How Banks Are Using AI to Transform and Scale Digital Lending in FY26

Banks move to tighter AI rules as compliance, risk and credit models shift. New mandates push lenders to rebuild digital systems at scale.

Can a bank judge a borrower faster than a human officer ever could. That question sits at the centre of India’s latest shift in how banks use artificial intelligence. A change began after the Reserve Bank of India released a formal report in August 2025 that pushed lenders to adopt monitored and documented AI systems.

New Compliance Rules That Changed How Banks Operate

The FREE-AI Committee Report of August 2025 set new controls for lenders. Banks must test models often. They must record decisions. They must explain why a model approves or declines a borrower. The RBI warned that high-risk cases still need human checks before final approval.

UPI also widened the data pool for banks. NPCI said UPI crossed 100 billion transactions in 2023. This huge digital base helps banks track spending, fraud trails and repayment signals. It also supports how banks use artificial intelligence in loan prediction.

A Loansjagat news article in October 2025 stated that public sector banks may cross ₹1 lakh crore in digital-footprint loans by FY26 as they shift to machine-driven scoring.

How Banks Use Artificial Intelligence

AI in banking means machines study financial records and learn patterns. A model reads numbers and text. It links behaviour with past trends. It predicts outcomes. Theory breaks this into data cleaning, model training and supervision. These three steps guide how banks use artificial intelligence with fewer errors.

Before reading the table below, note that banks rely on government sources to build safe AI controls.

Government Sources That Shape AI Rules In India
 

These websites document how India aligns AI rules with global banking practice. Their reports help banks design safe systems and maintain trust. The next section links today’s changes to older work already published.

How Banks And Government Responded In Earlier Phases

Banks had a slow start during early digital reforms. Between 2016 and 2019, model use stayed limited. Pilots ran in back-end fraud systems. Manual checks still guided final decisions.

 The pace shifted after the Union government’s Digital Payments Mission 2021 expanded digital rails across urban and rural belts. Banks then upgraded document readers, transaction monitors and reporting channels.

By 2022 and 2023, the Ministry of Finance published updates that encouraged faster adoption of electronic systems in compliance tasks. By 2025, the RBI had moved to full AI governance through the FREE-AI report. The Ministry used press statements to confirm support for supervised AI in banking processes.

Before viewing the second table, note that these official pages document how regulations changed over the last decade.

These platforms help banks track the regulatory steps that moved AI from small tests to formal systems.

Conclusion 

Banks now prepare for wider AI use in loan scoring, service response and fraud review. Models will read GST data, bank statements and past repayment signals. Supervisors will check how each model reaches a decision. Public lenders will pursue digital-lending targets shaped by FY26 plans. The RBI’s 46 percent efficiency estimate offers a clear benchmark.

India’s lenders stand inside a new phase. AI will not sit outside the system. It will stay inside core decisions as banks refine how banks use artificial intelligence across lending, risk and customer service.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.