The Reserve Bank of India (RBI) chief warns lenders against relying too heavily on algorithms, credit scoring and model-based lending, especially at a time when close collaboration with fintech companies makes it easier to offer innovative products and services.
Reserve Bank of India (RBI) Governor Shaktikanta Das has warned banks and NBFCs against relying too much on algorithms, credit scoring and model-based lending, especially during these times, as increasing collaboration with fintech companies facilitates the delivery of innovative products and services.
“Banks (RBI) and NBFCs need to be careful of relying solely on pre-defined algorithms as defaults for operations,” Mr. Das commented at the FIBAC 2023 conference co-organized by the Federation of Indian Chambers of Commerce and Industry and IBA in Mumbai on Wednesday. “These models need to be robust and tested and retested periodically. They may need to be recalibrated and calibrated.” “Based on the changing features of the financial ecosystem,” he added.
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He stressed that it is important to “be aware of any excessive accumulation of risks in the system due to information gaps in these models, which may lead to a relaxation of issued insurance standards.”
He urged banks and non-banking financial companies to take precautionary measures, and said credit portfolio expansion and pricing should be in line with expected risks. “Banks and non-banking financial companies also need to strengthen their asset and liability management. They can pay more attention to their debt. In some cases, we see an increasing reliance on large, high-cost, short-term deposits, while loan terms, both for personal and corporate loans, are lengthening, emphasizing the risk of contagion.
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