Management Perspectives

The World Bank recently highlighted India as one of seven nations where half of the world’s 1.4 billion adults lack access to formal banking services. This exclusion, perpetuated by traditional banking systems, has marginalised entire communities. However, a global movement characterised by the emergence of artificial intelligence, (AI) is challenging these barriers, heralding an era of democratising finance. This paper examines Artificial Intelligence’s pivotal role in fostering financial democracy in India.

AI serves as a transformative catalyst, reshaping digital banking and dismantling barriers to financial access. Through AI-powered initiatives, this paper elucidates how technology democratises finance, promoting economic inclusion and social justice.

Keywords: Artificial intelligence, financial inclusion, democratising finance, digital banking, socioeconomic disparities, marginalised communities.

Methodology

In order to study artificial intelligence (AI) as a means of democratising finance in India, this research will make use of secondary data. The latter will come from academic journals, periodicals, books and articles that revolve around digital technology in finance as well as electronic sources with current data.

Introduction

In the digital era, access to financial services equates to access to opportunity. India’s bank-dominated financial system, especially in credit allocation, underserves vast segments of the population, perpetuating socioeconomic disparities. However, a global movement advocating financial empowerment emerges, akin to democracy, characterised by the emergence of artificial intelligence, (AI) aiming to dismantle barriers and level the economic playing field, heralding an era of democratising finance.

Democratising finance transcends access to bank accounts; it empowers individuals to control their financial destinies. The democratisation of finance is realised through increased access to financial instruments, allowing ordinary people to participate in wealth-building activities.

History of inclusive banking

The spirit of financial inclusion materialised in 2005 when RBI underscored its significance in the Annual Policy Statement of 2005-06. It urged banks to extend their reach to the masses, taking banking services to rural areas. Subsequently, the RBI began encouraging banks to prioritise Financial Inclusion as a business objective. The transformative change came with the introduction of the Pradhan Mantri Jan Dhan Yojana (PMJDY) and direct benefit transfer schemes, coupled with expanding mobile and telecom services which laid the foundation for a more inclusive financial ecosystem.

It has played a crucial role in democratising access to traditional banking, credit, and money, ensuring that millions of citizens, especially those in vulnerable sections, have access to basic banking services, insurance, and pension schemes. Artificial intelligence (AI) and machine learning (ML) Technology, particularly AI and ML catalyse this transformation. These tools reshape finance, offering affordable solutions for all. AI enhances service delivery, while ML unlocks unprecedented insights.

Democratising finance

The democratisation of financial services is poised to have profound effects—amplifies the voices of the marginalised, fostering equity and driving sustainable growth. This movement’s impact transcends monetary value, touching lives across diverse backgrounds. It transforms finance from a privilege into a force for universal upliftment. Leveraging AI technologies, financial institutions can better cater to marginalised communities, promoting economic empowerment and social justice. This paper discusses AI’s pivotal role in democratising finance within India and how it reshapes the financial landscape, fostering inclusivity, and addressing long-standing disparities.

Artificial intelligence (AI) in financial services:

The adoption of AI has catalysed the emergence of innovative digital solutions spanning online banking, mobile apps, contactless payments, biometric authentication, chatbots, virtual assistance, personalised financial services, and new business models such as peer-to-peer lending. These technologies are revolutionising the design and delivery of financial products, aggregating and tailoring them to the unique needs and preferences of low-income households.

The collaboration between banks and digital solutions providers, facilitated by the synergy of AI, ML, and other technologies encompasses the entire lifecycle of a loan, from customer application to onboarding, approval, credit disbursement, management, collection, and recovery. This democratisation of lending extends to providing small loans or microfinance to diverse segments of the population, especially those who may not fit the conventional mold of creditworthiness. AI and ML algorithms possess the capability to analyse alternative data sources, such as mobile usage patterns and transaction histories, to accurately assess creditworthiness. However, with the advent of AI-driven solutions, this landscape is witnessing a paradigm shift. AI and ML enable financial service providers to utilise data and analysis creating affordable and convenient financial solution for the under presented segments of society.

Credit scoring revolutionised by AI

One of the most groundbreaking contributions of AI in the financial arena is the development of alternative credit scoring models. These models are specifically designed to include individuals without traditional credit histories, thereby reaching underserved populations. AI-enabled credit scoring models utilise a diverse range of data points, including an individual’s utility bill payments, social media activity, mobile and smartphone usage, online shopping behaviours, GST payments, rental history, and e-commerce transactions.

By analysing these alternative data sources, AI algorithms can predict an individual’s creditworthiness, particularly for the unbanked or underbanked demographics. This dynamism not only expedites the lending process but also leads to more accurate pricing of loans and a reduction in non-performing assets. As AI continues to evolve, its role in democratising access to credit is poised to make a lasting impact on global financial inclusion efforts.

Language accessibility: empowering financial literacy in India

In a country as linguistically varied as India, the importance of financial literacy is paramount. Traditional banking systems, which largely operate in a limited number of languages, frequently face linguistic obstacles. These barriers hinder the spread of essential financial services, especially in rural areas, and can result in misunderstandings that erode the trust that customers have in these institutions.

AI chatbots

In this scenario, the advent of AI-driven solutions provides a revolutionary solution. AI chatbots, armed with sophisticated linguistic algorithms, have the ability to communicate fluidly in a wide range of Indian languages. By eliminating language barriers, these chatbots not only enhance the quality of customer service but also play a pivotal role in fostering financial inclusion and democratising access to banking services across India.

These chatbots, as digital intermediaries, can interact with users in their local languages, navigating them through banking procedures, responding to queries, and even aiding in financial planning. The goal is to ensure that every individual, regardless of when they seek advice, which language they speak, or what their unique financial situation might be, has access to informed, relevant, and timely financial guidance.

AI’s role in fraud detection

AI emerges as a powerful ally, leveraging its sophisticated algorithms and data analysis capabilities to detect and mitigate fraudulent behaviour. AI operates tirelessly, scanning vast amounts of transactional data in real-time to identify anomalies and suspicious patterns indicative of fraudulent activity. Moreover, AI and machine learning (ML) technologies play a crucial role in enhancing risk management for financial crime surveillance. By continuously learning from new data and adapting to evolving fraud tactics, AI systems can stay ahead of emerging threats and ensure robust protection against financial crime.

Challenges in financial democracy with AI implementation:

Despite its benefits, AI also poses risks. AI models, while adaptable and scalable, can suffer from algorithmic bias, which leads to systematic favoritism towards certain outcomes, reducing their robustness. Additionally, AI system might generate false or misleading information, known as ‘hallucination’. Human biases, shaped by personal and professional experiences can unintentionally infiltrate these stages, resulting in AI systems that mirror these biases.

This can arise from design assumptions or programming errors where developers’ biases affect algorithm decision-making. In India, biases are more pronounced due to its cultural, linguistic, caste, religious and socioeconomic diversity. In the financial services sector, such biases can manifest as racial, gender, or socioeconomic discrimination, impacting credit and investment decisions, hiring practices and customer services.

The complexity of AI models often obscures their decision-making processes, leading to a lack of transparency. Customers may struggle to understand AI-driven financial decisions, which can lead to mistrust. The widespread adoption of AI could also lead to market concentration in the financial services industry. With AI’s pivotal role in financial democratisation comes significant responsibility.

Regular audits and fairness checks are imperative to ensure that AI models do not inadvertently perpetuate biases or disparities. Addressing accountability, it’s crucial for the RBI to provide detailed guidelines.

Conclusion The role of AI in democratising finance within India is paramount. As the nation strives to bridge the gap between the served and underserved, AI emerges as a transformative force, reshaping the financial landscape and fostering inclusivity. By embracing innovation with mindfulness and responsibility, India can unlock AI’s true potential in democratising finance, fostering a future where every individual has access to the financial resources and opportunities needed to thrive.