Is that a string groove cut into the BACK of the bow?
That's a big no-no! Unless you glue on tip overlays. It's a serious weakening of the bow, especially with a ring porous wood like oak. I would strongly advice you to file that groove flat, glue a tip overlay on, and re-file the string grooves.
I'm considering using a nylon/cotton camo fabric as a backing. Will this negatively effect the performance?
Short answer: yes, it will.
Longer answer: a fabric is typically dead weight. It may add a little bit of security in the sense that is keeps small splinters down. But since the bow is already shooting, there is no reason to suspect splinters will be raising. Since a fabric backing does not 'work', it only adds mass to the bow limbs, which will slow down the bow in principle. The question: how much? And will that bother you? You'll loose maybe a few FPS, which is nothing terrible if it is just a hunting or target bow. I can imagine that the beauty or camouflage added by the fabric backing, outweighs the loss of a few FPS. Other than loss of speed, there would be no real drawbacks.
You've made a nicely tillered mollie there! You can be proud of this one!