As the use of Artificial Intelligence (AI) continues to grow in the banking sector, the Reserve Bank of India (RBI) has proposed a new framework to ensure that these technologies are used safely and responsibly.
The central bank has released a draft circular outlining rules for banks and other regulated entities that use AI and machine learning (ML) models in their operations.
Stakeholders can submit their feedback on the proposal until July 24.
Why Does RBI Want New AI Rules?
According to RBI, banks are increasingly relying on AI and machine learning for various business functions and decision-making processes.
While these technologies can improve efficiency and speed, they also come with risks.
The regulator warned that weak governance, poor oversight, or inadequate controls could expose banks to financial, operational, compliance, and reputational risks.
If these risks are not managed properly, they could lead to incorrect decisions, financial losses, service disruptions, and problems for both customers and financial institutions.
Banks Will Need Strong Risk Management Systems
Under the proposed framework, RBI wants banks to establish a board-approved risk management system for all models, including AI and machine learning tools.
This requirement will apply to both:
Models developed internally by banks
Models obtained from third-party providers
The RBI has said that bank boards should actively oversee the implementation of these risk management measures and ensure that AI systems are being used responsibly.
Regular Monitoring Will Be Mandatory
The draft framework also requires banks to continuously assess risks associated with AI models.
Banks will need to evaluate model-related risks at both the individual model level and across the entire organization.
If any risk exceeds the institution’s acceptable limits, immediate corrective action must be taken.
The RBI believes regular monitoring will help prevent unexpected problems before they affect customers or business operations.
Banks Responsible for Third-Party AI Models Too
Many banks use technology and AI solutions developed by external companies.
However, RBI has made it clear that banks will remain fully responsible for the outcomes of these third-party models.
Before adopting any external AI system, banks will need to conduct proper due diligence and carefully assess potential risks.
The regulator has also advised banks to ensure that AI deployment does not introduce new security vulnerabilities or operational weaknesses into their systems.
What Happens Next?
The proposed framework is currently in the consultation stage, and RBI has invited feedback from stakeholders until July 24.
If implemented, the new rules could create a stronger governance structure for AI use in the banking sector, helping banks benefit from advanced technology while reducing risks for customers and the broader financial system.
