Non-Bank Finance Companies (NBFCs) received a warning from RBI Deputy Governor Swaminathan Janakiraman on their over-reliance on algorithm-based credit models. He underlined the danger of errors in ever-changing market conditions and advocated for financing source diversification. Janakiraman advised cautious risk management and cautioned against lending in high-risk categories, such as unsecured loans.
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. Over-reliance on such products may bring grief at some point in time later," Swaminathan said.
Additionally, the deputy governor urged NBFCs to diversify their funding sources to mitigate potential liquidity risks.
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