Context:

The Reserve Bank of India (RBI) has announced to constitute a committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector. 

About the Committee:

• It will be an eight-member committee headed by a professor from IIT Bombay (Dept of Computer Science and Engineering).
• The Committee will assess the current level of adoption of AI in financial services, globally as well as in India. 
• It will review regulatory and supervisory approaches to Artificial Intelligence (AI) with a focus on the financial sector globally.
• It will also identify potential risks associated with AI, if any, and recommend an evaluation, mitigation and monitoring framework and consequent compliance requirements for financial institutions, including banks, NBFCs, FinTechs, PSOs, etc.
• It will also recommend a framework that includes governance aspects for the responsible, ethical adoption of AI models/applications in the Indian financial sector.
• It will submit its report within six months from the date of its first meeting.

AI in the Indian Financial Sector:

In its October month’s report, the Reserve Bank of India (RBI) has recognized the transformative potential of artificial intelligence (AI) in the banking sector such as: - 

• AI is seen as a tool to streamline processes, reduce errors, and enhance customer experience.
• AI-powered solutions can improve risk assessment, fraud detection, and better customer service.
• These innovations can make banking services more accessible to a broader population.

Challenges and Concerns:

• The RBI highlighted the risk of bias in AI algorithms, which could lead to discriminatory outcomes.
• Data privacy and security concerns need to be addressed to ensure responsible use of AI.

Adoption by Private vs Public Sector Banks:

• Private sector banks have been more proactive in adopting AI solutions, focusing on digital innovation.
• They use AI for customer segmentation, robo-advisory, and personalized financial advice.
• Public sector banks are also increasingly recognizing the potential of AI.
• As AI evolves, banks must strike a balance between innovation and responsible use of the technology.