RBI's Committee on Responsible AI in the Financial Sector

The Reserve Bank of India (RBI) has established an eight-member committee to develop a framework for the responsible and ethical use of Artificial Intelligence (AI) in the financial sector, termed as FREE-AI.

Committee Leadership and Members

• The committee is led by Pushpak Bhattacharyya, a professor at IIT Bombay's Department of Computer Science and Engineering.
• Other members include: 
  • Debjani Ghosh - Independent Director, Reserve Bank Innovation Hub
  • Balaraman Ravindran - Head, Wadhwani School of Data Science and AI, IIT Madras
  • Abhishek Singh - Additional Secretary, Ministry of Electronics and Information Technology
  • Rahul Matthan - Partner, Trilegal
  • Anjani Rathor - Group Head and Chief Digital Experience Officer, HDFC Bank
  • Sree Hari Nagaralu - Head of Security AI Research, Microsoft India (R&D)
  • Suvendu Pati - Chief General Manager, FinTech Department, RBI

Objectives and Terms of Reference

• To recommend a robust, comprehensive, and adaptable AI framework for the financial sector.
• To assess current AI adoption levels in financial services, both globally and in India.
• To review regulatory and supervisory approaches on AI, focusing on the financial sector worldwide.
• To identify potential AI-associated risks and recommend frameworks for: 
  • Risk evaluation
  • Risk mitigation
  • Risk monitoring
  • Compliance requirements for financial institutions, such as banks, NBFCs, fintechs, and PSOs.
• To suggest a framework for the responsible and ethical adoption of AI models/applications in the domestic financial sector, including governance aspects.

Timeline

The committee is expected to submit its report within six months from the date of its first meeting.

Enhanced and Improved Recovery Policy for Oil and Gas

Policy Update

The government is set to notify a modified version of the Enhanced Recovery (ER) and Improved Recovery (IR) policy for oil and gas in 2025. This new policy aims to replace the existing 2018 framework, providing better financial incentives to ensure the commercial viability of projects.

• The expert committee submitted the draft Modified ER Policy, 2023, but it hasn't been adopted yet.
• The new policy is expected to address issues identified during studies and deliberations.

Existing Policy and Challenges

The 2018 policy framework was designed to promote ER and IR methods with fiscal incentives. It also included a provision for a review after five years, initiated in June 2023.

• India's recovery levels stand at 60% for oil fields and 80% for gas fields, as per the latest estimates from 2018.
• Declining oil and gas production is attributed to legacy wells with decreasing productivity.

Industry Concerns

• Both public and private sector companies call for policy updates to address productivity issues.
• Current ER/IR techniques are costly, and existing fiscal incentives are deemed insufficient.
• Administrative processes for availing incentives are cumbersome, requiring higher recovery rates and facing limitations like price ceilings.

Production and Import Dependency

• India's oil production has been on a decline since 2011-12, with FY24 production at 29.4 million tonnes, down from 38.1 million tonnes in 2011-12.
• The country remains a net importer of hydrocarbons, with import dependency rising to 87.8% in FY24 from 83.8% in 2018-19.

Significant Players

• Reliance Industries and Cairn Oil & Gas are major private sector companies engaged in upstream activities.
• National oil companies include Oil and Natural Gas Corporation (ONGC) and Oil India.

Upcoming Policy Benefits

• The new policy aims to provide better financial incentives for ER and IR projects.
• It is expected to address previous administrative and financial challenges faced by companies.

India's MoU with the US on Critical Minerals

India's Memorandum of Understanding (MoU) with the United States on critical minerals represents a significant advancement in their bilateral engagements. This is expected to pave the way for further commitments under the US Inflation Reduction Act (IRA).

Critical Minerals Partnership Agreement (CMPA)

• India has proposed a Critical Minerals Partnership Agreement (CMPA) with the US, especially in sectors like electric vehicles.
• The MoU on critical minerals supply chains was signed in October, aiming to leverage the complementary strengths of both countries to enhance resilience in the critical minerals sector.
• New Delhi anticipates that converting the MoU into a partnership would equate to a Free Trade Agreement (FTA), allowing India to benefit from the EV tax credit under the US IRA.

Benefits of US Inflation Reduction Act (IRA)

• The IRA provides a tax credit of up to $7,500 per electric vehicle, dependent on the origin of critical minerals used in EV batteries.
• The tax credit requires a percentage of materials to originate from the US or countries with an FTA with the US.
• This access is expected to attract substantial foreign investment and facilitate large-scale component manufacturing in India.

International Market Access Developments

• China: Granted market access for Indian exports of key fish species, including Pampus chinensis (Chinese pomfret), Pampus argenteus (silver pomfret), and Scylla serrata (mud crab).
• Russia: Allowed the export of dairy products from two listed establishments and egg products from six establishments in India.

FTA Negotiations

• India is engaged in FTA negotiations with several countries, including the UK, EU, Oman, Peru, and Sri Lanka.
• The India-Sri Lanka Economic and Technology Cooperation Agreement has completed its 14th round of negotiations by July 2024.
• Negotiations have concluded on most chapters, excluding specific goods lines related to garments.

Credit Growth Potential in India's Economy

A recent central bank report highlights India's potential for credit growth to stimulate economic expansion by analyzing the country's total debt to GDP ratio.

Key Findings

•  India's total credit-to-GDP ratio was 90.1% in 2022, which is below both advanced economies (AEs) and emerging market economies (EMEs), and under the estimated threshold of 113.1%. 
•  The central bank's economists suggest that a credit threshold of 113.1% of GDP could support economic growth without diverting credit towards less productive purposes. 
•  The study examined 16 emerging and advanced economies over the past 21 years to reach these conclusions. 

Economic Implications

•  Credit deepening can enhance consumption, investment, and economic activity. 
•  An inverted U-pattern is observed, suggesting that beyond a certain threshold, additional credit may be used for riskier or less productive activities, potentially dampening growth. 
•  Current credit growth has been below 15% for over three years, mainly driven by the retail sector. 
•  Lending to the private corporate sector, which constitutes about a quarter of total bank credit, has slowed in the current fiscal quarter compared to the previous quarter's high growth. 

Reserve Bank of India's Insights on Banking Digitization and Associated Risks

The Reserve Bank of India (RBI) has expressed concerns regarding the increased risk of cyber attacks, digital frauds, data breaches, and operational failures due to the rise in digitization. The findings were detailed in the report on the Trends and Progress of Banking in India.

Key Recommendations

• Enhancing Risk Management: Banks, non-bank financial companies (NBFCs), and co-operative banks are urged to bolster their risk management standards.
• Tightening IT Governance: There is a call for improved IT governance arrangements, stricter customer onboarding, and transaction monitoring systems to prevent suspicious activities.

Fraud Statistics

• Decline in Fraud Amount: As of March 2024, the total fraud amount was the lowest in a decade, with the average value being the lowest in 16 years.
• Digital Fraud Cases: For April-September 2024, digital frauds (card and internet) amounted to ₹514 crore across 13,133 cases, a decrease from ₹630 crore and 12,069 cases in the same period of the previous year.
• Internet and Card Frauds: These accounted for 44.7% of total frauds in terms of amount and 85.3% in terms of number of cases.

Specific Concerns

• Mule Bank Accounts: The RBI highlighted the rapid rise in the use of mule accounts for frauds, which pose financial, operational, and reputational risks to banks.
• Coordination with LEAs: Effective coordination with law enforcement agencies is necessary to detect and curb system-level fraud concerns.

Advisories for NBFCs

• Diversification of Funding Sources: NBFCs are advised to diversify their funding sources to mitigate risks and avoid over-reliance on bank-led funding.
• Risk Management Framework: The importance of developing a robust risk management framework and addressing customer grievances is emphasized.
• Discouraging 'Growth at Any Cost': NBFCs should avoid imprudent growth strategies and adhere to fair practices to prevent potential negative outcomes.

RBI's Initiative on Ethical AI in Financial Sector

The Reserve Bank of India (RBI) has taken a significant step towards the responsible implementation of artificial intelligence in the financial sector by forming a committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI).

Committee Composition

• Chairman: Pushpak Bhattacharyya, Professor, Department of Computer Science and Engineering, IIT Bombay.
• Members: 7 others from Industry and academia. 

Objectives and Responsibilities

• Assess the current level of AI adoption in financial services, both globally and in India.
• Review regulatory and supervisory approaches to AI with a focus on the financial sector worldwide.
• Identify potential risks associated with AI and recommend strategies for evaluation, mitigation, and monitoring.
• Suggest a framework for governance and responsible, ethical adoption of AI models in the Indian financial sector.
• Provide recommendations on any other matters related to AI in the Indian financial sector.

Timeline and Support

The Committee is expected to submit its report within six months from its first meeting. The FinTech Department, Central Office, Reserve Bank of India, will offer secretarial support to the Committee.