Reserve Bank of India (RBI) Governor Shaktikanta Das.
| Photo Credit: ANI
Reserve Bank of India (RBI) Governor Shaktikanta Das has cautioned banks and NBFCs towards being over-reliant on algorithms and model-based credit score appraisal and lending, particularly at a time when elevated collaboration with fintechs is facilitating introduction of revolutionary services.
“Banks and NBFCs need to be careful in relying solely on pre-set algorithms as assumptions based on which the models are operated,” Mr. Das noticed on the FIBAC 2023 Conference collectively organised by FICCI and IBA in Mumbai on Wednesday. “These models should be robust and tested and re-tested periodically. They may require to be calibrated and re-calibrated from time to time based on the changing contours of the financial ecosystem,” he added.
Crucially, it was “necessary to be watchful of any undue risk build up in the system due to information gaps in these models, which may cause dilution of underwriting standards,” he emphasised.
Urging banks and NBFCs to take sure precautionary measures, he mentioned the growth of the credit score portfolio itself and pricing of the identical needs to be in sync with the dangers envisaged.
“Banks and NBFCs also need to further strengthen their asset liability management. They may give greater attention to their liabilities side. In certain cases, we have observed increased reliance on high cost short term bulk deposits while the tenure of the loans, both in retail and corporate loans, is getting elongated,” he noticed.
He mentioned the growing interconnectedness between banks and non-banks deserves shut consideration and concentrated linkages could create a contagion risk. “Though the banks are well capitalised, they must constantly evaluate their exposure to NBFCs and the exposure of individual NBFCs to multiple banks. The NBFCs on their part should focus on broad basing their funding sources and reducing over-dependence on bank funding,” he mentioned.
Pointing out that microfinance had emerged as an vital monetary conduit to foster monetary inclusion, he mentioned they need to keep in mind the affordability and reimbursement capability of the debtors.
“Though the interest rates are deregulated, certain NBFCs-MFIs appear to be enjoying relatively higher net interest margins. It is indeed for micro finance lenders to ensure that the flexibility provided to them in setting interest rates is used judiciously. They are expected to ensure that interest rates are transparent and not usurious,” the RBI chief mentioned.
On the economic system, he reiterated that headline inflation remained susceptible to recurring and overlapping meals worth shocks coming from world components and antagonistic climate occasions. “The frequency and intensity of such shocks have increased in recent period. Monetary policy in such a scenario needs to remain watchful and actively disinflationary while supporting growth,” Mr. Das mentioned.
Highlighting that residents have been residing in extremely unsure instances in an interconnected world, he mentioned new dangers have been rising on occasion and new sources of risk have been additionally arising.
“In such a scenario, building up further on resilience would be the best insurance against shocks and uncertainties. This holds good for all businesses and financial entities,” he mentioned.
