RBI Governor warns banks and NBFCs about the risks of algorithm-based lending

Reserve Bank of India (RBI) Governor Shaktikanta Das cautioned banks and non-banking finance companies (NBFCs) on Thursday about the pitfalls of assessing customers for loans based on algorithms and artificial intelligence.

He cautioned that such model-based lending could lead to a potential crisis.

Management, boards of directors, and audit committees should ensure robustness in algorithms and gauge the possible risks these models could create, Das said at a BFSI event hosted by a publishing house.

The Governor observed that the RBI expects the senior management, the Board of Directors, the Audit and Risk Management Committees, and the Internal Audit function in banks to play a proactive role and be more watchful of incipient and emerging risks.

Underscoring the importance of firming up governance in regulated entities, Das said: “Our focus in recent years has been on strengthening the governance and assurance functions in the regulated entities to enhance their internal lines of defence.”

• Also read: FIDC to prepare model code of conduct for NBFCs

Focus area

The Governor observed that RBI’s emphasis has been on building an environment of trust, transparency, and accountability in the financial sector.

The assurance functions — risk management, compliance, and internal audit — are critical links between governance and business.

“The key is to identify risks early, monitor them closely, and manage them effectively. In this context, instilling an appropriate risk culture in the organisation is important.

“This needs to be driven by the Board and senior management with effective accountability at all levels. While we continue with our endeavour towards reorienting the financial system, our focus on broader systemic stability and addressing incipient signs of imprudent practices also continues,” Das said.

• Also read: 5 NBFCs line up NCD issuances aggregating ₹2,750 crore

Revamping processes

Referring to the revamp of RBI’s supervisory processes, Das emphasised that structural changes have been implemented to enhance the agility, flexibility, and specialisation of its supervisory structure.

“The Reserve Bank’s supervisory systems have been recalibrated to attune them to the dynamics of the financial sector in a forward-looking approach so as to smell possible distress early.

“The emphasis is on fostering resilience in the supervised entities (SEs) at three levels: financial, operational, and organisational. Needless to say, it is a constantly evolving process, but it has been made more dynamic,” the governor said.

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