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  • Riding The AI Wave: Lack Of Governance Framework Opens Door To Potential Misuse

Riding The AI Wave: Lack Of Governance Framework Opens Door To Potential Misuse

Indian banks are embracing AI for key operations, but challenges related to transparency, accountability, and cybersecurity are emerging. The RBI is working on frameworks to address risks and ensure responsible AI use in banking.

Riding The AI Wave: Lack Of Governance Framework Opens Door To Potential Misuse

Lack of appropriate governance framework for AI may lead to potential abuse or misuse of tech


Indian banks are rapidly adopting artificial intelligence (AI) across their operations, from credit underwriting to fraud detection, as part of their digital transformation. While AI offers immense potential to enhance efficiency, concerns around transparency, accountability, and cybersecurity are growing.

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The latest Economic Survey highlights the impact of fast-evolving technologies like AI, blockchain, and data analytics, creating new opportunities to rethink traditional banking processes. Indian banks are leveraging AI for essential tasks such as regulatory capital planning, liquidity management, portfolio optimization, and personalized customer service.

AI tools, including large language models (LLMs), are enhancing customer interactions through advanced chatbots and customized experiences. Meanwhile, blockchain is improving transaction security and transparency.

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However, as AI becomes more integral to banking, its “black-box” nature is raising significant challenges. The lack of transparency in AI systems makes it difficult to evaluate their reliability or contest their decisions. This creates trust issues and complicates the ability to validate AI decisions, making it hard to audit or understand the algorithms at play.

The “black-box” issue refers to the opaqueness of AI systems, where users cannot see how inputs are processed or how decisions are made. This lack of visibility hinders accountability and raises concerns about fairness and accuracy.

Key issues surrounding AI include:

  • Human oversight: Inadequate oversight, over-reliance on AI, and the erosion of human expertise.
  • Cybersecurity: As AI systems expand, so do vulnerabilities to cyberattacks.
  • Malicious AI use: Risks like synthetic identity fraud, rogue trading, and market manipulation.
  • Third-party dependencies: Growing reliance on external AI service providers, leading to concentration risks.

Experts argue that establishing a strong AI governance framework is essential to mitigate these challenges. Without clear guidelines, AI systems could be vulnerable to misuse or operate without proper oversight.

RBI’s Role in AI Governance

The Reserve Bank of India (RBI) is addressing these concerns by engaging with banks and experts to develop oversight mechanisms. It has launched a regulatory sandbox to test AI-driven innovations and created the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI).

The RBI has also cautioned that financial regulators must keep up with AI advancements to ensure effective supervision and regulation.

ALSO READ: What To Expect From CEA Nageswaran’s Third Economic Survey



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