RBI Proposes New Principles for Managing Credit Model Risks

The Reserve Bank of India (RBI) is proposing regulatory principles aimed at managing model risks within credit systems for banks and regulated entities. These models, used for credit appraisal and risk management, face inherent uncertainties. The RBI emphasizes a robust framework including governance, validation, and ongoing monitoring.

In a significant move, the Reserve Bank of India (RBI) announced on Monday its plans to introduce regulatory principles aimed at managing model risks in credit systems. These principles target banks and other regulated entities to ensure prudence and robustness in credit management.

Regulated Entities (REs) commonly use models for several aspects of credit management including credit appraisal, borrower scoring, and risk management. However, the RBI noted that model outputs are inherently uncertain due to underlying assumptions that may not always materialize as anticipated.

The proposed principles include a comprehensive, board-approved policy covering the entire model lifecycle, from development to validation. The models should be scalable and flexible to adapt to dynamic business conditions, and regular validations are mandatory, particularly after any material changes or on an annual basis.

(With inputs from agencies.)