%20(500%20%C3%97%20280%20px)%20(500%20x%20300%20px)%20(24).png "RBI releases draft circular on ‘Regulatory Principles for Management of Model Risks in Credit’")
- This circular aims to address the potential risks associated with the use of various models in credit management by regulated entities (REs) such as banks and non-banking financial companies.
- Key Highlights:
- Definition: A credit risk model is any quantitative method that applies statistical, economic, financial, or mathematical principles to process data for credit decisions.
- Governance and Oversight: REs must establish a detailed, board-approved policy for model risk management, covering the entire model lifecycle.
- Model Validation: The models must be validated to ensure they are consistent, unbiased, explainable, and verifiable.
- Implementation Timeline: The circular will come into force within three months from the date of issuance. New credit models must comply immediately, while existing models must be validated within six months.
- This initiative is part of RBI’s efforts to ensure robustness and prudence in credit risk management, enhancing the overall stability of the financial system.
Question:
1 What is the primary purpose of the RBI's draft circular titled "Regulatory Principles for Management of Model Risks in Credit"?
- A) To introduce new credit models for banks and NBFCs
- B) To manage and mitigate risks associated with the use of models in credit management
- C) To enhance the profitability of regulated entities (REs)
- D) To reduce the interest rates for credit products
