RBI urges urban co-operative banks to stay alert on risks, warns NBFCs against using algorithm-based credit

Today, on May 16, Deputy Governor of the Reserve Bank of India (RBI) M Rajeshwar Rao stated that chief risk officers of urban co-operative banks should support management in monitoring and controlling balance-sheet risks.

In a conference organised in Mumbai for the Heads of Assurance Functions (i.e., Chief Compliance Officers, Chief Risk Officers, and Heads of Internal Audit) of select Urban Co-operative Banks (UCBs), Rao said, "Chief Risk Officers must assist the management in monitoring and containing risks in banks’ balance sheets."

Rao's keynote talk highlighted the significance of the three assurance functions and the necessity to ensure their effectiveness and independence.  He advocated a proactive approach to the Compliance Function. "The Internal Audit Function should develop clear communication channels with other functions to convey critical findings and take remedial action," he added.

The conference was attended by about 300 participants representing more than 120 UCBs.

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According to an RBI press release, deputy governors M. Rajeshwar Rao and Swaminathan J. addressed the participants. Executive directors S C Murmu, Saurav Sinha, Rohit Jain, and Manoranjan Mishra along with other senior officials representing the regulation, supervision, and enforcement departments of the Reserve Bank also participated in the conference.

At the conference, Swaminathan stressed the need to identify and manage the emerging risks as well as the changing dynamics of the traditional risks, for which the internal control systems should be continuously updated and strengthened.

During the same conference today, Swaminathan also warned non-banking finance companies (NBFCs) against certain systemic risks, complexity, and interconnectedness.

He added with concern that while automation can enhance efficiency and scalability, NBFCs should not allow themselves to be blinded by these models.

Overreliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions. 

Therefore, NBFCs must maintain a clear-eyed perspective on their capabilities and limitations, supplemented by continuous monitoring and validation of credit scoring models, he added.

Also Read: RBI warns NBFCs against using algorithm-based credit to boost their portfolio