RBI governor raises red flag on model-based lending

Mumbai: The Reserve Bank of India is closely examining the risks that can emerge from model-based algorithm lending, which led to the surge in unsecured loans, according to RBI governor Shaktikanta Das. He also spoke on several other issues. Edited excerpts:

On unsecured loans

At the moment, the Indian banking sector remains resilient and robust. Even if you look at the unsecured consumer loans and some segments of personal loans, the numbers that we have before us are not particularly alarming. Even the NPA numbers are also within reasonable limits. But what came to our notice were two or three points. One, as I mentioned in my address, there was a kind of exuberance which we saw that was building up and kind of a fear of missing out (FOMO). This was one opportunity which everybody thought they would capitalise on.

In this process, what was happening was that every institution, whether it is a bank or an NBFC, has a certain management bandwidth to appraise proposals, to diligently examine a loan application. Some of them have got model-based lending and there are models which automatically generate sanction letters. We saw that banks and certain NBFCs, as per our supervisory assessment, did not have that kind of bandwidth of doing due diligence of the loan proposals to justify the kind of loan growth that was seen. It was very clear that going forward this kind of growth would not be sustainable if it is not slightly moderated. So, we clearly smelt, saw and anticipated some problems ahead of us down the road.

On revisiting personal lending framework in regulated entities

It is for the banks to do it. How to do appraisal is not something which the regulators should be telling the banks. This model-based algorithm or model-based lending is one area where currently we are looking at. The robustness of models is something for the bank management, board of directors, that includes NBFCs also, the audit committees or the risk management committees of these financial entities to see how robust the algorithms are and how robust the models are. The ground realities keep on changing. Whether your model is falling behind the curve or it is in tune with the times and what are the possible risks which the models can create... That is one area which we are closely studying now. But again, our expectation is that the management of the banks, the boards of banks and NBFCs should themselves analyse and look at the possible riskiness or the possible gaps which are there in their model-based, algorithm-based lending, which can lead to a potential crisis.

On cryptocurrency thinking after the US securities and exchange commission allowed an exchange-traded fund tracking these cryptocurrencies

The US capital market regulators in that same announcement have also issued necessary cautionary advice and if I can say, warning to the investors to be careful, so pointed to the riskiness of the whole thing. The capital market regulator in the US is fully aware of the risks that it poses. Our position, my position and RBI’s position on this whole crypto thing remains unchanged irrespective of who does what.

Travelling down that path will create huge risks which, going forward, will be very, very difficult to contain. The question arises, why do you need to travel down that road? What is it that you get out of it? It is the speculative nature of that product which enables some people to make perhaps big money for some time, but the majority of people are not going to make big money for all time. In fact, the majority of people will encounter losses because it is an entirely speculative product. We are all familiar with the term, the tulip mania in the Netherlands which built up into a big asset bubble and then it collapsed. So, I do not think the world and in particular the emerging market economies can afford a crypto mania which will lead to similar outcomes.

On raising the mutual fund industry’s overseas investment limit of $7 billion set in 2008

This request has been coming to us from the mutual fund industry from time to time. We have just come out of the pressure on our currency which we witnessed in the aftermath of the starting of the Ukraine war. From February 2022 onwards, the rupee exchange rate was under a lot of pressure. Initially, there were a lot of outflows. So, it is a question of timing. We do not question the basis of their request. It is a question of the right time for us to do it.