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The Reserve Bank of India (RBI) has proposed to lay down certain regulatory principles for managing risks emerging from use of models in credit decisions, including appraisal, borrower scoring and pricing.
The practice of such principles is aimed to ensure prudence and robustness in deployment of models by regulated entities (REs).
In a draft circular issued on Monday, the regulator said they should have a board-approved policy for risk management framework for models deployed, covering the entire model life cycle. RBI has sought feedback from stakeholders by September 4.
Dwelling on the principles, RBI said the objectives of the models as well as solutions sought from them should be clearly defined.
The inputs and assumptions considered for the model development must ensure adequate robustness to effectively address the intended objectives on a consistent basis.
There should be detailed documentation for each of the models which facilitate clear understanding by RE users, top management and supervisors.
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The model should have the necessary scalability and flexibility to meet the needs of dynamic business conditions. It should have the necessary interface with core banking/financial system, liquidity management, asset-liability management (ALM) or any other risk management system of the REs.
Outcomes of the model should be consistent, unbiased, explainable and verifiable. This should form part of the model validation framework. When subjective factors are used to override model outcomes, then these factors should be according to the provisions of the policy. Such deviations must be suitably documented in an auditable format, RBI added.
The circular will come into force within three months from the date of issuance. New credit models to be adopted by REs should follow these guidelines with effect from the date of issuance. The existing models should be validated in terms of these guidelines within six months from the date of issuance of the circular, it added.
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