RBI Urges NBFCs to Adopt AI for Stress Detection and Risk Management

Reserve Bank of India Deputy Governor S C Murmu on Thursday urged non-banking financial companies (NBFCs) to use artificial intelligence and machine learning to detect early signs of borrower stress, as rapid credit growth increases the need for stronger risk management.

Addressing the 7th CII NBFC and HFC Summit, Murmu said NBFCs and housing finance companies (HFCs) have evolved from alternative lenders into specialised, technology-driven institutions that complement banks by serving underserved segments, remote areas and niche markets.

“AI and machine learning tools should be used more to detect early signs of borrower stress,” Murmu said.

He called for rigorous stress testing, early warning systems and dynamic provisioning, while cautioning lenders against compromising underwriting standards in pursuit of faster growth.

“Growth must never come at the cost of underwriting standards,” he said.

NBFC credit currently stands at about 16.7% of nominal GDP, up from 15.9% a year earlier. Their credit accounts for about 27% of credit extended by scheduled commercial banks, compared with 26% a year ago.

Murmu said technology is changing not only how financial services are delivered but also how credit risk is assessed and managed, with NBFCs increasingly adopting paperless onboarding, algorithmic credit scoring and cash-flow-based lending.

Digital public infrastructure such as the Unified Lending Interface (ULI) and Account Aggregator framework can further help lenders reduce reliance on physical collateral and expand formal credit to MSMEs and microfinance borrowers, he said.

The deputy governor also highlighted the need for stronger governance and liquidity management as NBFCs expand, calling for diversified funding sources and a deeper corporate bond market. He said securitisation should evolve beyond a liquidity tool into a mechanism for genuine risk transfer and capital release.

Murmu also stressed that faster digitalisation must not come at the expense of customer protection. Conduct regulation, grievance redressal, responsible lending and cyber resilience would remain key priorities, he said.

“The opportunities ahead of NBFCs and HFCs are real and large,” Murmu said, adding that the sector’s growth would be shaped by technology and trust.