Shaktikanta Das, the Governor of the central bank, has warned Indian financial institutions about the risks of relying solely on algorithms and artificial intelligence for loan assessments. He expressed his concerns during a speech at an annual banking event in Mumbai, hosted by the Mint newspaper, stating that model-based, algorithmic lending could potentially lead to a crisis.
He emphasized that banks and non-bank financial companies need to evaluate the robustness of the models they use for lending. The Reserve Bank of India has recently tightened restrictions on risky lending to enhance financial stability. In November, it increased the capital cost of unsecured lending by banks and directed lenders to divest investments in alternate investment funds or face substantial provisioning costs against those assets.
Das noted that some banks and non-bank financial companies lacked the capacity to handle the increase in loans approved by algorithms. Despite the robustness and security of the nation’s banking system, the central bank will remain vigilant to prevent any complacency, Das added. The RBI announced last month that the bad-debt ratio for Indian banks is expected to decrease to 3.1% of total loans by September from the current level of 3.2%.
On the the importance of firming up governance in regulated entities, Das said: “Our focus in recent years has been on strengthening the governance and assurance functions in the regulated entities to enhance their internal lines of defence.”
