An RBI panel has recommended that banks and other financial institutions formulate a policy to mitigate risks arising from the use of artificial intelligence (AI) in the financial sector, saying that without guardrails, it can exacerbate risks.
The Reserve Bank of India (RBI) had set up the committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the financial sector in December last year.
In its report, published by the RBI on Wednesday, the panel sets out a framework to guide the use of AI in the financial sector, aiming to harness its potential while safeguarding against associated risks.
The committee has developed seven Sutras to serve as the foundational principles for AI adoption. Guided by the Sutras, the committee has recommended a forward-looking approach, containing 26 actionable recommendations under six strategic pillars.
The report envisions a financial ecosystem where encouraging innovation is in harmony, and not at odds, with the mitigation of risk.
“For an emerging economy like India, AI presents new ways to address developmental challenges,” the report said.
Multi-modal, multi-lingual AI can enable the delivery of financial services to millions who have been excluded. When used right, AI offers tremendous benefits.
“If used without guardrails, it can exacerbate the existing risks and introduce new forms of harm,” it said.
To mitigate AI risks, the panel has recommended the formulation of a board-approved AI policy by regulated entities (REs) and making consumers aware when they are dealing with AI.
It has also recommended the expansion of product approval processes, consumer protection frameworks and audits to include AI-related aspects.
Augmentation of cybersecurity practices and incident reporting frameworks, and establishment of robust governance frameworks across the AI lifecycle, are some of the other suggestions of the panel.
According to the report, the challenge with regulating AI is in striking the right balance, making sure that society stands to gain from what this technology has to offer, while mitigating its risks.
Jurisdictions have adopted different approaches to AI policy and regulation based on their national priorities and institutional readiness.
In the financial sector, AI has the potential to unlock new forms of customer engagement, enable alternate approaches to credit assessment, risk monitoring, and fraud detection, and offer new supervisory tools.
“At the same time, increased adoption of AI could lead to new risks like bias and lack of explainability, as well as amplifying existing challenges to data protection, cybersecurity, among others,” the report said.
The seven Sutras formulated by the panel are: trust is the foundation; people first; innovation over restraint; fairness and equity; accountability; understandable by design; and safety, resilience and sustainability.
To foster innovation, the panel has also made several recommendations, including the establishment of shared infrastructure to democratise access to data and compute, the creation of an AI Innovation Sandbox, and the development of indigenous financial sector-specific AI models.
