RBI drafts model risk rules for public comment
The Reserve Bank of India has released draft guidance on regulatory principles for model risk management. The comprehensive framework applies to a wide range of regulated entities and is open for public comments until July 24, 2026.
Holistic framework for diverse entities
The Reserve Bank of India has released its draft 'Guidance on Regulatory Principles for Model Risk Management,' establishing a comprehensive framework for oversight across the financial sector.
This new guidance applies to a wide array of regulated entities, ensuring a unified and robust approach to model governance.
The scope includes commercial banks, small finance banks, payments banks, local area banks, and regional rural banks.
It further extends to urban and rural co-operative banks, All India Financial Institutions, Non-Banking Financial Companies, Asset Reconstruction Companies, and Credit Information Companies.
This broad applicability underscores the RBI's commitment to fostering sound risk management practices across all segments of the financial system.
The framework provides holistic regulatory expectations for managing model risk throughout the entire model lifecycle, from initial development and implementation to ongoing validation and monitoring.
It explicitly covers all models used by these entities, encompassing both third-party models and those employing advanced Artificial Intelligence (AI) and Machine Learning (ML) technologies.
This expansive scope reflects the RBI's proactive stance in addressing the increasing complexity and pervasive use of analytical models within the financial system, aiming to strengthen overall risk management practices and mitigate potential vulnerabilities.
Mitigating evolving model risks
This new guidance builds upon previous regulatory efforts, including earlier draft principles for credit model risks (August 05, 2024) and insights from the Committee on Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) report (August 13, 2025).
The significant expansion of model usage, particularly those employing Artificial Intelligence and Machine Learning (AI/ML), across various business and decision-making processes, has highlighted substantial vulnerabilities.
Weaknesses in their governance, oversight, risk management, and controls may expose regulated entities to financial, operational, compliance, and reputational risks.
Recognizing these evolving challenges, the Reserve Bank has developed this comprehensive guidance to ensure that regulated entities proactively manage these risks, thereby safeguarding financial stability.