IMF urges stronger AI safeguards as India deepens financial sector adoption

The International Monetary Fund (IMF) has called on central banks globally to strengthen oversight of artificial intelligence (AI) as its rapid adoption transforms trading, lending and financial supervision, warning that inadequate governance could amplify systemic risks and cyber threats.

“Under normal market conditions, the effects (of AI) are largely positive. AI-driven execution can help improve liquidity, lower transaction costs, and accelerate price discovery,” the IMF said in a blog published on Thursday. “During periods of stress, however, those same features can amplify: AI can make markets faster and more tightly coupled,” it added.

Future flash crashes may arise less from coding errors and more from many AI systems reacting in parallel to the same information, the IMF said. Thus, regulators should focus on improving visibility into AI use and concentration risks, and enhancing international cooperation on cyber resilience.

The recommendations assume significance for India, where the government and regulators are increasingly promoting the use of AI across the financial sector for applications such as credit assessment, fraud detection, customer service and regulatory supervision, even as they move to strengthen oversight of AI-related risks.

Several regulatory initiatives are also under way. The Reserve Bank of India’s Regulatory Sandbox allows banks and fintech firms to test AI-enabled financial products under regulatory supervision, while the Reserve Bank Innovation Hub has developed MuleHunter.AI to detect mule bank accounts used in cybercrime through AI-driven transaction analysis.

However, while AI can help alleviate skill shortages, it also requires specialised expertise that is scarce in emerging markets such as India, according to the IMF. “Supervisors will need stronger technical capabilities to assess increasingly complex AI systems and may need to draw on specialised external institutions. Model risk and over-reliance on automated outputs can create blind spots, especially when systems perform poorly under stress,” the blog said.

The IMF has also cautioned that the growing dependence on a handful of cloud, data and AI model providers could create new systemic vulnerabilities, with disruptions at a critical service provider potentially affecting multiple financial institutions simultaneously. It further warned that generative AI is increasing the sophistication of cyberattacks, making cyber resilience a broader financial stability concern rather than merely an operational risk.

In India, the government is also deploying AI-powered credit assessment to help lenders move beyond conventional credit scoring by analysing digital payment transactions, Goods and Services Tax filings, bank statements and utility payments, helping improve access to formal credit for micro, small and medium enterprises (MSMEs), first-time borrowers and informal workers. According to government estimates, such models could unlock an additional $130-170 billion in economic value by narrowing the credit gap for smaller businesses.

Meanwhile, the multilateral institution has recommended that AI should augment, rather than replace, supervisory judgement. While AI-based supervisory technology can improve market surveillance and help identify emerging risks more quickly, financial supervisors would need stronger technical capabilities, governance standards and human oversight to manage increasingly complex AI systems.

“If policymakers act early and collectively, AI can reinforce global financial resilience. If they do not, future instability may be faster, more correlated, and harder to manage than past episodes,” the IMF said.