Role of Information Technology in Banking and Finance: Fintech, AI and Cyber Security for RBI Grade B Finance

Last updated: 2026-11-13 · MockMentor

"Role of Information Technology in Banking and Finance" is a line of the Financial System unit in the RBI Grade B Phase 2 Finance syllabus, and it has become one of the most asked areas in recent years. Descriptive questions in 2025 and 2026 covered fintech, artificial intelligence (AI) and its risks, and digital public infrastructure such as ONDC and UPI. Objective questions test terms such as API, Account Aggregator, regulatory sandbox and the digital lending rules. This chapter covers how technology has changed banking, the new models it has created, the rules that govern it and the risks it brings. Payment systems are covered separately in the chapter on digital payments.

In one line: technology has moved Indian banking from ledgers to core banking, mobile apps, data-driven lending and AI, widening access and cutting costs, while creating new risks of cyber attacks, fraud, data misuse and unregulated lenders that RBI now regulates closely.

Basic concepts

• Core Banking Solution (CBS): a centralised system in which all branches of a bank work on one shared database, so a customer can bank from any branch.
• Fintech: the use of technology to deliver financial services in new ways, and the companies that do so.
• Application Programming Interface (API): a set of rules that allows two software systems to talk to each other, used for example to let a fintech app fetch account data with the customer's consent.
• Digital public infrastructure (DPI): shared digital systems built as public goods, such as Aadhaar, UPI, DigiLocker and the Account Aggregator framework, on which private firms build services.
• RegTech and SupTech: technology used by regulated firms to comply with rules (RegTech) and by regulators to supervise them (SupTech).
• Cyber security: the protection of systems, networks and data from attack, damage or unauthorised access.

Why in News?

1. In August 2025, an RBI committee released the Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector, setting out principles and recommendations for the safe use of AI by banks and other regulated entities.
2. The Reserve Bank Innovation Hub developed MuleHunter.AI, an AI tool to detect mule bank accounts used in fraud, which banks have started to adopt.
3. RBI issued consolidated directions on digital lending in 2025, building on the guidelines of 2022 that required loans to flow directly between the borrower and a regulated lender.
4. The Digital Personal Data Protection (DPDP) Act, 2023 and its rules, notified in 2025, set obligations for banks and fintech firms that process personal data.

Evolution of technology in Indian banking

How technology is used in banking

Delivery channels

Back-end systems

• Core banking: all scheduled commercial banks, RRBs and most cooperative banks now run on CBS.
• Data warehouses and analytics: for credit scoring, cross-selling and risk management.
• Cloud computing: banks are moving non-core and some core workloads to cloud, under RBI's outsourcing and IT governance rules. A community cloud for the financial sector has been proposed.
• Robotic Process Automation (RPA): software robots for repetitive tasks such as reconciliation and report generation.

Credit and risk management

• Credit scoring using bureau data and alternative data, such as GST returns, utility payments and cash flows in bank accounts.
• Early warning systems that flag stressed accounts before they become NPAs.
• Fraud detection through pattern analysis of transactions.
• Anti-money laundering screening and transaction monitoring.

Fintech in India

What fintech firms do

India has one of the largest fintech markets in the world, built on three advantages: a large population with smartphones and cheap data, digital public infrastructure (the "India Stack") and a regulator open to innovation.

The India Stack

Account Aggregator framework

An Account Aggregator (AA) is an NBFC licensed by RBI (NBFC-AA, under 2016 directions) that moves a person's financial data from one institution (the Financial Information Provider) to another (the Financial Information User), only with that person's explicit, digital consent. The AA cannot see or store the data itself. The system lets a borrower share bank statements, deposits, mutual fund holdings, insurance and GST data instantly, which supports faster and cheaper credit. RBI, SEBI, IRDAI and PFRDA all participate.

Unified Lending Interface (ULI)

ULI, developed by the Reserve Bank Innovation Hub, connects lenders to many data sources such as land records, milk cooperative data, satellite data and GST records through standard APIs. It is aimed at quick, low-paperwork loans for farmers and MSMEs. It was piloted from 2023 and launched more widely in 2024.

Regulatory sandbox

RBI's Regulatory Sandbox, launched in 2019, lets firms test new products with real customers on a small scale under relaxed rules for a fixed period. Cohorts have covered retail payments, cross-border payments, MSME lending, fraud prevention and financial inclusion. SEBI, IRDAI and IFSCA run their own sandboxes, and an inter-regulatory sandbox exists for products that cross sectors.

Artificial intelligence in banking

Uses

• Credit underwriting with more data and better prediction of default.
• Fraud detection, such as MuleHunter.AI for mule accounts.
• Customer service through chatbots and voice bots in many Indian languages.
• Personalised product offers.
• Compliance and anti-money laundering checks.
• Supervisory analysis by RBI, which uses AI and machine learning in its SupTech tools.

Risks

The FREE-AI framework

The RBI committee on responsible AI, chaired by Pushpak Bhattacharyya, recommended principles in August 2025 such as trust, people first, fairness, accountability, understandability and safety. Its recommendations included board-approved AI policies, AI inventories and audits in regulated entities, a shared AI infrastructure and sector data for smaller players, and clear disclosure to customers when they deal with AI.

Digital lending and its regulation

Digital lending grew fast after 2018, but many unregulated apps charged hidden fees and very high interest, and used harsh recovery practices such as accessing contacts and harassing borrowers. RBI's Working Group on Digital Lending (2021, chaired by Jayant Kumar Dash) led to the Guidelines on Digital Lending of September 2022.

Buy now pay later products and first loss guarantees that hid credit risk were brought under these rules.

Cyber security and fraud

Threats

• Phishing and vishing (voice phishing), where fraudsters trick people into sharing passwords or OTPs.
• Malware and ransomware attacks on bank systems.
• SIM swap fraud and mule accounts used to move stolen money.
• Attacks on third-party vendors and payment processors.
• "Digital arrest" scams, in which fraudsters pose as officials on video calls.

Regulatory response

Other technologies changing finance

Blockchain and distributed ledger technology

A distributed ledger is a database shared across many participants, in which records are added in blocks linked by cryptography, so that they cannot be changed without agreement. Blockchain is its best-known form.

Benefits include transparency, fewer reconciliations and faster settlement. Limits include scalability, energy use in some designs, legal recognition of records and the need for common standards. RBI has supported several blockchain pilots through its Regulatory Sandbox and the Reserve Bank Innovation Hub, and tokenisation of assets is being studied by regulators worldwide.

Open banking and APIs

Open banking means letting customers share their bank data with other providers through secure APIs, with consent. In India, this happens mainly through the Account Aggregator framework rather than through rules forcing banks to open their systems, as in Europe. Banks also offer API banking to companies, for example to integrate payments and collections into their accounting software.

Embedded finance and banking as a service

Embedded finance places financial services inside non-financial apps, such as a loan offered at checkout on a shopping site or insurance bundled with a travel booking. Banks provide the licence and the balance sheet, while technology firms provide the customer interface, a model known as banking as a service. RBI's rules on digital lending, outsourcing and co-branding require the regulated bank or NBFC to remain responsible for the customer.

Big Tech in finance

Large technology firms with huge customer bases have entered payments, lending and insurance. They bring scale and data but raise concerns of market power, data concentration and conflicts of interest. The Bank for International Settlements has studied these risks, and India's regulators watch the concentration of UPI payments among a few apps.

Cloud and data localisation

Banks increasingly use cloud services for flexibility and lower costs. RBI's directions on IT outsourcing require them to keep control over data, ensure they can audit the provider and plan for exit. Since 2018, RBI has required all payment system data of Indian users to be stored only in India, so that it can supervise payment systems fully. The Digital Personal Data Protection Act, 2023 adds obligations on consent, purpose limitation and breach reporting.

Quantum computing and future risks

Quantum computers may one day break the encryption that protects banking systems today. Central banks and standard setters have begun asking banks to prepare for "post-quantum" cryptography, which is a long-term technology risk for the sector.

Central KYC and digital onboarding

These tools cut the cost of opening an account from hundreds of rupees to a small amount, which made mass financial inclusion affordable.

Technology in RBI's own work

RBI uses SupTech to supervise a large and fast-growing system.

• Centralised Information Management System (CIMS): a platform to collect regulatory returns and data from banks and other entities.
• DAKSH: RBI's supervisory monitoring system for tracking compliance and supervisory issues, launched in 2022.
• Data analytics and machine learning: used to spot early signs of stress, unusual transactions and frauds.
• Central Repository of Information on Large Credits (CRILC): a database of large borrowers' exposures across banks, set up in 2014, which helped expose hidden stress during the Asset Quality Review.
• PRAVAAH: an online portal for applications for licences and approvals, launched in 2024.

When technology fails: supervisory action

RBI has acted firmly when banks' technology did not keep pace with growth.

These cases show that RBI treats IT resilience and compliance as core prudential issues, not only operational ones.

Fintech and banks: competition or partnership?

In India, most fintech firms now partner with banks and NBFCs rather than compete with them directly: banks provide the licence and funds, fintechs provide the technology and distribution. Many banks have also built their own apps and digital lending platforms, and some invest in or acquire fintech firms.

Benefits of technology in banking

1. Lower cost per transaction and the ability to serve small customers profitably.
2. Wider reach to rural areas and the unbanked.
3. Faster service and 24-hour availability.
4. Better data for credit decisions and risk management.
5. More transparency and less cash in the economy.
6. New products such as instant loans, digital gold and online investments.

Challenges

• Rising cyber and fraud risks, with losses borne by customers and banks.
• Digital divide: older people, women in some regions and rural users may lack devices, skills or connectivity.
• Concentration of payments and cloud services among a few large firms.
• Legacy systems in some public sector and cooperative banks.
• Data privacy and consent, especially with many apps.
• Outages in core systems that disrupt services, which have drawn RBI penalties and restrictions.
• Over-indebtedness from easy digital credit.

Way forward

1. Invest in cyber resilience, threat intelligence sharing and regular drills.
2. Implement the FREE-AI recommendations, with explainable and fair models.
3. Use DPI such as the Account Aggregator and ULI to bring formal credit to MSMEs and farmers.
4. Strengthen digital literacy and simple fraud reporting, including the national cyber crime helpline 1930.
5. Encourage interoperable, open systems to prevent monopolies.
6. Apply activity-based regulation: the same activity, with the same risk, should face the same rules whether done by a bank or a fintech.

Possible exam and interview questions

1. Discuss the role of information technology in transforming Indian banking. What new risks has it created? (620 words)
2. What is the Account Aggregator framework? How can it improve credit access for MSMEs? (420 words)
3. Explain the main features of RBI's digital lending guidelines.
4. What are the opportunities and risks of using artificial intelligence in banking?
5. Interview: Will fintech companies replace banks, or will they work with them?

Related reading: digital payments, NBFCs and the non-banking system, and financial inclusion.

More in Finance

• Financial System
• Functions of RBI
• Banking System
• Banking Reforms
• Financial Institutions

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