Reserve Bank of India (RBI), in a draft circular titled ‘Regulatory Principles for Management of Model Risks in Credit’, stated that Regulated Entities (REs) shall put in place a detailed Board approved policy with regard to model risk management framework for all models deployed, covering the entire model life cycle. The policy shall cover, inter alia, details of governance and oversight aspects commensurate with model materiality; processes around model development or selection; documentation for models deployed; independent vetting / ongoing validation or review processes; change control; and the monitoring and reporting framework including role of internal audit function. The policy shall also cover the approach with regard to adoption and usage of third-party models. The REs shall maintain a Model Inventory of approved models, insourced or outsourced, with critical information on it.

The RBI noted that the deployment of individual credit models adopted under the policy, and any subsequent changes in their inputs or assumptions, shall be with the approval of the Risk Management Committee of the Board (RMCB) or any other Sub-Committee, as designated by the Board. The models used by the REs may either be developed internally or sourced from external third-party suppliers, including under collaborative lending arrangements, or can be a mix of both as per the provisions of the policy.

Comments on the draft circular may be submitted by 4^th September, 2024.

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