The Role of Artificial Intelligence in Financial Regulation and Compliance: Evidence from Indian Financial Institutions

Abstract

The study examines the transformative role of Artificial Intelligence in financial regulation and compliance within the Indian financial sector, set against the backdrop of the Reserve Bank of India's released Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI). Through systematic analysis of regulatory developments, corporate implementations, and market data from 2024 to 2026, this paper investigates how Indian financial institutions including scheduled commercial banks, non-banking financial companies (NBFCs), and fintech firms are integrating AI into compliance workflows. The research reveals that Indian Reg Tech market is projected to grow at a CAGR of 30.58% from USD 628.31 million in FY2024 to USD 5.31 billion by FY2032, driven by regulatory complexity and digital transformation. However, this rapid integration occurs within a newly formalized regulatory framework: the RBI's FREE-AI framework, built on seven foundational principles ("Seven Sutras") and six strategic pillars balancing innovation enablement with risk mitigation. Drawing on case studies of Poonawalla Fincorp's five AI compliance tools, Hero Fin Corp's GenAI-powered privacy-first transformation, and Intellect Design Arena's enterprise-wide governed AI deployment, this paper proposes a contextually adapted research model for AI-enabled compliance architecture that aligns with Indian regulatory expectations. The findings indicate that while Indian institutions demonstrate innovation with Poonawalla Fincorp implementing 45 AI projects including Suspicious Transaction Reporting (STR) and Reg Intel tools successful implementation requires adherence to the FREE-AI framework's mandates for board-approved AI policies, explainable models, and robust governance structures.