In-depth: RBI warning to NBFCs on algo lending sparks concerns among MSME lenders?

Access to affordable bank credit for MSMEs has long been challenging due to the lack of collateral. To address this, banks and NBFCs have increasingly used MSME historical data, such as GST filings and cash flow information, coupled with AI algorithms to assess creditworthiness, leading to quicker loan disbursals and portfolio growth. However, the RBI cautions against over-reliance on such rule-based credit engines, emphasizing that these models are only as effective as their underlying data. \r

Deputy Governor Swaminathan J highlighted the risks of relying solely on historical data, particularly in dynamic markets, and warned against high-risk lending practices. NBFCs have agreed to balance AI with human intelligence, recognizing that AI models may not capture the full MSME landscape. George Alexander Muthoot of Muthoot Finance stressed the need for traditional evaluation methods alongside AI. Experts like Nishith Maheshwari of InCred Finance advocate for integrating broader data insights, including GST and customer feedback, into lending models. \r

Tirthankar Datta of JSA Advocates suggests NBFCs should develop advanced algorithms and explore non-traditional data sources, such as mobile and UPI payments, for a more comprehensive risk assessment. RBI Governor Shaktikanta Das also underscored the importance of ensuring lending models remain adaptable to changing market conditions.