In News:

• The Reserve Bank of India (RBI) has set up an eight-member committee to create a framework for the responsible and ethical use of Artificial Intelligence (AI) in the financial sector.
• The committee is chaired by Dr. Pushpak Bhattacharyya, Professor in the Department of Computer Science and Engineering at IIT Bombay.

Key Highlights:

Committee's Objective:

• The primary goal is to develop a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector.
• It will guide the ethical adoption of AI in financial services to enhance operational efficiency, decision-making, and risk management.

Scope of the Committee's Work:

• Assess the current global and domestic adoption of AI in financial services.
• Identify potential risks and challenges associated with the integration of AI in the sector.
• Recommend a framework for evaluating, mitigating, and monitoring AI-related risks.
• Propose compliance requirements for various financial entities (e.g., banks, NBFCs, fintech firms).
• Suggest a governance framework for ethical AI usage.

Key Benefits of AI in Financial Services:

• Operational Efficiency: AI can automate repetitive tasks, process large datasets, and enhance accuracy (e.g., loan application processing).
• Enhanced Decision-Making: Predictive analytics in AI help forecast market trends, aiding in better financial decision-making (e.g., algorithmic trading).
• Customer Relationship Management: AI-powered chatbots and virtual assistants enhance customer interaction, offering 24/7 support.
• Improved Risk Management: AI enables proactive fraud detection, improving security and preventing financial losses.

Concerns Associated with AI in Finance:

• Embedded Bias: AI models can replicate biases present in training data, leading to discriminatory outcomes and financial exclusion.
• Data Privacy and Security: The use of AI poses risks to personal data security, with potential violations of privacy regulations.
• Operational Challenges: AI systems may exhibit inconsistent responses, leading to challenges in trust and effectiveness.
• Cybersecurity Risks: Increased use of AI can heighten vulnerability to cyber-attacks and exploitation.

RBI's Role & Governance:

• The RBI aims to ensure that AI adoption in the financial sector is ethical, transparent, and aligned with global best practices.
• The committee's recommendations will influence policies to prevent misuse and safeguard consumer interests.