RBI Releases Guidelines to Regulate AI Use in Financial Sector

The Reserve Bank of India has released a report called Framework for Responsible and Ethical Enablement of AI (FREE-AI) to regulate the use of AI in the financial sector. The report has seven guidelines and 26 recommendations to encourage innovation, addressing risks such as bias and accountability. RBI aims to strike a balance between regulating AI and promoting innovation in the financial sector.

The Reserve Bank of India (RBI) has introduced the Framework for Responsible and Ethical Enablement of AI (FREE-AI) to govern the use of artificial intelligence in the financial sector. The report, released on July 02, 2025, aims to strike a balance between regulating AI and fostering innovation, addressing critical risks such as bias and accountability.

The FREE-AI framework consists of seven guidelines and 26 recommendations, designed to encourage responsible AI adoption in the financial sector. It emphasizes fairness, explainability, and robustness in AI systems, transforming responsible AI into a compliance requirement [1].

Experts believe that implementing this framework will necessitate significant investment and cultural shifts for banks. While upfront costs may challenge some, long-term benefits such as improved decision-making and increased customer trust are anticipated. Data quality and bias removal are critical hurdles that banks must address [1].

From an implementation perspective, cultural change is deemed critical. According to Ajay Trehan, founder and CEO of AuthBridge, "Explainability means every AI-driven decision must be traceable to logic a human can understand, while fairness means ensuring no demographic is unduly disadvantaged." He added that the RBI's move makes responsible AI a compliance requirement, extending it from just best practice [1].

While the upfront costs of infrastructure, training, and monitoring may pressure some banks, experts agree that long-term benefits will outweigh these challenges. Improved decision quality, reduced compliance risk, and increased customer trust are expected to follow. "The hardest part is rarely the technology; it's cleaning legacy data and driving cultural change so that fairness and transparency are built in from day one," said Trehan [1].

Auditing an AI system under the FREE-AI framework involves more than just testing algorithms. According to Karthik Pasupathy, partner, Financial Services Risk Consulting, EY India, auditing involves evaluating governance processes, use case approvals, involvement of risk and compliance functions, and documenting decisions. Broader evaluations involve running models through rare or extreme cases to ensure they adhere to laws and ethical norms. Techniques like SHAP and LIME can explain complex models, but fairness eventually depends on the quality of training data [1].

Most Indian banks are still in the early stages of AI adoption, transitioning from rule-based to simpler machine learning models. The adoption of AI in the banking sector is expected to reshape 35-50% of jobs, addressing limited productivity gains despite increased IT spending. However, the job market in the formal sector has faced challenges from the adoption of AI, with some sectors already experiencing layoffs. Indian banks will increasingly spend on technology, with IT cost leading the pack in operating expenses over the decade to FY25 [2].

The consultancy firm Boston Consulting Group (BCG) reports that adopting AI can overcome the challenge posed by limited productivity gains and said many banks are already adopting such tools. "We feel that about 35-50 per cent of jobs can get reshaped if banks are able to boldly embrace these new technologies, and that will be a prerequisite if the banking sector has to break the sticky cost structures that they've been encountering over the last few years," said Ruchin Goyal, senior partner at BCG [2].

In the fast-casual dining sector, Restaurant Brands International (RBI) leverages AI and sustainable energy to reshape the industry. The company's strategic investments in AI and digital tools have already contributed to a 4.1% year-over-year comparable sales growth in Burger King International by 2025. Similarly, Tim Hortons has deployed AI-enhanced customer engagement platforms, enabling hyper-localized promotions and real-time inventory management [3].

RBI's energy strategy is equally groundbreaking, achieving 99% renewable energy procurement for corporate-owned facilities in 2024. This transition reduces exposure to volatile energy markets and positions RBI as a leader in ESG investing. The company's Q2 2025 results underscore the financial viability of its dual strategy, with consolidated system-wide sales growing 5.3% year-over-year and adjusted operating income (AOI) rising 5.7% organically [3].

In conclusion, the RBI's FREE-AI framework represents a significant step towards responsible AI adoption in the financial sector. While the implementation may pose challenges, the long-term benefits are expected to outweigh the initial costs. The banking sector is also expected to undergo significant changes due to AI adoption, with a potential reshaping of up to 50% of jobs. Meanwhile, companies like Restaurant Brands International demonstrate how AI and sustainable energy can drive operational excellence and financial resilience.

References:
[1] https://economictimes.indiatimes.com/tech/artificial-intelligence/rbis-free-ai-framework-will-require-governance-structures-capacity-building/articleshow/123533954.cms
[2] https://m.economictimes.com/industry/banking/finance/banking/ai-could-reshape-half-of-the-roles-in-indias-banking-sector-report/articleshow/123504418.cms
[3] https://www.ainvest.com/news/restaurant-brands-international-strategic-position-fast-casual-dining-sector-ai-energy-megatrends-2508/