“There appears to be a fancy among most NBFCs to do more of the same thing, such as retail unsecured lending, top-up loans or capital market funding. Over reliance on such products may bring grief at some point in time later. It is also observed that the risk limits that are fixed for certain category of products or segments, say like unsecured lending, in some entities, is way too high to be sustainable in the long run. I hope risk managers make a professional assessment of such risks that may be building up in their books,” Swaminathan said in a speech at the conference of heads of assurance of NBFCs held in Mumbai.
“While automation can enhance efficiency and scalability, NBFCs should not allow themselves to be blinded by these models. It is crucial to recognise that rule-based credit engines are only as effective as the data and criteria upon which they are built. Over-reliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions,” Swaminathan said.
Concentration of funding sources and maturity mismatches could also amplify liquidity vulnerabilities for NBFCs, especially during periods of market stress or disruptions in funding. He said that the RBI has observed that internal audit functions in most entities are not up to the mark.