Blitz Bureau
NEW DELHI: The Reserve Bank of India (RBI) issued a circular to all banks and NBFCs, introducing new regulatory principles for management of model risks in credit, with a view to ensuring prudence and robustness in the process. Regulated Entities (REs) use various models as part of the credit management life cycle for borrower selection, credit scoring/ rating, pricing, risk management, credit loss provisions, etc.
“Inherently, model outputs are exposed to uncertainties as they are based on assumptions which may not manifest in the envisaged ways and may take different forms in a real-world scenario,” the RBI said.
“This potentially exposes the REs (banks, NBFCs and housing finance companies) to model risk, which has implications on prudential aspects of credit risk management, compliance and reputational risk,” the RBI further stated.
The RBI said that a regulated entity will have to draft a board-approved policy for all the risk management model frameworks it uses, including the reason for adopting a third-party model.
