Swaminathan Janakiraman / RBI Deputy Governor warns non-banking financial companies, says these important things

Vikrant Shekhawat : May 17, 2024, 08:10 AM
Swaminathan Janakiraman: Reserve Bank of India Deputy Governor Swaminathan Janakiraman has alerted the Non-Banking Financial Companies (NBFCs), saying that excessive dependence on unsecured loans and capital market financing will cause problems for NBFCs in the long run. Can be the cause of. According to language news, Swaminathan, while addressing the heads of assurance functions (compliance, risk and internal audit) of NBFCs at an RBI event last Wednesday, also said that there is excessive reliance on 'algorithms' to take decisions about lending. Dependence can also be challenging.

RBI's disappointment also made public

According to the report, the Deputy Governor also made public his disappointment over the RBI's approach of "discreet analysis" of the rules to "disregard the rules". He described it as a 'significant risk' to the financial system. Swaminathan said the risks for some products or sectors like unsecured loans are too high and this is not sustainable in the long run. He said that it seems that most NBFCs have a desire to do the same thing. Such as retail unsecured loans, ‘top up’ loans or capital market financing. Excessive dependence on such products can create problems later.

What was said on 'algorithm based' loan

On the issue of 'algorithm' based lending, Swaminathan said that many institutions are turning to rule-based 'credit' to grow their books faster. The deputy governor, however, also said that while automation can increase efficiency, NBFCs should not tie themselves to such models. It is important to recognize that rules-based lending systems are only as effective as the data and criteria on which they are built. Swaminathan said excessive reliance on historical data or algorithms, especially in emerging market conditions, could lead to errors in loan valuation.

Pay attention to cyber security risks

Janakiraman asked NBFCs to maintain a clear view of their capabilities and limitations and focus on monitoring mechanisms. Also asked NBFCs to pay adequate attention to cyber security risks. The Deputy Governor said that the risk management and internal audit functions have to be tightened on skill parameters so that they are able to assess the preparedness of their institutions regarding IT and cyber security from time to time.