI is probably the most ubiquitous and disruptive in nature. The use
of AI by organizations and governments, and its deployment in improving customer
experience, operational efficiency, fraud detection and cybersecurity is on the rise
across the world. Although the adoption of AI varies significantly across geographies,
there are pockets of industries even within the developed countries that are
increasingly adopting AI to better service their customers and bring in efficiencies of
scale. One such industry that has embraced AI across geographies is banking.

Developing AI infrastructure in India is a key priority for the Indian Government.

The Indian Government’s NITI Aayog (a policy resource centre) formulated the
‘National Strategy for AI’ in 2018. The strategy seeks to position India as a global
leader in AI. This is one of the many initiatives launched by the Indian Government
to channel and utilize the potential of AI for India. Outlining the vision and
importance of development of AI for India, Prime Minister Narendra Modi
remarked, “We need to make artificial intelligence in India and make artificial
intelligence work for India.”

As India progresses in its economic journey and aims to become a USD 5 trillion
economy by 2024, it will require infrastructure to scale up and support this growth.
Financial infrastructure will play a fundamental role in this process given India’s
policy objective of financial inclusion and the banking sector will be an integral part
in this journey. The government has stated that for banks to fulfil India’s growing
needs, they must harness technologies such as AI and big data.
Banks and financial institutions stand to benefit significantly from AI. Whether to
improve overall customer experience, take more informed decisions on credit
underwriting, detect frauds and defaults early, improve collections or increase
employee efficiency, AI has the potential to transform India’s banks.

As AI makes inroads into several untraversed domains, its definition gets blurred. An
important objective of this research report is to demystify the concept of AI. Further,
this report explains the applicability of AI to banks in India and recommends steps
that could be taken to make them ready to embrace the changes that AI can bring.

WHY THIS TOPIC?

The reason I have selected this topic for my research project is because Artificial
Intelligence has been adopted widely in many sectors today, Banking being one of
them. Banking sector has been greatly benefitted with the use of this technology as it
reduces human interactions and helps in getting things done at a faster and hassle-
free rate. Today, many banks are actively implementing and improving Artificial
Intelligence in their day-to-day business activities.
Thus, Artificial Intelligence has proved to be a boon for the banking industry and has
many benefits to offer to the industry. It is changing the face of how business
processes work and front-desk operations.

OBJECTIVES OF THE STUDY

1. To study the areas where the artificial intelligence is being used by the banks
2. To study about the application of Artificial intelligence in Banking Sector

SCOPE
The study covers the technological developments in Indian banking sector only.
METHODOLOGY
The study is descriptive in nature and is based on secondary data. The data are
collected from various reports, journals, news articles, various bank portals, RBI
portal and internet sources.
As the objective is to analyse different AI implemented by banks and to find some key
features and drawbacks and to make recommendations to the same, the research is
of secondary nature.
The research for this study is done by analysing 9 banks viz. State Bank
of India, Bank of Baroda, Axis Bank, Canara Bank, HDFC, ICICI, City
Union Bank, Andhra Bank and IndusInd Bank.
All these banks have implemented Artificial Intelligence in their day-to-day business
activities which makes the customer experience hassle-free. Many of these bank
applications are going under upgradation and improvement for a better experience.
Some of the banks have humanoid chatbots installed in their offices while some have
AI enabled chatbots on their websites.
WHAT IS ARTIFICIAL INTELLIGENCE?
According to the father of Artificial Intelligence, John McCarthy, it is ―The science
and engineering of making intelligent machines, especially intelligent computer
programs.
Artificial Intelligence is a way of making a computer, a computer-controlled robot, or
a software think intelligently, in the similar manner the intelligent humans think.
AI is accomplished by studying how human brain thinks and how humans learn,
decide, and work while trying to solve a problem, and then using the outcomes of this
study as a basis of developing intelligent software and systems.

ARTIFICIAL INTELLIGENCE IN BANKING

Artificial Intelligence in banking will move with humans by creating choices and
during a convincing manner encourage customers. AI allows industry to understand
the shopper’s preferences, guarantee client satisfaction, and facilitate the shoppers
perceive their expectations from the banks. Banks are actively adopting new-age
technologies for higher growth prospects and to serve new-age customers. From
accounting to sales to contracts and Cybersecurity, AI helps banks reshape
operations across all areas. With the help of information analytics, blockchain and
machine learning, banks are enduring their offerings and services. several ancient
banks have collaborated with fintech start-ups to supply modernised banking
resolution to their customers.
Ancient banks competitive with tech-savvy fintech players, moving to adopt newer
technologies like computing. AI enables banks utterly redefine however they operate,
establish innovative product and services, and impact client expertise interventions.
To urge competitive edge, banks can have to be urged to embrace AI and adopt into
their business strategy.
India’s digital banking (including retail banking) and finance sector has witnessed
immense growth in the past two decades. This transformation has been primarily
driven by an increase in digital payments across sectors and industries.
The country’s established financial institutions are now deploying fintech to provide
end users agile, efficient, and differentiated experiences along the complete value
chain of financial services. The rise in fintech use will bring in financial innovations
and transform
India’s financial landscape in two primary ways: (i) consumers will have a larger set
of options at competitive prices, and (ii) lower operational costs can improve
efficiency at financial institutions. The Government of India’s ‘DigiDhan Mission’
states that financial inclusion remains one of the foremost challenges for India and
those digital payments promise access to formal financial services and benefits,
especially to those who continue to be excluded.20 AI models are being used to
detect fraudulent accounts and improve the efficacy of the scheme.
CURRENT STATE OF USE OF AI IN INDIAN BANKS

India is already at the frontline of the fintech revolution. The rapid growth of mobile
technology in Asian nation in recent years has contributed to the unequalled growth
of India’s fintech sector. The arena has leveraged the ever-changing client
preferences that have emerged from this growth in conversion to develop associate
array of innovative services and product for the ever-changing economy. These
embrace net banking, mobile banking and payment apps. This shift in business
strategies has junction rectifier to a rise in partnerships between technology
developers, banks, and monetary establishments mistreatment such technologies.
Banks will mine the monetary dealings information generated by the proliferation of
digital payments and banking to higher monitor, predict and answer client
behaviour. The rising demand for on-line banking and monetary info offerings has
created opportunities for AI implementation in India’s retail banking, financial, and
investment services sector.
The centre is involved in advanced research, training, teaching, developing and
guiding Indian banks on their AI journey for several areas. These areas include
diversification of customers, NPA prediction, credit scoring, detection of fraud and
analytics for credit recovery. Over 1,000 executives from the IT and business
segments of public and private sector banks have already been trained in these areas.
The hallmark of these customized training programmes has been the stringent
hands-on component on state-of-the-art commercial and open-source tools.

APPLICATIONS OF AI IN BANKING
i. Algorithmic Trading
Algorithmic trading (AT) also called “Automated Trading System”, has become one
of the main players in the global financial markets. AT goes all the way back to the
1970s when computerized trading systems were introduced in American financial
markets (Chen, 2019). Cartea et al (2015) defines AT as the implementation of
trading rules into a sophisticated program and then use it to trade. Today, AT has
implemented complex AI systems that are able to act extremely fast and hence, able
to trade immensely faster than humans. HFT and computers generates 50-70% of all
trades in equity markets and 60% of futures trades (Seth, 2019). Some estimate this
number to be even higher in the US and a bit lower in emerging markets such as
India with about 40%.
One of the other technologies is the AT strategy known as “news reader”. This
technology scans for news headlines and articles and is trained to react in a certain
way based on this news. Next, is the “pattern recognition” technology that enables
machines to see, learn, and react based on different patterns. Third, is the “signal
processing” which is a mathematical extension of complex technical analysis. The
signal processing technology is filtering information to eliminate false information
and get more correct discern trading patterns. Finally, we have the “market
sentiment” where the computer is not aware of the market activity until we feed it
with data.
The objective of this form of AT is to provide the algorithm sufficient data to analyse
as well as learn market psychology (supply and demand).
ii. Fraud Detection and Compliance
Irregularity detection can be used to increase the accuracy of credit card fraud
detection and anti-money laundering.
iii. Customer Support and Helpdesk
Humanoid Chatbot interfaces can be used to increase efficiency and cut down on cost
for customer interactions.
iv. Risk Management
Personalized products can be offered to clients by looking at past data, doing risk
analysis, and eliminating human errors from hand-crafted models.
v. Security
Suspicious behaviour, logs analysis, and malicious emails can be tracked down to
prevent and possibly anticipate security breaches.
vi. Digitization and automation in back-office processing
AI captures document’s data using OCR to generate insights from text data which
can help in reducing the back-office processing times.
vii. Wealth management for masses
Chatbots manage tailored portfolios for clients by taking into account their lifestyle,
appetite for risk, expected returns on investment, etc.
viii. Passbook updating kiosk
The Indian banking system has been evolving from people- driven to machine
controlled in the past few years. Passbook printing kiosk is an automatic kiosk which
helps customers to print their passbooks without human intervention.
ix. Chatbot-The Intelligent Banking Assistant
Chatbots are tools designed to simplify interaction between humans and computer.
Chatbots are examples of AI in banking that are replacing front-desk operations.
These AI-led machines provide digitized and personalized interactive experiences to
the customers.
x. Cash Deposit Machine
The Cash Deposit Machines are self-service terminals which allow customers to
deposit cash at any time. This facility ends the troubles of customers to stand in long
queues to deposit cash.
Both public and private banks offer this facility where account balance is credited
instantly. Customers receive a transaction receipt for each successful transaction and
can make payment in different accounts using this machine.

BENEFITS OF AI IN BANKING
i. For the economy, business and industries
AI will benefit the economy by helping the evolution of work and will help people
perform their work better.
ii. For humanity and society
AI enhances information throughput and efficiency, helping people create new
opportunities.
iii. Expenditure pattern
AI can help in understanding the customer’s spending pattern and customized plans
can be offered to customers.
iv. Online banking and mobile banking
The online banking and mobile banking have become popular as a tool for 24/7
transaction. AI can access customer data, such as detailed demographics, website
analytics and records of online and offline transactions, machine learning can
integrate and analyse information.
v. Offer High security
AI makes the transactions more secure and safe reducing any anomalies.

LIMITATIONS OF AI IN BANKING
i. AI might able to do, replacing adaptive human behaviour
ii. AI makes the people lose their creative power, and can increase the unemployment
rate.
iii. The production and maintenance of AI requires high costs
iv. AI consists of advanced software programs that require regular updates to meet
the needs of the changing environment.
v. AI in wrong hands can be serious threat to human kind, if individuals start
thinking destructively, they can generate these advanced machines
REASONS FOR ADOPTION OF AI IN BANKING
• Reduction of fraud and security risks
• To move towards process-driven services
• Improvement in operational efficiencies
• For effective decision making
• To Increase employee productivity
• Due to demand from customers for more customized solutions
• To introduce self-service at banks
• Immense competition in the banking sector
• To focus on profitability and compliance
• Management of huge volumes of data at record speed
• To accelerate human work through software robotics
AREAS OF ADOPTION OF AI IN BANKS
• Compliance
• Physical security
• Fraud and Cybersecurity
• Internal audit
• Accounting
• Customer Service
• Financing and loans (credit assessment)
• Business process management
• Merchant services
• Asset Management
• Risk management
• Sales
• Marketing
• Wealth management
WHAT DO BANKS NEED FOR AI ADOPTION?
AI strategy
In order to successfully adopt disruptive technologies, organisations need to have a
clear vision on what they want this technology to achieve; how they want to integrate
it within their organisation; the feasibility and impact of the technology; and its
possible consequences for the internal dynamics of the organisation. According to
the aforementioned McKinsey survey, about 17% of the respondents said that their
companies have mapped out where, across the organisation, all potential AI
opportunities lie. Only 18% of the respondents said that their companies have a clear
strategy in place for sourcing the data that enables AI to work.
Data collection
To take advantage of AI’s enormous potential, an organisation needs to invest in the
creation and storage of a large amounts of data to train AI algorithms. The dividends
yielded by AI are related to the quality and the quantity of the data that has been
recorded or stored by these companies.
Internal digitization
A large impact of AI on business is in the improvement and streamlining of
cumbersome internal processes. Organisations that are looking to adopt AI should
undertake internal digitisation, promote a pro-technology culture and familiarise
their employees with emerging technologies.
Talent creation
Acquisition of talent is one of the biggest challenges to AI adoption. To gain
advantage in AI, most organisations either hire AI experts or train them. Due to
competition among firms for AI experts, and the unique needs of each organisation,
most companies prefer to develop their own talent pools.
Developing safe systems
The banking ecosystem functions on trust. This makes it imperative for banks to
invest in cybersecurity and to develop AI systems. Due to the sensitive nature of data
stored by banks, they are prone to data breaches by online hackers. Banks need to
increasingly invest in cybersecurity collaborations with technology firms to identify
and plug potential threats.