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Informist, Friday, Jan. 9, 2026

 

MUMBAI – India's banking sector must subject artificial intelligence and generative AI models to far greater scrutiny before adopting and scaling them, Department of Financial Services Secretary M. Nagaraju said, cautioning that unchecked deployment could expose banks to ethical risks, financial losses, and erosion of public trust. 

 

Speaking at a conference on responsible and resilient banking in the age of AI, organised by the Indian Banks' Association on Friday, Nagaraju said while banks across the world are rapidly investing in new-age technologies to remain agile and competitive, AI remains an "uncharted territory" for the financial system and requires careful governance, robust risk frameworks and bias-free data before widespread use.

 

"The core issues of AI ecosystems such as embedded biases, hallucinations and lack of explainability are troubling stakeholders globally," Nagaraju said, adding that these risks could lead to unethical practices and significant financial exposure if not addressed adequately before adoption.

 

His remarks come at a time when Indian banks are increasingly experimenting with AI-driven tools for credit underwriting, fraud detection, customer servicing and risk monitoring. Nagaraju noted that while AI can automate repetitive tasks, process large volumes of data and strengthen early warning systems, traditional banking systems are largely reactive and respond only after a shock has occurred.

 

The secretary said AI-powered models could help banks move towards predictive risk management by analysing global and domestic market conditions in real time, potentially preventing crises before they unfold. However, he stressed that such benefits can only be realised if AI systems are trained on unbiased data and embedded within strong corporate governance and cybersecurity frameworks. 

 

Nagaraju underlined that the Reserve Bank of India has already begun incorporating AI-specific guidance into its master directions and has outlined a framework for responsible and ethical development of artificial intelligence. Still, he said, "more scrutiny would be required before these models are adopted and scaled up," pointing to the need for safeguards at both the institutional and systemic levels.

 

At the same time, Nagaraju highlighted the transformative role AI could play in advancing financial inclusion and responsible banking. He said AI, combined with India's digital public infrastructure, could help simplify know-your-customer processes, enable faster grievance redressal and expand credit access to underserved segments by analysing unconventional data sources. 

 

India's MSME sector, which contributes around 30% to GDP and 44% to exports, faces a credit gap, he said. AI-driven credit models, multilingual interfaces and computational tools could help banks reach small borrowers, farmers and micro-entrepreneurs who remain dependent on informal channels despite multiple policy initiatives.

 

Looking ahead to the government's vision for 2047, Nagaraju said the scale of the challenge for the financial sector is unprecedented. India's banking sector is expected to grow to about $39 trillion by 2047, alongside a $30 trillion economy, requiring massive expansion in credit, financial inclusion, insurance penetration and digital payments infrastructure.

 

He said the aggregate outstanding banking assets would need to rise sharply from current levels, with credit to the private non-financial sector projected to increase significantly as a share of GDP. Achieving this growth sustainably, he said, would depend heavily on AI-enabled systems that can scale existing platforms while managing risks effectively.

 

Nagaraju also spoke about mule accounts and said the government along with the RBI has been hunting for them. However, new ones keep getting created which the government identifies. 

 

Nagaraju concluded by calling for coordinated efforts among regulators, banks, technology providers, and investors to build a strong domestic AI ecosystem, warning that without such an ecosystem, India risks falling behind global leaders such as the US and China in financial innovation.  End

 

Reported by Kabir Sharma and Cassandra Carvalho

Edited by Akul Nishant Akhoury

 

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