India central bank cautions non-bank lenders against growing reliance on algo credit models

INDIA’S central bank has cautioned non-bank finance companies (NBFCs) against becoming over-reliant on algorithm-based credit models, while also urging them to avoid overlending in certain segments.

Rule-based models can lead to inaccuracies in credit assessment, deputy governor Swaminathan J said in a speech released on the Reserve Bank of India’s website on Wednesday (May 15).

While many NBFCs are turning to such models to accelerate growth, they “should not allow themselves to be blinded by these models”, said Swaminathan.

An over-reliance on past data, on which these credit models are built, can lead to mistakes in evolving market conditions, he said.

The deputy governor, speaking to a gathering of senior officials from among non-bank lenders, said they should avoid setting high-risk limits for certain 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.

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

NBFCs were also asked to diversify their sources of funding to counter any emerging liquidity risks. REUTERS