We are in a new era of technology. Everywhere we look, Artificial Intelligence (AI) devices promise to make our lives easier, faster, and more efficient. Detecting fraud, giving alerts if inconsistencies are found in credit card spending, and getting instant answers via an insurance company’s chatbot—all this is being made possible by AI. But if this technology is not used correctly, there is a risk of injustice to people. For example, what if AI wrongly rejects someone’s loan application? Or what if your personal information is collected without permission and used for other purposes? Let’s see what the Reserve Bank of India (RBI) is doing to prevent these risks.
For the past few weeks, I have written more than ten articles on AI and India’s judicial system, which you can read by visiting my previous articles like how Indian Judiciary is using AI and how Indian police are using AI etc.. As a continuation of that, another important administrative and regulatory body, the RBI, released a framework last August regarding its stance on AI, accountability, and the rules all institutions under its control must follow, titled “Framework for Responsible and Ethical Enablement of Artificial Intelligence“.
In this article, I will give a brief introduction to Benefits and pitfalls of using AI in financial sector, RBI’s seven basic principles, the key tasks all financial institutions under RBI must do to realize these principles, the six major pillars suggested for their implementation, and the benefits for the common people.
Benefits (Opportunities) of AI in the Financial Sector :-
- Fast Service: When you apply for a loan, instead of waiting for days, AI can review your application and give you an answer in just a few minutes.
- Equal Opportunity for All: Traditional banks often do not easily give loans to those in villages or small towns, or to those without proper documents. But AI can estimate their loan repayment capacity by analyzing a person’s mobile usage patterns, online purchases, or utility bill payments. This helps lakhs of people who were previously excluded from banking services.
- Better Customer Service: Are you tired of hearing “All our executives are busy on other calls” when you call the bank? AI-powered chatbots can answer our questions instantly, 24/7.
- Fraud Prevention: In this age of increasing online fraud, AI works like a security guard. It monitors every transaction in our account and immediately alerts us if anything suspicious is found.
- Personalized Advice: AI can analyze our expenses and give personal financial advice like, “You are spending too much here, you can save in this way.”
AI’s Risks and Challenges :-
Like the other side of a coin, AI also has some risks.
- Bias: AI doesn’t learn anything on its own; it learns based on the information (data) we provide. If we train it by feeding it more data of urban people, that AI might hesitate to give loans to people from villages. This leads to discrimination.
- The “Black Box” Problem: Sometimes, it’s impossible to explain why an AI made a certain decision (for example, rejecting your loan application). Its internal workings are mysterious. This is called the “Black Box” problem.
- Data Security: AI needs a huge amount of data to work. Since it uses our personal and financial information, there is a risk of that information being leaked or misused.
- Cyber-attacks: Hackers can use AI technology itself to conduct even more dangerous cyber-attacks. For example, they might try to transfer money by calling the bank using a copy (Deepfake) of your voice.
- Over-reliance: If we become dependent on AI for everything, there is a risk that the entire financial system could collapse if its system fails.
Keeping all these opportunities and risks in mind, the RBI committee has tried to find a balanced path.
Main Principles of RBI’s AI Framework :-
- Trust is the Foundation: The financial system is built on trust, and AI must only be used in a way that strengthens this trust.
- People First: AI is just a tool, not the decision-maker. AI should only help humans make decisions; the final judgment must always be in human hands.
- Priority for Innovation over Over-restriction: The RBI wants to encourage the use of AI; fostering responsible innovation is its goal.
- Equality: AI systems must be designed and tested to be fair, unbiased, and not discriminate against any person or group. It should be used to make financial services available to all.
- Accountability: If a financial institution uses AI, the institution itself is fully responsible for all AI decisions. This means if the AI makes a mistake, the bank cannot escape by saying, “The system made an error.”
- Transparency: Customers must be informed about how the AI made its decision. For example, the bank must simply explain why your credit limit was changed.
- Data Privacy, Consent, and Security: Your permission must be obtained before using your personal information. The AI cannot use it for any other purpose. The institutions themselves must take full responsibility for the security and privacy of your data.
Rules Financial Institutions Must Follow :-
- Every institution must establish an internal AI system oversight team and an accountability framework.
- AI models must be continuously reviewed. For example, the reasons why AI is rejecting loan approvals must be checked, and it must be verified that no bias is occurring.
- Banks must clarify how they are collecting customer data, how long they are storing it, and for what purpose they are using it. They must create consent and data protection policies for this.
- All staff must be given proper training on AI systems and how to interact with customers using them.
- All institutions must establish an easy grievance redressal system to correct it if customers face injustice from AI or if AI makes a wrong decision.
- Banks must regularly provide complete reports to the RBI on how they are using their AI models, what checks have been conducted, and what complaints have been received.
The 6 Pillars for Implementing RBI’s 7 Principles:-
The RBI will ensure that banks and financial institutions use AI technology with policy, justice, and transparency by implementing the 7 principles of its responsible AI framework—”Trust, People First, Innovation, Equality, Accountability, Transparency, Data Privacy, Consent, and Security”—through 6 pillars.
These 6 pillars are divided into two sections: the first three pillars promote the use of AI, and the next three pillars mitigate the risks arising from it.
- Infrastructure: This includes establishing a financial data lake for high-quality data and an AI sandbox to use it, providing financial incentives and technical assistance, and using all this to develop special AI models suited to our country’s needs.
- Policy: This involves adhering to rules that adapt to the speed of AI technology, slight relaxation in rules for financial inclusion for all, and fair liability for mistakes made during AI adoption.
- Capacity Building: This includes training everyone about AI technology and its risks, providing a platform for sharing experience/knowledge, and honoring organizations that develop good AI technology with awards.
- Governance: Establishing each institution’s own AI policy, strict rules for customer data management, and an AI system monitoring framework.
- Protection: A grievance platform for protecting customer interests from AI decisions and establishing “Red Teaming” for the cybersecurity of AI systems.
- Assurance: Every institution must establish its own AI inventory, conduct regular audits to check if AI systems are working correctly, fairly, and according to the rules, and disclose their AI usage transparently in their annual reports.
Benefits for the Common People from RBI’s framework :-
- Easy and fast loan opportunities for everyone.
- Service in local languages with the help of AI.
- Ability to conduct secure online business without fear of online fraud.
- An end to various types of discrimination through the use of AI.
- A system to easily file a complaint if there is an error in the service provided by AI.
Finally, this RBI framework is a compass for how to use the two-edged sword called AI carefully and with a human touch. It is a bold step that builds a bridge between technology and humans, giving a new direction to India’s economic progress.