Risk Management Policy

RISK MANAGEMENT POLICY

Introduction

Risk Management is a key aspect of the “Corporate Governance Principles and Code of Ethics” which aims to improvise the governance practices across the Company’s activities. The Management of NBFCs have to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. Risk management policy and processes will enable the Company to proactively manage uncertainty and changes in the internal and external environment to limit negative impacts and capitalize on opportunities.

If we learn how to apply a systematic risk management process, and put into action the core 5 risk management process steps, then the project will run more smoothly and be a positive experience for everyone involved.

  • Step 1: Identify the Risk. Identify the nature of risk involved.
  • Step 2: Analyze the risk. Once risks are identified you determine the likelihood and consequence of each risk. You develop an understanding of the nature of the risk and its potential to affect project goals and objectives.
  • Step 3: Evaluate or Rank the Risk. You evaluate or rank the risk by determining the risk magnitude, which is the combination of likelihood and consequence. You make decisions about whether the risk is acceptable or whether it is serious enough to warrant treatment.
  • Step 4: Treat the Risk. This is also referred to as Risk Response Planning. During this step you assess your highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels. How can you minimize the probability of the negative risks as well as enhancing the opportunities? You create risk mitigation strategies, preventive plans and contingency plans in this step.
  • Step 5: Monitor and Review the risk. This is the step where you take your Project Risk Register and use it to monitor, track and review risks.

Background & Purpose of policy:

Risk management involves understanding, analysing and addressing risk to make sure organisations achieve their objectives.

We need to make sure we manage risks so that we minimise the threats and maximise the potential.

NBFCs are exposed to several major risks in the course of their business- credit risk, interest rate risk, liquidity risk and operational risk. It is therefore important that NBFCs should introduce effective risk management policy that addresses the issues relating to various business risks.

Risk management policy and processes will enable the Company to proactively manage uncertainty and changes in the internal and external environment to limit negative impacts and capitalize on opportunities.

The specific objectives of the Risk Management Policy are:

  • To ensure that all the current and future material risk exposures of the company are identified, assessed, quantified, appropriately mitigated, minimized and managed i.e., to ensure adequate systems for risk management.
  • To establish a framework for the company’s risk management process and to ensure its implementation.
  • To enable compliance with appropriate regulations, wherever applicable, through the adoption of best practices.
  • To assure business growth with financial stability

RISKS SPECIFIC TO THE COMPANY AND THE MITIGATION MEASURES ADOPTED

We have divided the risks associated with the Company as under:

Credit risk, Liquidity risk, market risk or Interest rate risk, political risk, operational risk and credit exposure /concentration risk.

(I) CREDIT RISKS

These includes:-

  • Loss due to Counterparty Default in or failure of Payment.

Risk mitigation measures:

  • In all categories, emphasis will be on high credit quality, proper appraisal and collateral securities

(II) LIQUIDITY RISKS

Ongoing liquidity needs of the company will be monitored regularly to ensure that cash flow requirements are met on a day-to-day, cyclical, and long-term basis

These risks include:

  • Financial solvency and liquidity risks
  • Cash management risks

Risk Mitigation Measures:

  • Investments should mature to meet anticipated cash requirements.

(III) MARKET RISKS:

Adverse and unanticipated market (including change in interest rates etc) and economic developments may significantly change the risk profile and market value of investments.

Risk Mitigation Measures:

  • Tracking micro and macro economic level data, market trends and forecasts by expert agencies, internal review by team of experts.
  • The Company shall only undertake such transactions as permitted by the laws of the country applicable to it including the RBI guidelines.

(IV) POLITICAL RISKS:

Any adverse change in the political environment of the country, government policies etc., can have an impact in growth strategies of the company.

Risk Mitigation Measures:

  • Reviewing and monitoring the NBFC and other related policies and involvement prevailing in the country.

(V) OPERATIONAL RISKS:

Operational risk “Is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events Operational risks arise from numerous areas within and outside of a company. Examples of personnel-based operational risks include: Poorly trained employees and retirement / resignation of a key employee.

Risk Mitigation Measures:

  • Managing Equipment Failures. …
  • Keep Strong Business to Business Relationships. …
  • Having Adequate Insurance. …
  • Know the Regulations.
  • Staff welfare.

Credit exposure and concentration risk

The company strives to avoid excessive concentration in any single counterparty, industry sector.

Risk Mitigation Measures:

  • The maximum credit exposure that the company is willing to take is expressed in terms of exposure limits set by the Board of Directors.
  • Credit exposure is the aggregate of lending. The limits are measured by total credit exposure against company’s net owned funds. The limits are reviewed annually.