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This is not right to give loans without guarantee to expand business, RBI warned NBFCs

2871747 Rbi1RBI To NBFC: Reserve Bank of India (RBI) Deputy Governor Swaminathan J has warned NBFCs. He said that reliance on loans considered unsafe i.e. loans without guarantee and capital market financing can become a problem for NBFCs in the long run. Addressing the heads of assurance functions (compliance, risk and internal audit) of NBFCs at an RBI event, Swaminathan also warned against excessive reliance on ‘algorithms’ to take decisions regarding loans.

Described as a big risk for the financial system

He also expressed his disappointment with RBI for ‘ignoring the rules’. He called it a big risk for the financial system. Swaminathan said that the risk for some products or areas like unsafe loans is very high and it is not going to last long. He said, ‘It seems that most NBFCs want to do only one thing. Like retail unsafe loans, ‘top up’ loans or capital market financing. Excessive dependence on such products can create problems later.’

Steps being taken to increase bookkeeping
Swaminathan said on the issue of ‘algorithm’ based lending that many institutions are turning to rule-based ‘credit’ to increase bookkeeping rapidly. She said, ‘Although automation can increase efficiency, NBFCs should not tie themselves to such a model. It is important to recognize that rule-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 can lead to mistakes in loan evaluation, especially in emerging market conditions.” He asked NBFCs to maintain a clear view of their capabilities and limitations and pay attention to monitoring systems. He also asked NBFCs to pay attention to cyber security risks.