Algo lending can lead to potential crisis, warns RBI chief Shaktikanta Das

financialexpress.com:

Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday warned financial institutions against the potential risks of relying on algorithm- or model-based lending. Lenders must continuously maintain a vigil on the efficiency of such models, he said at an event organised by Mint.

Das urged banks and non-bank financial companies (NBFCs) to “appraise robustness of models used for lending”. He said, “The ground realities keep on changing. So, it is important to monitor whether your model is falling behind the curve or is in tune with the times, and what are the possible risks.”

He pointed out that the RBI noticed there was a “fear of missing out” or a FOMO approach building among lenders in relation to personal loan growth. What led the RBI to hike the risk weight, he said, was the excessive exuberance that was building up within lenders.

Tightening restrictions on risky lending, the RBI had hiked the risk weight on personal loans by 25% to 125% in November last year. The governor said the country’s banking sector remains fairly resilient and robust at the moment, and even the unsecured consumer loans’ asset quality is within reasonable limits.

According to the RBI’s latest sector deployment of credit data, while banks’ non-food credit rose nearly 21% year-on-year (y-o-y) to Rs 155.80 trillion as of November 17, personal loans grew 30% y-o-y to Rs 50.56 trillion.

On the US equity market regulator allowing bitcoin exchange-traded funds (ETFs) to list on bourses, Das said the RBI view remains unchanged that cryptocurrencies pose a significant threat to the financial stability of the country.

“Our position, my position and the RBI’s position on this remain unchanged irrespective of who does what. Just because someone