Reserve Bank of India (RBI) Governor Shaktikanta Das has cautioned Indian financial institutions against relying solely on algorithms and artificial intelligence for assessing customer loans. Speaking at an annual banking event hosted by Mint newspaper in Mumbai on Thursday, Das highlighted the potential risks associated with model-based algorithm lending, emphasizing that it could “lead to a potential crisis.”
Das urged banks and non-bank financial companies to thoroughly appraise the robustness of the models used for lending, expressing concerns over the surge in algorithm-approved loans. In recent months, the RBI has implemented measures to tighten restrictions on risky lending to enhance financial stability. In November, it increased the capital cost of unsecured lending by banks and directed lenders to offload investments in alternate investment funds, imposing hefty provisioning costs against those assets.
The RBI Governor acknowledged that some financial institutions lacked the necessary bandwidth to manage the exponential growth in loans approved by algorithms. “It was very clear to us that this kind of growth would not be sustainable going forward if it is not slightly moderated. We clearly anticipated some problems ahead of us down the road. Therefore, we acted preemptively,” Das stated.
Despite assuring that the nation’s banking system remains robust and secure, Das emphasized the need for caution to prevent any sense of complacency.
In addition to concerns over algorithm-based lending, Das addressed the International Monetary Fund’s (IMF) exchange rate regime reclassification. He pushed back against the notion that the RBI’s intervention in the foreign-exchange market was excessive, refuting claims that the country was attempting to influence the level of the rupee. The rupee weakened by 0.6% last year and traded in the narrowest range since 2002.
The RBI, in a statement last month, projected that the bad-debt ratio for Indian banks would likely ease to 3.1% of total loans by September, down from the current level of 3.2%.
Das’s warnings come at a time when central banks globally are grappling with the challenges and opportunities posed by the increasing use of algorithms and artificial intelligence in the financial sector. As technology continues to shape the future of banking, regulatory authorities are keen on maintaining a balance between innovation and risk management to safeguard financial stability.