The Reserve Bank of India (RBI) today noted that as per its internal committee fewer than one in four financial institutions in the country have adopted artificial intelligence (AI), with uptake primarily confined to larger banks and non-banking financial companies (NBFCs).

The findings were part of the newly-released report, titled 'Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector.'

According to the committee’s report, only 20.8% of 612 supervised entities surveyed by the Department of Supervision (DoS) were either using or developing AI systems.

“In case of UCBs, no AI usage was reported by Tier 1 Urban Co-operative Banks (UCBs), while adoption among Tier 2 and Tier 3 UCBs remained below 10%. Among the 171 surveyed NBFCs, only 27% have been using AI in some manner. No adoption was observed among Asset Reconstruction Companies (ARCs),” RBI noted in the report.

The gap between large and small players is clear. Larger public and private banks reported higher adoption rates, mainly in the implementation of 'simpler rule-based models or early-stage exploration of advanced models. Smaller institutions cited capacity constraints, limited business cases, and high infrastructure costs as reasons for their limited engagement.

The RBI’s FinTech Department conducted a detailed survey showing that among adopters, most relied on basic rule-based AI models and moderately complex machine learning models, with only limited use of advanced AI. Common applications included customer support, credit underwriting, sales and marketing, and cybersecurity — functions that are lower risk and easier to integrate.

However, the report highlighted significant obstacles hindering wider adoption. “The respondents cited several barriers to broader AI adoption that included the AI talent gap, high implementation costs, lack of high-quality data for model training, insufficient access to computing power, and legal uncertainty. Smaller entities, particularly those with resource constraints, emphasised the need for low-cost environments where they could securely experiment before deploying their use cases,” stated the report.

 The committee also cautioned that India’s financial ecosystem risks falling behind if adoption continues to weaken.

"The risk of not adopting AI, at both the sectoral and institutional levels, presents a significant threat to the long-term competitiveness, operational efficiency, and financial inclusion goals of India’s financial ecosystem. At the institutional level, reluctance to deploy AI-enabled tools may itself pose a significant risk, as this is often the only effective way to counter the use of AI by malicious actors,” RBI noted.

“It can also risk widening the financial access gap, particularly in underserved and rural areas, where AI-driven solutions like alternative credit scoring models and predictive analytics for microfinance can be transformative," stated the report

The committee report also laid a framework to guide AI use in the financial sector. It aims to harness its potential while protecting against related risks. For this, the committee has developed 7 Sutras to serve as the core principles for AI adoption.