Mumbai: Non-banking finance firms’ (NBFCs) adoption of know-how is fuelling development, however reliance on algorithms constructed on poor knowledge, over-reliance on unsecured loans and unsustainable mortgage limits are resulting in build-up of dangers that would carry grief sooner or later, mentioned Reserve Bank of India (RBI) deputy governor J Swaminathan.

“There seems to be a elaborate amongst most NBFCs to do extra of the identical factor, resembling retail unsecured lending, top-up loans or capital market funding. Over reliance on such merchandise might carry grief sooner or later in time later. It can be noticed that the risk limits that are fixed for certain category of products or segments, say like unsecured lending, in some entities, is way too high to be sustainable in the long run. I hope risk managers make a professional assessment of such risks that may be building up in their books,” Swaminathan mentioned in a speech on the convention of heads of assurance of NBFCs held in Mumbai.

“While automation can enhance efficiency and scalability, NBFCs should not allow themselves to be blinded by these models. It is crucial to recognise that rule-based credit engines are only as effective as the data and criteria upon which they are built. Over-reliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions,” Swaminathan mentioned.
Concentration of funding sources and maturity mismatches might additionally amplify liquidity vulnerabilities for NBFCs, particularly in periods of market stress or disruptions in funding. He mentioned that the RBI has noticed that inner audit capabilities in most entities usually are not up to speed.

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