RBI's new credit risk standards are game changer for Indian economy

A well-executed model risk management framework can give a lender precise credit assessment, improve customer trust and edge over competition

The Reserve Bank of India (RBI) has taken a significant step in enhancing model risk management (MRM) protocols for regulated entities (REs), issuing draft guidelines on 'Regulatory Principles for Management of Model Risks in Credit'. The guidelines address the increasing complexity and potential vulnerabilities in credit decision models. The need for a comprehensive framework to manage associated risks is pressing.

Globally, model risk is a recognised concern among financial regulators. The RBI’s initiative seeks to resolve several critical issues faced by REs, such as the lack of a formalised mechanism for model-risk management, ineffective policy implementation, unclear