Winning in the AI Era

In remarks delivered this week, Sanjay Malhotra, Governor of the Reserve Bank of India (RBI), discussed how Indian banks should approach AI adoption and the governance, risk management, and investment needed to support it.

Malhotra said the RBI sees AI as “a capability to be responsibly harnessed and not merely as a risk to be contained.” He highlighted its potential to expand access to credit through alternative data, improve credit-risk and liquidity forecasting, support customer service and financial inclusion, reduce operating and compliance costs, and strengthen fraud detection. But each institution’s use of AI should be guided by its own playbook, he explained, shaped by its customer base, risk appetite, and governance capabilities. To accelerate adoption, banks will need to invest in infrastructure, talent, training, partnerships, and governance, supported by “a deliberate, board-driven strategy” and intent, Malhotra argued.

He also identified risks that banks should address as AI becomes more embedded in financial decision-making. These include model opacity, bias, concentration among technology providers, third-party dependence, data privacy, cyber vulnerabilities, and the potential erosion of human judgment and accountability. “‘The model decided’ can never be an acceptable answer to a customer, an auditor, or the Reserve Bank,” Malhotra said.

The RBI intends to pursue a principles-based and proportionate approach, building on recommendations from its Committee for the Framework for Responsible and Ethical Enablement of AI (FREE-AI) and its draft Model Risk Management guidelines. Malhotra urged banks to maintain complete inventories of AI systems, establish board-approved AI governance policies, explain decisions that materially affect customers, regularly red-team and stress-test systems, and preserve meaningful human oversight where errors could cause material harm.

“The banks that will win in the AI era will not necessarily be the ones that adopt the most AI, or the fastest,” Malhotra concluded. “They will be the ones that adopt it with the deepest understanding of what they are deploying, the clearest accountability for its outcomes, and the strongest commitment to the customer's trust that has always been, and will remain, the true capital of Indian banking.”