On August 13, 2025, the Reserve Bank of India (RBI) released the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI), committee report.
To balance innovation with accountability, the FREE-AI framework sets out seven core principles: trust; innovation over restraint; accountability; safety, resilience, and sustainability; people first; fairness and equity; and understanding by design.
Ronin Legal unpacks the report.
Recommendations: A Dual-Focus Approach to Responsible AI Governance
In its recommendations for principles to practice, the committee sets out a variety of principles, with the dual focus approach of innovation and risk mitigation. The Report suggests the following:
- establishing a high-quality financial sector data infrastructure to build trustworthy AI models, integrated with AI Kosh under the IndiaAI Mission.
- establishing an AI Innovation Sandbox, to manage risks before AI systems are deployed at scale. A controlled testing environment will allow financial institutions, fintechs, and regulators to trial AI-driven models and identify potential issues early on.
- creation of a framework that allows AI technologies to be used in delivering financial services that are inclusive, affordable, and scalable.
- periodic review of policies by regulators to facilitate innovation while addressing emerging risks, with the RBI issuing a consolidated AI guidance for Regulated Entities (REs).
- establishing a graded liability framework to hold entities accountable for damages caused by AI deployment. However, leniency may be shown for first-time breaches, provided proper safeguards are in place.
- formation of a permanent AI Standing Committee under the RBI to oversee AI’s long-term impact, which would monitor risks and assess the relevance of current regulations.
- establishing a dedicated body under the National AI Safety Institute to focus on the financial sector’s AI safety.
- implementation of data governance practices in line with the Digital Personal Data Protection Act, ensuring transparency, fairness, and consumer protection.
- establishment of a board-approved consumer protection framework by REs to prioritise transparency, fairness, and accessible recourse mechanisms.
- investment by REs in consumer awareness on safe usage and their rights and encouragement of the same by regulators.
- risk simulation and establishment of an AI incident reporting mechanism by REs that prioritizes transparency.
- maintenance an AI inventory by REs for supervisory inspection, with auditors assessing AI systems based on their risk profile.
- mandatory AI disclosures in annual reports to ensure transparency.
- development of an AI Compliance Toolkit to help entities demonstrate their adherence to regulations.
- implementation of a risk-based AI audit framework by REs aligning with board-approved AI risk categorisation in the following manner:
- internal audits proportional to the risk level of AI.
- independent third-party audits for high risk or complex AI use cases.
- reviews and biannual update of the overall audit framework to incorporate emerging risks, technologies, and regulatory developments.
- Engaging an artificial intelligence law firm can help financial institutions interpret these evolving principles and build compliance-ready AI systems.
AI Specific Enhancements in RBI Master Directions
In parallel with new frameworks, the committee has highlighted the importance of aligning AI governance with existing regulatory directions issued by the RBI. Some of the prominent directives are as follows.
- Expanding the scope of the RBI Guidelines on Outsourcing of Financial Services to require institutions to include clauses on algorithmic bias and accountability in AI processes, extending these obligations to third-party vendors and subcontractors, including disclosure of AI usage.
- Broadening of the Cyber Security Framework in Banks to manage AI-related risks, such as model poisoning and adversarial attacks, with protocols for AI-related cybersecurity incidents.
- Evolution of the Guidelines on Digital Lending to mandate transparency in AI-driven credit assessments, while fairness audits could be introduced to detect algorithmic biases.
- Updating the Master Circular on Customer Service in Banks to require banks to notify customers when they interact with AI systems and allow them to challenge AI-driven decisions.
- In fraud detection, the Fraud Risk Management Master Direction may encourage the use of AI to detect early warning signs of fraud, with regular testing to ensure accuracy.
- Amendment of the Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices to include provisions to establish measures for managing access to autonomous AI systems, ensuring security and accountability in their deployment.
- Requiring additional transparency under the Master Direction on Outsourcing of Information Technology Services by requiring service providers to disclose the use of AI in service delivery and to include AI-specific risk assessments, for outsourcing arrangements involving AI technologies.
Conclusion
In conclusion, the committee’s report presents a balanced approach to the deployment of AI within India’s financial sector.
By integrating AI with existing regulatory frameworks and proposing targeted updates to current guidelines, the report ensures that the rapid adoption of AI technologies is met with appropriate oversight and accountability.
The focus on risk mitigation, transparency, and consumer protection, alongside fostering innovation, aims to create a sustainable environment for AI without compromising the integrity or stability of the financial system. At the same time, guidance from a top corporate law Firm ensures that AI adoption is aligned with broader governance, risk management, and long-term business strategy.
Authors: Shantanu Mukherjee, Akshara Nair
