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RBI's AI panel calls for balancing innovation with risk mitigation

The Reserve Bank of India's (RBI's) Committee on the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the financial sector has recommended an approach that treats the objectives of fostering innovation and mitigating risks as complementary forces to be pursued in tandem. The FREE-AI committee was constituted by the RBI to encourage the responsible and ethical adoption of AI in the financial sector. The committee outlined seven 'sutras' — core principles to guide AI adoption in the financial sector: trust is the foundation; people first; innovation over restraint; fairness and equity; accountability; understandable by design; and safety, resilience, and sustainability. It observed that AI has the potential to unlock new forms of customer engagement, enable alternative approaches to credit assessment, improve risk monitoring and fraud detection, and offer new supervisory tools. However, it cautioned that increased AI adoption could also lead to new risks such as bias and lack of explainability, while amplifying existing challenges related to data protection, cybersecurity, and more. According to the committee, the twin objectives of innovation and risk mitigation can be achieved through a unified vision built on six strategic pillars: Infrastructure, Policy, Capacity, Governance, Protection, and Assurance. These address both innovation enablement and risk mitigation. Its recommendations include establishing a shared infrastructure to democratise access to data, creating an AI innovation sandbox, and developing indigenous, financial sector-specific AI models. The committee also called for the formulation of an AI policy to provide regulatory guidance, as well as institutional capacity building at all levels, including boards, the workforce of regulated entities, and other stakeholders. It recommended sharing best practices and lessons across the financial sector, and taking a more tolerant approach to compliance with regulations for low-risk AI solutions to promote inclusion and other priorities. To mitigate AI-related risks, the committee urged all regulated entities to formulate a board-approved AI policy, expand product approval processes, update consumer protection frameworks and audits to include AI-related aspects, and strengthen cybersecurity practices and incident reporting frameworks. It also recommended establishing robust governance frameworks across the AI lifecycle, and ensuring consumers are informed when they are interacting with AI. 'For an emerging economy like India, AI presents new ways to address developmental challenges. Multi-modal, multi-lingual AI can enable the delivery of financial services to millions who have been excluded,' the FREE-AI committee said, adding that when used responsibly, AI offers tremendous benefits. At the same time, it warned that without guardrails, AI could exacerbate existing risks and create new forms of harm.