AI to drive next credit revolution but trust will be the real currency, says RBI Deputy Governor Rao

M. Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, said on Tuesday that artificial intelligence (AI) has the potential to power the next big leap in India's banking sector—just as UPI did for payments—but warned that its adoption must be responsible, transparent and centred on trust.

Speaking at the Banking Transformation Summit, Rao said Indian banking has entered "a new phase of revolution" where digital democratisation and AI-driven tools can expand credit access, especially for millions of underserved borrowers.

"An important use case of AI is in the way credit is assessed and distributed. By leveraging alternate data sets—from UPI transactions to GST filings—AI can bring millions of credit invisibles into the fold," Rao said, adding that this could shift India from asset-based to cash-flow-based lending.

But the inclusion gap remains stark. Despite steady progress in financial inclusion—RBI's index rose from 53.9 in March 2021 to 67 in March 2025—only 25% of India’s adults have formal access to institutional credit. For MSMEs, which contribute nearly 30% to GDP, just 40% of credit needs are met by formal institutions.

Rao stressed that AI could help close this gap. From behavioural analytics that fine-tune credit scoring to multilingual chatbots that localise customer service, AI promises to make banking more inclusive. "Credit must not only grow in numbers, but also be directed to productive sectors like MSMEs, rural and informal segments," he said.

At the same time, Rao warned of risks that could undermine the promise—algorithmic bias, opaque "black box" models, cyber vulnerabilities, concentration risks from reliance on a handful of tech providers, and the rise of deepfakes and AI-enabled fraud. "AI is only as strong as the data that shapes it," he cautioned, underlining the dangers of poor data quality and hidden systemic linkages.

For banks, this means investing in explainable AI, keeping a "human in the loop," and building strong governance frameworks. "The excitement around AI’s benefits should not overshadow prudent risk management," Rao said.

He closed with a reminder that technology cannot replace the foundations of finance: "Trust is the currency of banking. Even as we broaden credit coverage using algorithms and digital interfaces, maintaining this trust will be our biggest challenge and our biggest responsibility."