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RBI Governor Flags Financial Stability Risks With Model-Based Lending

Updated: Jan 15, 2024 06:57:15pm

RBI Governor Flags Financial Stability Risks With Model-Based Lending

Mumbai, Jan 15 (KNN) RBI Governor Shaktikanta Das has expressed concerns over the risks associated with model-based algorithm lending, which has contributed to a surge in unsecured loans. 

While the current state of the Indian banking sector is described as resilient and robust, Governor Das emphasised that certain aspects of unsecured consumer loans and specific personal loan segments are showing signs of exuberance and a "fear of missing out."

Governor Das highlighted a key issue where financial institutions, both banks and NBFCs, may lack the necessary bandwidth for thorough due diligence in assessing loan applications.

According to the RBI's supervisory assessment, certain banks and NBFCs exhibited a shortfall in due diligence, raising concerns about the sustainability of the observed loan growth.

Governor Das stressed that the responsibility lies with the banks to manage this situation. 

While regulators won't dictate the appraisal methods, the focus is currently on scrutinising the robustness of model-based algorithms. 

The rapidly changing ground realities necessitate ongoing evaluation to ensure that the models align with current trends and avoid potential risks.

The RBI expects bank management, boards, and audit or risk management committees to proactively analyse the riskiness and potential gaps in their model-based, algorithm-based lending practices to avert a potential crisis. 

The central bank is closely studying this area to ensure the financial sector remains stable and sustainable.

(KNN Bureau)


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