Lok Sabha Question No. 2619 (UNSTARRED), answered on 2025-03-17
Subject: Use of AI in Financial System
Ministry: FINANCE
Asked by: Shri Naveen Jindal

## GOVERNMENT OF INDIA MINISTRY OF FINANCE

## DEPARTMENT OF ECONOMIC AFFAIRS

## LOK SABHA UNSTARRED QUESTION NO. 2619

ANSWERED ON MONDAY, MARCH 17, 2025/PHALGUNA 26, 1946 (SAKA)

## USE OF AI IN FINANCIAL SYSTEM

2619.  Shri Naveen Jindal

Will the Minister of FINANCE be pleased to state:

- (a) whether it is a fact that the Reserve Bank of India in its latest Financial Stability Report (FSR) has red flagged significant emerging risks from the adoption of Artificial Intelligence  in  Financial  Sector  including  increased  cyber  risks,  potential  aid  to fraudsters in launching sophisticated phishing attacks using deep fakes, etc.; and
- (b) if so, the effective counter strategy planned by the Government in this regard?

## ANSWER

## MINISTER OF STATE IN THE MINISTRY OF FINANCE

(SHRI PANKAJ CHAUDHARY)

- (a): Yes, Sir.

The December 2024 Financial Stability Report (FSR) of RBI released on December 30,  2024,  has,  inter  alia,  mentioned  that  the  evolution  and  adoption  of  Artificial Intelligence (AI) poses several risks to financial stability. RBI has highlighted that the threat of cyber risk turning into a financial stability risk is high as AI could aid cyber attackers through sophisticated phishing attacks such as creation of deepfakes using generative AI.

(b): RBI has taken various initiatives  to  enhance  the  banking  sector's  resilience against  frauds  by  leveraging  the  use  of  emerging  technologies  including  AI/ML (Machine Learning).

In  the  fourth  cohort of  Regulatory Sandbox (RS) of RBI on theme 'Prevention and Detection of Financial Frauds' and in fifth cohort of RS which was 'Theme Neutral', entities tested early warning systems for fraud identification based on proprietary AI models that used data across public and private data sources to trigger alerts. One of the  themes  in  the  third  edition  of  HaRBInger  2024  was  'Zero  Financial  Frauds' focussing  on  problem  statements  of  real-time  fraud  detection  and  identifying  mule bank accounts. During this many of the solutions developed by teams were based on AI/ ML.

RBI has constituted a committee on December 26, 2024 to develop a Framework for Responsible and Ethical Enablement of AI (FREEAI) and one of the terms of reference of  the  committee  is  'To  identify  potential  risks  associated  with  AI,  if  any  and recommend  an  evaluation,  mitigation  and  monitoring  framework  and  consequent compliance requirements for financial institutions, including banks, NBFCs, FinTechs, PSOs, etc.'. In this regard, the said framework is expected to address risks from the adoption of Artificial Intelligence in financial sector including increased cyber risks.

Further, in the context of the securities market, SEBI has recently issued regulations mandating that persons regulated by SEBI [including Market Infrastructure Institutions (MIIs), registered intermediaries, Asset Management Companies (AMCs), managers of pooled investment vehicles], who use Artificial Intelligence tools, either designed by them  or procured from third-party technology service providers, to take full responsibility  for  their  use  of  such  tools.  The  regulations  would  be  applicable irrespective  of  the  scale  and  scenario  of  adoption  of  such  tools  for  conducting  its business and servicing its investors and such SEBI regulated persons would be solely responsible for-

(i) the  privacy,  security  and  integrity  of  investors  and  stakeholders'  data including data maintained by it in a fiduciary capacity, throughout the processes involved; (ii) the output arising from the usage of such tools and techniques it relies upon or deals with; and (iii) the compliance with applicable laws in force.

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