RBI warns NBFCs against over-reliance on algorithm-based credit models

The Reserve Bank of India (RBI) has advised non-bank finance companies (NBFCs) to exercise caution regarding their increasing reliance on algorithm-based credit models and to avoid excessive lending in specific segments.

Deputy Governor Swaminathan Janakiraman, in a speech published on the Reserve Bank of India’s website on Wednesday, highlighted the potential inaccuracies of rule-based credit assessment models.

He highlighted that while many NBFCs are adopting these models to drive growth, they “should not allow themselves to be blinded by these models”.

Swaminathan pointed out that relying heavily on historical data, which these models use, can lead to errors in changing market conditions.

Addressing a group of senior officials from non-bank lenders, he advised against setting high-risk limits for segments like unsecured loans.

“There appears to be a fancy among most NBFCs to do more of the same thing, such as retail unsecured lending, top-up loans or capital market funding,” Swaminathan said.

“Over-reliance on such products may bring grief at some point in time later,” he added.

Additionally, the deputy governor urged NBFCs to diversify their funding sources to mitigate potential liquidity risks.