In-depth: RBI warning to NBFCs on algo lending sparks concerns among MSME lenders?

financialexpress.com:

Lack of access to affordable bank credit for MSMEs has remained a perennial issue for not just the entrepreneurs but also for lenders and the government alike to bring businesses in the informal economy into the formal fold. Poor credit access emanates from the lack of collateral with MSMEs to pledge against the credit. To tide over this challenge, over the past few years, banks and non-banking financial companies (NBFCs) have been gradually integrating historical data of MSMEs including GST filings, cash flow information, and more to underwrite business or working capital loans to them.

The ease of access to this data coupled with the use of artificial intelligence (AI) powered algorithms to analyse the repayment ability of the borrower has enhanced lenders’ dependence on such rule-based credit underwriting models. This translates into quicker disbursals and faster growth of loan portfolios for lenders. 

However, the Reserve Bank of India (RBI) now wants such lenders particularly NBFCs, whose reliance on rule-based credit engines is relatively higher than banks, “to recognize that rule-based credit engines are only as effective as the data and criteria upon which they are built. Overreliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions,” said Swaminathan J, Deputy Governor, RBI on May 15 at the Conference of Heads of Assurance of NBFCs. 

Cautioning NBFCs over lending based on historical data, Swaminathan said 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