RBI warns NBFCs: Avoid algorithm-based credit

New Delhi, May 16

The Reserve Bank of India (RBI) on Thursday warned non-banking finance companies (NBFCs) against certain systemic risk, complexity and interconnectedness.

Addressing a conference of heads of assurance of NBFCs held in Mumbai, Swaminathan J, Deputy Governor, RBI said that many NBFCs are increasingly turning to rule-based credit engines to accelerate the growth of their lending portfolios. He added with concern that while automation can enhance efficiency and scalability, NBFCs should not allow themselves to be blinded by these models.

Overreliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions. Therefore, NBFCs must maintain a clear-eyed perspective on their capabilities and limitations, supplemented by continuous monitoring and validation of credit scoring models, he added.