Latest News

RBI Governor says RBI is closely monitoring algorithm based loans lending by Banks


➡️ Click here to join our Whatsapp Group

On Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das expressed reservations about the algorithm-based lending practices adopted by banks and NBFCs. He emphasized the importance of ongoing testing for such models to mitigate potential risks.

What is Algorithm Based Lending?

Algorithm-based lending, also known as algorithmic lending or automated lending, refers to the use of computer algorithms and data analytics in the loan approval and decision-making processes by financial institutions, including banks. Instead of relying solely on traditional methods that involve manual assessment and subjective judgment, algorithm-based lending leverages technology to make more data-driven and efficient credit decisions.

What RBI said?

The RBI is closely monitoring the model-based lending approach currently employed by banks and NBFCs. Speaking at a banking event organized by Mint newspaper, Das stressed the need for rigorous evaluation by the management, board of directors, and audit or risk management committees of these financial institutions to assess the robustness of algorithms and models.

Highlighting the dynamic nature of ground realities, Das advised banks and NBFCs to regularly assess whether their models remain aligned with current trends or are at risk of becoming outdated. He urged them to identify potential risks associated with their algorithm-based lending practices and emphasized the responsibility of management and boards to self-analyze for potential crises.

In his speech, Governor Das expressed confidence in the resilience of the Indian banking system, citing its pivotal role in supporting the country’s growth trajectory in the coming years.

Addressing concerns in the fintech sector, Das acknowledged certain issues, attributing most of them to illegal apps. He assured that the government, RBI, and other authorities are actively addressing these challenges. He highlighted the positive impact of the digital lending guidelines issued by the RBI in September 2022, along with the subsequent norms on first loss default guarantee (FLDG) introduced in June 2023. These regulatory measures have bolstered private sector investor confidence in the digital lending space.

The September 2022 digital lending guidelines aimed to safeguard customers from unethical business practices, including mis-selling, breach of data privacy, unfair conduct, and exorbitant interest rates by digital lenders. Das explained the concept of FLDG, a credit-risk sharing agreement, where third-party guarantees, such as lending service providers, compensate for a specified percentage of defaults in the loan portfolios of regulated entities like banks and NBFCs.

Das concluded by emphasizing that the regulatory objective of digital lending guidelines was to control negative externalities while preserving the beneficial impacts of innovative digital models.

Leave a Reply

Your email address will not be published. Required fields are marked *