Unpacking the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI)
Artificial Intelligence is no longer just a buzzword in finance. It is underwriting loans, monitoring fraud, and powering customer conversations. But with every new use case comes new questions: Is it fair? Is it reliable? Can we trust what the model decides?
The Reserve Bank of India (RBI) has stepped in with an answer. It recently released the Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI), a first-of-its-kind set of principles and recommendations for how banks, NBFCs, and payment players in India should build, deploy, and govern AI.
In this blog, we will unpack what the FREE-AI framework is, why it matters, and how its recommendations could shape the future of AI in Indian finance.
What is FREE-AI?
FREE-AI is RBI’s recommendation for how AI should be used in India’s financial sector. It was developed by a committee of experts and released on August 13, 2025, after extensive surveys and consultations with banks, NBFCs, fintechs, and global regulators.
The framework makes it clear that RBI does not see AI as optional. It recognises that the technology can improve inclusion, efficiency, and risk management, but only if adoption is done responsibly. FREE-AI is meant to guide institutions in building, deploying, and governing AI systems that are innovative and trustworthy.
To achieve this balance, the framework is organised around a set of strategic pillars, under which RBI has laid out 26 recommendations. These cover everything from shared infrastructure and institutional policy to governance, consumer protection, capacity-building, and independent assurance.
Why did the RBI introduce FREE-AI?
Artificial Intelligence is already reshaping Indian finance. It is being used to detect fraud, score credit, and interact with customers through chatbots and other digital channels. The RBI’s surveys found that while large banks and fintechs are actively experimenting with AI, smaller institutions remain cautious, citing challenges of cost, data quality, and governance.
The benefits of AI are clear: faster decisions, stronger fraud prevention, and new ways to bring underserved customers into the financial system. But the risks are equally significant. The RBI report highlights:
- Bias and fairness concerns, when models are trained on incomplete or skewed data
- Lack of explainability, where model outcomes cannot be interpreted or justified to customers and regulators
- Operational and systemic risks, as errors can quickly cascade across high-volume transactions
- Third-party dependencies, since many institutions rely on external vendors or cloud providers for AI capabilities
- Cybersecurity threats, where AI can be both a tool for defence and an attack surface
- Consumer protection and ethical concerns, especially when AI-driven decisions impact customer trust, rights, or financial well-being
The central challenge is balance. The report stresses that innovation and risk mitigation are not competing goals but complementary ones. FREE-AI was introduced to help financial institutions capture the upside of AI while putting safeguards in place to protect consumers and maintain trust in the financial system.
Who does FREE-AI apply to?
The FREE-AI framework is meant for all regulated entities (REs) in the Indian financial system. This includes:
- Scheduled commercial banks
- Non-banking financial companies (NBFCs)
- All India financial institutions
- Payment system operators (PSOs)
- Fintech companies and other innovators developing AI-driven solutions
The framework also recognises the role of ecosystem participants such as technology providers, cloud service partners, and fintechs that develop or deploy AI models used by regulated entities. While these players may not be directly regulated by the RBI, institutions that rely on them are expected to ensure that the principles of FREE-AI are followed throughout the AI lifecycle.
In practice, this means that whether an institution is experimenting with AI chatbots or deploying machine learning for credit decisions, it will need to align its processes with the expectations set out in FREE-AI.
FREE-AI’s seven sutras and six strategic pillars
At the heart of the FREE-AI framework are the seven sutras, guiding principles that should be woven into the lifecycle of every AI system in the financial sector. The sutras are:
- Trust is the foundation
- People first
- Innovation over restraint
- Fairness and equity
- Accountability
- Understandable by design
- Safety, resilience, and sustainability
To turn those principles into action, the framework is organised into six strategic pillars. Three pillars focus on enabling responsible innovation, and three focus on managing risks:
- Infrastructure — Build shared sectoral capabilities such as a financial sector data infrastructure integrated with IndiaAI’s AI Kosh, AI sandboxes, and accessible compute resources so institutions of every size can innovate responsibly.
- Policy — Develop adaptive, sector-specific policy guidance and encourage institutions to adopt board-approved AI policies that define permissible use cases, risk appetite, and governance norms.
- Capacity — Invest in skills, board and senior management competence, and cross-sector collaboration so people can design, assess, and oversee AI safely.
- Governance — Establish clear accountability, lifecycle governance for models, vendor oversight, and reporting lines so AI decisions are auditable and managed.
- Protection — Ensure consumer safeguards such as disclosures, explainability, grievance redressal, bias mitigation, and AI-aware cybersecurity to protect users and financial stability.
- Assurance — Put in place independent audits, impact assessments, continuous monitoring, and standardised toolkits to validate that AI systems meet the Sutras in practice.
FREE-AI’s 26 recommendations
The FREE-AI framework is built on six pillars, but its real strength lies in the 26 recommendations that bring those pillars to life. These recommendations guide institutions on everything from setting up sector-wide infrastructure to building governance frameworks, protecting consumers, and ensuring independent audits.
Together, they form a practical roadmap for adopting AI in a way that is both innovative and responsible.
What does FREE-AI mean for institutions?
For regulated entities, the FREE-AI framework is more than guidance. It signals a shift in how AI adoption will be expected to unfold across the financial system. Institutions will need to:
- Formalise governance by drafting a board-approved AI policy, assigning clear accountability, and reporting on AI initiatives at the senior management level.
- Prioritise transparency by explaining AI-driven decisions to customers, issuing disclosures, and offering grievance redressal mechanisms when outcomes are contested.
- Participate in shared initiatives such as sector-wide data infrastructure and AI innovation sandboxes that the framework envisions. These will make responsible AI development accessible to institutions of all sizes.
- Prepare for assurance mechanisms, including independent audits, bias testing, and impact assessments, which will likely become routine parts of regulatory compliance.
Wrapping up
The FREE-AI framework marks an important milestone in India’s financial sector. By combining principles with practical recommendations, it gives institutions a clear path to adopt AI in ways that are innovative, fair, and accountable.
For banks, NBFCs, fintechs, and payment operators, the message is clear: AI is no longer optional, but neither is responsibility. The framework sets expectations for governance, transparency, consumer protection, and assurance, all of which will shape how AI is built and deployed in the years ahead.
Organizations that start aligning early will not only stay ahead of regulatory expectations but also build stronger trust with customers, partners, and investors.
At Scrut, we help forward-looking institutions embed compliance and governance into how they adopt emerging technologies like AI. If you are exploring the FREE-AI framework and want to prepare your organization for what comes next, our team is here to support you. Schedule a demo to learn more.
FAQs
1. What is the FREE-AI framework?
FREE-AI (Framework for Responsible and Ethical Enablement of Artificial Intelligence) is the Reserve Bank of India’s guidance for how AI should be responsibly adopted, governed, and deployed in India’s financial sector. It provides principles and 26 recommendations covering governance, consumer protection, infrastructure, and assurance.
2. Why did the RBI introduce FREE-AI?
AI adoption in finance is growing rapidly, from chatbots to credit scoring and fraud detection. While AI offers benefits like efficiency, inclusion, and better risk management, it also poses risks such as bias, lack of explainability, operational failures, and cybersecurity threats. FREE-AI helps institutions balance innovation with responsible deployment to protect consumers and maintain trust.
3. Who needs to follow FREE-AI?
FREE-AI applies to all regulated entities under RBI, including:
- Scheduled commercial banks
- Non-banking financial companies (NBFCs)
- All India financial institutions
- Payment system operators and providers
- Other financial institutions under RBI oversight
Institutions that work with AI technology providers, fintechs, or cloud partners are also expected to ensure the framework’s principles are followed throughout the AI lifecycle.
4. What are the key pillars of FREE-AI?
The framework is structured around six strategic pillars:
- Infrastructure – Building sector-wide data infrastructure and AI innovation sandboxes.
- Policy – Clear institutional and national AI policies guiding adoption and risk management.
- Capacity – Developing AI skills, knowledge sharing, and expertise in fairness and explainability.
- Governance – Board-level accountability, reporting, and oversight of AI initiatives.
- Protection – Ensuring consumer disclosures, grievance mechanisms, and fairness in AI decisions.
- Assurance – Conducting independent audits, impact assessments, and evaluations to ensure AI systems are reliable, fair, and trustworthy.
5. What are the 26 recommendations in FREE-AI?
The 26 recommendations provide actionable guidance across all six pillars, from establishing shared infrastructure and drafting AI policies to conducting audits, bias testing, and ensuring explainability. They offer a practical roadmap for responsible AI adoption in finance.
6. How does FREE-AI impact financial institutions?
Institutions must:
- Formalise governance with board-approved AI policies and clear accountability.
- Prioritise transparency through customer disclosures and grievance redressal mechanisms.
- Participate in sector-wide initiatives like data infrastructure and AI sandboxes.
- Prepare for assurance measures such as audits, impact assessments, and bias testing.
Essentially, AI cannot be treated as an isolated experiment; it must be governed as a core financial process.
7. Is AI adoption mandatory under FREE-AI?
AI adoption is not mandatory, but FREE-AI makes clear that any AI used must follow responsible practices. The framework sets expectations for governance, transparency, consumer protection, and assurance, ensuring AI deployment is safe, fair, and accountable.
8. Where can I learn more about implementing FREE-AI in my institution?
Institutions can refer to the full framework document released by the RBI and use the FREE-AI checklist for step-by-step guidance on aligning AI initiatives with the 26 recommendations.
