Beyond the Hype: AI’s Rise Demands Legal, Ethical Guardrails and Human Involvement

The Financial Express Modern Banking Summit brought together leaders from India’s top banks, fintechs, and consulting firms to discuss how digital transformation is shaping the financial services sector. The panel, moderated by Vijay Mani, Banking & Capital Markets Leader at Deloitte India, offered a candid look at what’s working, what’s not, and what lies ahead—especially as banks balance innovation with operational risk.

Moving from Legacy to Modern Systems

Rajeev Ranjan Prasad, Chief General Manager (Digital Banking and Transformation - Consumer) at State Bank of India, opened the discussion by expounding on the ‘hollowing the core’ approach, stating that modernising core banking systems is no longer optional. 

“Most Indian banks began the unbundling of legacy cores a few years ago,” he noted. While this has made digital banking possible, it also brought challenges around data integrity, microservice integration, security vulnerabilities, and skills gaps in areas like cloud and API management. Despite these hurdles, a phased, agile approach has helped reduce the fear factor in modernisation.

Ramesh Narayanaswamy, Chief Technology Officer at Aditya Birla Capital, underscored that modernisation is often more about mindset than capability. Recalling a major system migration exercise by the Citi Bank across 40 countries in six years, he remarked, “People get comfortable with what works. But once you cross the threshold and see the opportunity to rationalise products and improve service, the problem solves itself.”

Adding to this, Sivaram Kowta, President of Digital Banking at Zeta India, said digital transformation is now table stakes. However, he emphasised the difference between adopting digital as a channel and embedding it as a mindset. 

“Underwriting is still based on CIBIL scores. Banks still avoid small-ticket loans, which fintechs see as scalable through fast turnarounds. So yes, digital as a channel is mainstream, but digital as a mindset needs development,” he said.

AI: Never sleeps but human-in-the-loop necessary

“AI is beyond hype now,” said Prasad, highlighting its use in credit decisioning, fraud detection, and automation. But only 20-25% of BFSI IT investment goes toward innovation, with most funds directed toward "run the bank" operations and regulatory compliance.

Narayanaswamy noted that AI’s impact depends not on building models, but on integrating and adopting tools effectively. “If your rule-based system works 95% of the time, that’s already good enough,” he said. At Aditya Birla Capital, an audit process that once required eight people for two months was completed in five hours using AI—with 100% accuracy.

Kowta offered specific examples from Zeta: “We integrated Copilot into our Integrated Development Environment (IDE) and saw a 30–40% productivity boost. Our incident commander is an AI bot—it never sleeps and always knows who to go to.” Yet, he echoed Narayanaswamy’s concerns: “Would you trust a chatbot to talk to your customer, unsupervised? Not yet. Human-in-the-loop remains necessary.”

Richa Roy, Partner at Cyril Amarchand Mangaldas, emphasised legal and ethical guardrails. “There is a right to a human decision, especially in credit. We must prevent exclusion errors, thus the importance of human-in-the-loop,” she said. Roy also pointed to regulators using AI proactively—SEBI for scanning offer documents and RBI in regulatory reviews.

Infrastructure: Giga Campuses and Green Goals

Manish Gupta, Head-Global Enterprise Sales at AdaniConneX, addressed the backend transformation required to support AI and digital banking. He revealed that large banks are already collaborating with AdaniConneX and hyperscalers to build “giga campuses”—multi-tenant, energy-resilient, 100% renewable energy-powered data centers.

“Transformation isn’t just about migrating workloads. It’s about evolving infrastructure that meets regulatory and privacy requirements,” Gupta explained. However, he acknowledged challenges like 70% of India’s data still residing outside the country and scalability concerns compared to markets like China.

Kowta added that successful enterprise tech has always grown out of customer collaborations—citing Vision Plus, Finacle, and others. “Most fintechs imagine solutions in isolation. The third way—building in partnership—is where real traction lies,” he noted.

MSMEs: Addressing Finance Scarcity with Tech

The discussion concluded with a pressing issue—MSME credit penetration. Roy called the current system inequitable, despite MSMEs accounting for 40% of India’s GDP. 

“Traditional lenders look at balance sheets, which MSMEs often don’t have. Digital public infrastructure and fintech can fix this,” she said, but warned of governance and regulatory challenges.

Prasad shared sobering statistics: “India has 63 million MSMEs, yet less than one lakh are on the TReDS platform.” While fintech-led and anchor-led models offer promise, the value chain remains fragmented. “We lack deep-tier financing mechanisms—fractionalised, tokenised, and blockchain-based solutions that can reach the last mile,” he said.

To address this, he proposed a four-pillar strategy: clear customer segmentation, robust digital credit processes, advanced analytics using GST and cash flow data, and adaptable operating models. “Solving these foundational issues is the only way forward,” Prasad concluded.