Banking PSUs Under RBI AI Guidance

A public-sector bank's IT committee minutes said the vendor was 'compliant with the RBI AI Act'. There is no such Act. A later inspection would have asked for the section. The minutes would have become the story. The CISO, who had not been in the room, had the sentence struck and replaced with four citations that actually exist.

This explainer is for compliance, DPO and CISO staff in public-sector banks and other RBI-regulated entities that still use PSU governance habits. It is a layered map, not a new statute. As of 17 August 2026, treat RBI's published Master Directions on IT outsourcing (10 April 2023, effective 1 October 2023) and on IT governance, risk, controls and assurance (7 November 2023), the 6 April 2018 payment-system data storage direction, KYC and digital-lending texts that mention analytics, DPDP, CERT-In, and any draft guidance RBI has actually posted. If a draft exists the week you file, call it a draft. Do not promote it to an Act.

Public-sector banks add a second culture on top of the RE stack: CVC, CAG, DPE-adjacent board habits, and unionised staff. Those do not rewrite RBI. They do decide how slowly a model will move from a sandbox to a branch.

Not legal advice and not an inspection manual. Read the current Master Direction text on rbi.org.in, the 2018 FAQs, your board-approved IT policy, and counsel. We will not invent section numbers that a later consolidation might move.

Layers, not an Act

Layer one: storage of payment-system data. The 6 April 2018 direction (DPSS.CO.OD.No.2785/06.08.005/2017-18) and RBI's FAQs require the full end-to-end payment-system data to be stored in India. A prompt that carries a UPI reference, a card artefact, an account number, or a reconciliation exception is payment-adjacent even when the product team calls it 'just context'. The conservative file does not send that prompt to a foreign model host.

Layer two: outsourcing of IT services. The 2023 Directions treat many cloud, analytics and managed-service arrangements as outsourcing. An agent vendor that operates the model, the vector store, or the SOC view is usually in that conversation. Boards remain accountable. Subcontractors have to be known. Cross-border processing has to be written, not assumed. We will not pretend the Direction is an AI-specific code. We will also not pretend an LLM vendor is 'just software' if they run the stack.

Layer three: IT governance, risk, controls and assurance. The 7 November 2023 Master Direction (effective 1 April 2024 for the relevant REs) is about IT strategy, risk, business continuity and assurance. An agent in a customer or credit path is an IT system. It inherits change control, audit logs, and the expectation that the board's IT committee can name the owner.

Layer four: activity-specific texts. KYC Directions already contemplate analytics, including AI/ML language in places, for monitoring. Digital lending and outsourcing-to-LSP texts constrain who may decide credit and how data moves. Those are not a general AI permission. They are activity rules that still apply when the activity is wrapped in a chat window.

Layer five: horizontal law. DPDP for personal data. CERT-In for specified ICT logs. MeitY's November 2025 Guidelines as culture, not as a banking licence. A later RBI draft on AI risk, if one is on the website the week you file, is a draft until it is not. File the URL and the date. Do not nickname it an Act.

Cite the layer. If you cannot, you do not have a citation.

Layer	Instrument you can actually name	Typical agent failure
Payment data	6 April 2018 storage direction + FAQs	Invoice or UPI text in a foreign prompt
IT outsourcing	Outsourcing of IT Services Directions, 2023	Unknown subprocessor, no exit, board not told
IT governance	ITGRCA Directions, 7 Nov 2023	No owner, no change record, no assurance path
Activity rules	KYC / digital lending / LSP texts as applicable	A model that decides credit or KYC without the human the text expects
Horizontal	DPDP, CERT-In, MeitY Guidelines; any live RBI draft	Calling a draft or a blog 'the RBI AI Act'

What a public-sector bank adds

A PSB is an RE and a public-sector body. Vigilance will ask about vendor selection and related parties. CAG will ask about a reconstructable decision on a named account. Unions will ask whether the branch copilot is a staffing story. None of that is in the 2018 payment circular. All of it will land on the same file.

Do not run a customer-facing agent in a branch until the packet can show: lawful purpose, India storage for payment data, outsourcing register updated, model version, retrieval set, and the officer or the system of record that actually decided. A thumbs-up on a bank phone is not a decision.

Drafts, speeches and the inspection room

RBI speeches and discussion papers are useful. They are not directions. If the Bank has placed a draft guidance on rbi.org.in, your compliance cell should read it, map gaps, and say in the note that it is a draft. Building irreversibly against a draft — for example sending all embeddings to a foreign group entity because the draft 'seems liberal' — is how you fund a repatriation project later.

Inspection staff will ask for your register of AI or analytics use, even if the title differs. Keep one. Columns: purpose, data class, residency, outsourcing status, human decision point, owner, last assurance date. That register is more valuable than a vendor's 'RBI aligned' sticker.

What not to write

Do not write 'RBI AI Act', 'RBI AI licence', or 'approved by RBI' unless you have a letter that says exactly that about this system. You will not have that letter for a copilot.

Do not write that DPDP repeals the 2018 payment-data direction. Horizontal privacy law does not eat a sector storage rule. The stricter operational requirement wins for that data class.

Objections you will hear — and what to do with them

These are the lines that stall the file. Answer them in the room, then put the answer in the note. A spoken answer without paper will be forgotten by the next officer.

Our private-sector peer uses the same hosted model.

Peers are not a direction. PSBs also carry vigilance and CAG. Copy the control, not the brand. If the peer stored payment data in India and you did not, you copied the wrong half.

The 2018 circular is only for payment system operators.

Read the FAQs and your counsel. The conservative file follows the data. If payment-system data is in the prompt, do not hide behind the letterhead. If you are not an operator and the data is not payment data, write that sentence and live with it.

Outsourcing Directions do not apply to a software licence.

If the vendor runs the model, hosts the vectors, or can see production prompts, you are usually in an outsourcing conversation. A shrink-wrap PDF does not end that conversation. Put it to counsel with the actual architecture.

We will wait for the AI Master Direction.

Wait if you want, but do not skip the layers that already bind. Payment storage, outsourcing, IT governance and DPDP are not optional because a future AI text might repeat them.

A four-week layered map for a PSB

This is a compliance-cell exercise. The vendor does not fill it in alone.

1. Week 1: list every live or proposed agent. Tag data class: payment-adjacent, customer-personal, employee, credit, public. Open rbi.org.in and download the current texts. Date the downloads.
2. Week 2: for each workflow, write the outsourcing row, the IT owner, the human decision point, and the residency of prompts, embeddings and logs.
3. Week 3: kill or isolate any path that takes payment-adjacent text abroad. Update the board IT-committee paper with citations, not nicknames.
4. Week 4: tabletop an inspection question: 'show the instrument you complied with'. If the answer is a blog or 'the AI Act', rewrite the file.

How this shows up in the file

Subject: Agent workflows — layered RBI and DPDP map; no 'AI Act' citation.

This bank has not identified a statute titled an RBI AI Act. Each agent workflow is placed against the 6 April 2018 payment-data storage direction where payment-system data may appear, the IT Outsourcing Directions, 2023 where a vendor operates processing, the ITGRCA Directions, 2023 for ownership and assurance, applicable KYC or lending texts, DPDP, and CERT-In. Any RBI draft on AI risk is treated as a draft dated (URL, date).

Payment-adjacent prompts remain in India. The outsourcing register holds the vendor and subprocessors. This note is not legal advice.

This article is informational field guidance for Indian public sector undertakings and their vendors, not legal, audit, labour, energy-regulatory, banking-regulatory or procurement advice. Confirm the live circular, DPE guideline, CVC instruction, sector regulator text, purchase manual and your counsel before you file it.