Banks and other regulated entities (REs) may soon have to ensure every artificial intelligence (AI) system they deploy can be overridden, suspended or deactivated through “kill-switch arrangements”, under the Reserve Bank of India’s (RBI) draft Guidance on Regulatory Principles for Model Risk Management, 2026.
Released for public consultation on Wednesday, the draft proposes a broad framework governing how banks, NBFCs and other financial institutions develop, deploy and oversee models, including AI systems. Stakeholders can submit comments until July 24, 2026. The guidance would apply to commercial banks, small finance banks, payments banks, local area banks, co-operative banks, regional rural banks, NBFCs, all-India financial institutions, asset reconstruction companies and credit information companies. The guidelines also clarify that “further requirements, if any, applicable to AI models may be issued later”.
Why is the RBI issuing these guidelines? The RBI said REs are increasingly using models to improve customer service, automate business processes, strengthen risk management and defend against cyber attacks. It attributed this to the growing scale and complexity of financial activities, digitalisation of financial services, advances in analytical and computational capabilities, AI and machine learning (ML), and greater reliance on third-party providers.
The draft defines a “model” broadly. It includes any internally developed or third-party system that uses data and statistical, mathematical, financial or AI/ML techniques to generate outputs used for business operations or decision-making. It also covers algorithms, analytics, applications, decision-based rules and other computational tools that materially affect business decisions, regardless of whether an RE formally classifies them as models.
The AI-specific provisions apply to AI and ML models, including foundational AI models and frontier AI models. The RBI said REs should define their scope and implement additional controls based on their potential impact on customers, business operations and financial outcomes.
Board oversight and governance: The RBI proposes that every RE establish a Board-approved Model Risk Management Framework (MRMF) covering governance, model tiering, inventory, documentation, validation, approvals, monitoring, change management, business continuity and decommissioning.
The Board would oversee the framework, while the Risk Management Committee of the Board would review high-risk models, monitor third-party and AI models, review model tiering at least annually and oversee breaches or other material concerns. The RBI also makes clear that REs remain accountable for the outcomes of every model they use, whether developed internally, sourced from third parties or a combination of both.
AI should only be used where risks can be managed: The RBI said REs should assess whether risks arising from AI models can be…
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