The Reserve Bank of India (RBI) has released a draft “Guidance on Regulatory Principles for Model Risk Management, 2026” for public comments. The proposed framework is applicable to a wide range of regulated entities, including Urban Co-operative Banks (UCBs) and Rural Co-operative Banks.
According to the RBI, the increasing use of models, including those based on Artificial Intelligence (AI) and Machine Learning (ML), across business operations and decision-making processes has heightened the need for stronger model governance and risk management practices.
The central bank noted that weaknesses in model governance, oversight, risk management and controls could expose regulated entities to financial, operational, compliance and reputational risks.
The draft guidance lays down broad regulatory principles for managing risks arising from the use of models throughout their lifecycle. It covers key aspects such as model governance, risk-based model tiering, lifecycle management, validation, continuous oversight, change management and business continuity. It also includes specific principles for managing risks arising from third-party models and models employing AI/ML.
RBI has clarified that the guidance will apply to all models used by regulated entities, whether developed internally, sourced from third parties or a combination of both. The regulated entity will remain accountable for the outcomes of all models used by it, including third-party models.
The draft guidance is applicable to Commercial Banks, Small Finance Banks, Payments Banks, Local Area Banks, Regional Rural Banks, Urban Co-operative Banks, Rural Co-operative Banks, Non-Banking Financial Companies (NBFCs), All India Financial Institutions, Asset Reconstruction Companies (ARCs) and Credit Information Companies (CICs).
The RBI said the draft follows its August 2024 draft on Regulatory Principles for Management of Model Risks in Credit and the report of the Committee on Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) released in August 2025.
Comments and feedback on the draft guidance have been invited from regulated entities, members of the public and other stakeholders by July 24, 2026.
