Expected Credit Loss model:
Company's Credit loss system is based on its credit risk function and the risk perceives. Under Ind AS, credit loss provisioning is mainly based on past trends and judgment of the entity. Implementation of expected credit losses not only consider historical data but also incorporates consideration to forward looking information.
4.4 Provision
Provision is recognized when the Company has a present obligation as a result of past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation as at the Balance Sheet date. These are reviewed at each Balance Sheet date and adjusted to reflect the current best estimates.
4.5 Cash Flow Statement
Cash flows are reported using the indirect method, whereby profit before tax is adjusted for the effect of transactions of non-cash nature and any deferrals or accruals of past or future cash receipts or payments and item of income or expenses associated with investing or financing cash flows. Cash flow from operating, investing and financing activities are segregated.
5. ACCOUNTING POLICIES
5.1 CASH & CASH EQUIVALENTS
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term investments with an original maturity of three months or less.
5.2 Financial Instruments
The Company recognizes financial assets and financial liabilities when it becomes a party to the contractual provisions of the instrument.
Company has a business model of 'Hold to collect' with sole purpose of collecting principal and interest from loans, thus as per Ind AS 109- 'Financial Instruments' Loans are measured at amortized cost.
Other financial assets or liabilities maturing within one year from the balance sheet date are measured at the carrying value as the same approximate the fair value due to the short maturity of these instruments.
The valuation of listed shares is considered at market price and that of security receipts as per the valuation report as at Balance Sheet date.
5.3 Impairment of Financial Assets
In accordance with Ind AS 109, the Company applies Expected Credit Loss (ECL) model for measurement and recognition of impairment loss of the financial assets on the basis of their credit risk exposure.
For the same, ECL is measured as per the management policy after performing due diligence of Company's historical data in regards to the respective asset. Also, since company is a RBI registered ND-SI- NBFC and as per RBI guidelines, a 0.4% provision for Standard Assets is created against Company's credit exposures.
The Company shows overdue installment amount of customers under trade receivables.
Determining significant increase in credit risk
It is very judgmental to determine the significant increase in credit risk, which enable entity to move from stage 1 to stage 2. i.e. to move from 12 month expected losses to life time expected losses. Entity need to assess significant increase in credit risk as compared to its initial recognition level by considering significant changes in financial position of a borrower, expected or current delay in payment, historical trend of the repeat borrowers etc.
Company also has a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument's credit risk has increased significantly since initial recognition.
Forward looking information
ECL is based on history of financial asset and includes forward-looking statement; however, it is a forecast about future conditions over the entire expected life of a financial instrument. The forward-looking information is based on:
• Internal historical credit loss experience and the period of time over which its historical data has been captured and the corresponding economic conditions represented in the past
• Effects that were not present in the past or to remove the effects that are not relevant for the future
• Macroeconomic factors such as interest rates
The Calculations of ECL
Company calculates ECL on the basis of probability-weighted average scenarios on the basis of historical data.
The calculation of ECL has following key elements of Company's internal estimates:
Probability of default (PD):
It is an estimate of the likelihood of default over a given time horizon.
Exposure at default:
Estimate of an exposure at a future default date -expected changes in exposure after the reporting date.
Loss Given Default:
Estimate of the loss arising on default. It is based on the difference between contractual cash flows that are due and expected to receive including from collateral. It is generally referred as a percentage of exposure at default.
Discount rate:
Used to discount an expected loss to a present value at the reporting date using the effective interest rate.
ECL system:
Stage 1: At stage one 12 months ECL is recognized which is calculated as the portion of total outstanding advances, that are overdue till 30 days, that result from a default event on the financial instrument that are possible within 12 months after the reporting date. Company calculates the 12 months ECL provision based on the expectation of default occurring in 12 months following the reporting date. These expected 12 month default probabilities are applied to an EAD and multiplied by the expected LGD.
Stage 2: When a loan has shown a significant increase in the credit risk, i.e., where the same is overdue till 90 days, PDL records a provision for life time ECL. PDs and LGDs in this case are estimated over life span of the financial instrument.
Stage 3: When a loan is considered credit-impaired, i.e., where the same is overdue for past 90 days, Company recognize the lifetime expected credit losses. In this scenario PD is estimated at 100%. For Company, stage 3 incorporates the loans which are due past 90 days but, in certain cases where the internal assessment of the individual borrowers reflects that the overdue amount can be recovered in the near future then the same is subjected to some additional provision other than the prescribed provisioning.
Conclusion:
ECL concept is to recognize the expected loss on the defaulted advances on timely basis so as to present a true and fair view of financial position of the Company. Also, Ind AS states that entity can adopt any ECL model to present its historical trends adjusted for its forward-looking information. However, as per Company's internal policy, the Company follows a policy of writing off 100% of Sub-Standard Assets in respect of these cases where possibility of recoveries are remote which does incorporate the requirements of Ind AS of better presentation of financial position.
Company ECL model is subjected to review every year.
5.4 Derecognition of Financial Instruments
The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it transfers the financial asset and the transfer qualifies for derecognition under Ind AS 109. A financial liability (or a part of a financial liability) is derecognised from the balance sheet when the obligation specified in the contract is discharged or cancelled or expires.
5.5 Investments
Investments are carried at cost in the separate financial statements. Investments in subsidiary is measured at the previous GAAP carrying amount as per the provisions of Ind AS 27 - 'Separate Financial Statements'.
5.6 Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and impairment, if any or at fair market value if the same present a better presentation of Company's financial position.
Costs directly attributable to acquisition are capitalized until the property, plant and equipment are ready for use, as intended by the Management. If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss on disposal of an item of property, plant and equipment is recognized in the statement of profit and loss.
The Company depreciates property, plant and equipment over their estimated useful lives using the straightline method. The estimated useful lives of assets are as follows:
Advances, if any, paid towards the acquisition of property, plant and equipment outstanding at each Balance Sheet date is classified as capital advances under other non-current assets and the cost of assets not ready to use before such date are disclosed under 'Capital Work-in-Progress'. Subsequent expenditures relating to property, plant and equipment are capitalized only when it is probable that future economic benefits associated with these will flow to the Company and the cost of the item can be measured reliably. Repairs and maintenance costs are recognized in the Statement of Profit and Loss when incurred. The cost and related accumulated depreciation are eliminated from the Financial Statements upon sale or retirement of the asset and the resultant gains or losses are recognized in the Statement of Profit and Loss.
5.7 Impairment of Tangible Assets
Property, plant and equipment are evaluated for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For the purpose of impairment testing, the recoverable amount is determined on an individual asset basis unless the asset does not generate cash flows that are largely independent of those from other assets. If such assets are considered to be impaired, the impairment is to be recognized in the Statement of Profit and Loss and is measured by the amount by which the carrying value of the assets exceeds the estimated recoverable amount of the asset. An impairment loss is reversed in the Statement of Profit and Loss if there has been a change in the estimates used to determine the recoverable amount. The carrying amount of the asset is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of any accumulated depreciation) had no impairment loss been recognized for the asset in prior years.
5.8 Intangible Assets
Intangible assets are stated at cost less accumulated amortization and impairment or fair market value if the same present a better presentation of Company's financial position. Intangible assets are amortized over their respective individual estimated useful lives on a straight-line basis, from the date that they are available for use. The estimated useful life of an identifiable intangible asset is based on a number of factors including the effects of obsolescence, demand, competition and other economic factors (such as the stability of the industry and known technological advances). Amortization methods and useful lives are reviewed periodically including at each financial year end.
Software product development costs are also expensed as incurred unless technical and commercial feasibility of the project is demonstrated, future economic benefits are probable. The cost during the development phase shall be capitalized as the cost of the app. The costs which can be capitalized include the cost of material, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Over the period of time the Company has developed its own ERP software which is a core strength of the Company, the revaluation of which shall be taken up at later stage.
5.9 Contingent Liabilities and Contingent Assets
Contingent liabilities are disclosed for:
a. possible obligations which will be confirmed only by future events not wholly within the control of the Company, or
b. present obligations arising from past events where it is not probable that an outflow of resources will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made.
c. Contingent assets are disclosed wherein an inflow of economic benefits is probable.
d. The Company has not recognized the Assets & Liability in respect of Arbitration Decree.
5.10 Share Capital
a. Ordinary shares are classified as equity, incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds.
b. The Company may capitalize permitted Reserves and Security Premium for Bonus Shares.
5.11 Segment Reporting Policy
The Chief Executive Officer reviews the operation at the Company level. Therefore, the operations of the Company fall under "Financing activities" business only, which is considered to be the only segment in accordance with the provisions of Ind AS 108- Operating segment.
5.12 Business Model
During the previous year, the company entered into bilateral assignment transactions against outstanding loans. But the value of these loans are trivial in light of the Company's AUM, thus Company's business model continue to be 'Hold to collect' as per Ind AS 109- Financial Instruments.
5.13 Employee Retirement Benefits
Contributions to Provident Fund and Super Annuation Fund made during the year, are charged to Statement of Profit and Loss.
Employees Gratuity liabilities has been calculated on the basis of Projected Unit Credit method adopted by LIC of India at the time of renewal of gratuity policy. Accordingly, Company has made contribution in line of that which is charged to Statement of Profit & Loss Account in the year of contribution.
5.14 Borrowing Cost
Borrowing costs, which are directly attributable to the acquisition /construction of fixed assets, till the time such assets are ready for intended use, are capitalized as a part of the cost of assets.
All borrowing costs other than mentioned above are expensed in the period they are incurred. In case of unamortized identified borrowing cost is outstanding at the year end, it is classified under loans and advances as unamortized cost of borrowings.
In case any loan is prepaid/cancelled then the unamortized borrowing cost, if any, is fully expensed off on the date of prepayment/cancellation.
5.15 Related Party
A related party is a person or an entity that is related to the reporting entity. A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
A person or a close family member is related if he:
• Has control/joint control;
• Has significant influence;
• Is a member of the Key Managerial Personnel (KMP); of the reporting entity or its parent.
Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity including:
• that person's children, spouse or domestic partner, brother, sister, father and mother;
• children of that person's spouse or domestic partner; and
• dependents of that person or that person's spouse or domestic partner.
Key Management Personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any Director (whether executive or otherwise) of that entity.
Company has duly complied with all the disclosure requirements of Ind AS 24 "Related Party Disclosures"
5.16 Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Company follows accrual basis for all revenue recognition. Interest income is recognized on due basis and penal income is recognized on receipt basis. For recognition of revenue, the valuation of listed shares is considered at market price and that of security receipts as per the valuation report as at Balance Sheet date.
Processing fees received from customer was recognized as income in the year of receipt under India GAAP. But, as per Ind AS, the same is now amortized over the period of relevant loan.
5.17 Earnings Per Share
The Earning per Share (Basic as well as Diluted) is calculated based on the net profit or loss for the period attributable to equity shareholders i.e. the net profit or loss for the period.
For the purpose of calculating (Basic and Diluted EPS), the number of equity shares taken are the weighted average number of equity shares outstanding during the period.
b) Contingent Assets:
In March 2020, Paisalo Digital Limited engaged in a significant transaction involving the transfer of book-debts amounting to Rs. 23.29 Crores. These debts primarily consisted of loans extended to 'Bottom of Pyramid' customers, in accordance with a 10:90 risk and rewards sharing arrangement with Central Bank of India. This strategic move adhered to the regulatory guidelines set forth by the Reserve Bank of India (RBI), reflecting the company's commitment to prudent financial practices.
However, the unforeseen emergence of the Covid-19 Pandemic shortly thereafter precipitated unforeseen challenges within this demographic segment, resulting in a notable increase in loan defaults. Despite the company's proactive measures to mitigate these challenges, a portion of the loans turned non-performing, impacting both Paisalo Digital Limited and Central Bank of India.
Of particular concern was Central Bank of India's unilateral action on March 31, 2023, whereby they debited Paisalo Digital Limited's Cash Credit account by Rs. 5.38 Crores. This action, which deviated from the agreed terms of the transaction, has raised legal and operational concerns. Since the requests for resolution of dispute through negotiation have not been considered by the Bank hence the Company is in the process of filing pre-litigation mediation petition before the Hon'ble Court.
As a prudent accounting measure, the company has already charged this disputed amount to the profit and loss statement in the previous year as an exceptional item. However, given the merits of the company's position in contesting this debit, the amount continuous to be classified as a contingent asset pending resolution.
iv) Co-Lending done by the company with Banks
Paisalo Digital Ltd. has strategically partnered with a five esteemed banks, including State Bank of India, Bank of Baroda, UCO Bank, Punjab National Bank and Karnataka Bank, to facilitate Co-Lending agreements. This symbiotic alliance underscores the company's commitment to fostering financial inclusivity and empowering underserved segments such as the agriculture (AGRI) sector, micro, small and medium enterprises (MSMEs) and small businesses.
The essence of this collaboration lies in the seamless provision of easy and hassle-free loans with a quick turnaround time, addressing the diverse financing needs of these critical sectors. By pooling resources and expertise, Paisalo Digital Ltd. and its banking partners are able to leverage synergies, capitalize on operational efficiencies and optimize risk management practices.
Under the Co-Lending model, both Paisalo Digital Ltd. and its partner banks share the responsibility of disbursing loans, with the former contributing 20% of the total loan amount and the latter contributing the remaining 80%. This equitable distribution of risk and rewards is underpinned by a robust regulatory framework established by the RBI, ensuring compliance and adherence to best practices.
One of the key advantages of this collaborative approach is the ability to offer competitive interest rates to borrowers, thereby enhancing affordability and accessibility to credit. While the bank's interest rates are benchmarked against prevailing sectoral norms, Paisalo Digital Ltd. retains the flexibility to set its own rates within regulatory constraints, ensuring a fair and transparent lending process.
Furthermore, the recent policy directives issued by the Reserve Bank of India on Co-Lending have provided greater clarity and impetus to this innovative financing model. By harnessing digital technologies and embracing end-to-end digitalization, Paisalo Digital Ltd. and its banking partners are poised to revolutionize the lending landscape, driving financial inclusion and fostering economic empowerment at the grassroots level.
In summary, Co-Lending represents a paradigm shift in collaborative finance, offering a compelling value proposition for both borrowers and lenders alike. As Paisalo Digital Ltd. continues to chart new frontiers in inclusive finance, its strategic partnerships and innovative initiatives are set to redefine the contours of sustainable growth and development in the financial services sector
d) Details of financing of parent company products : NIL
e) Details of Single Borrower Limit and Group Borrower Limit exceeded by NBFC
The company has adhered to the Prudential Exposure norms as prescribed by RBI and has not given any advances exceeding the limits as prescribed for Single borrower and Group Borrower.
f) Unsecured Advances
The unsecured advances outstanding as at Balance Sheet date are Rs. 36,206.27 Lakhs. The Company does not have any loan or advances which are partially secured against any sort of licenses, rights, authorizations charged to the company.
49. Registration obtained from other financial sector regulators:
RBI Registration No. : B-14.02997
Company Identification No. : L65921DL1992PLC120483
The company has never been penalized for any non-compliance by financial sector regulators.
50. Bank borrowings and Long Term Debt Securities of the Company have been assigned rating of "IVR AA/STABLE OUTLOOK" by Infomerics Valuation and Rating Pvt. Ltd. which denotes "Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk". Similarly, the Company has been assigned rating of "IVR A1 (IVR A One Plus)" for Commercial Paper by Infomerics
e) Concentration of NPAs
Provisioning for Substandard Assets/Doubtful Assets/Loss Assets has been made in compliance with the directions of Reserve Bank of India. As per decision of the Board of Directors in the cases where loan installments are overdue for more than 180 days past due and management is of the opinion that its recovery chances are very remote or negligible, the Company writes off these accounts (Net of Future Interest Charges) as bad debts. In all other cases where loan installments are overdue for more than 180 days past due the provisioning for non-performing assets is made in compliance with Non-Banking Financial Company Systemically Important Non-Deposit Taking Company and Deposit Taking Company (Reserve Bank) Directions 2016, as applicable to the company. As per the RBI Directions dated 1st September 2016 updated as on 23rd February 2018 Company has made general provision of 0.40% of Standard assets. Other directives of Reserve Bank of India have been duly complied with. The details of top 4 NPA's written off during the year are given below:
59. Uncertainty relating to the global health pandemic from COVID-19 ("Covid-19”):
a) The global landscape remains fraught with challenges, chiefly stemming from the widespread COVID-19 pandemic. This unprecedented crisis has precipitated multifaceted repercussions, including sweeping governmental interventions, a resilient economic rebound post a severe global recession, surging inflation rates, geopolitical tensions such as the conflict in Ukraine and substantial economic sanctions imposed on Russia.
b) In light of the enduring ramifications of the global pandemic, Paisalo Digital Ltd. has proactively instituted alternative work modalities to safeguard the health and well-being of its workforce and business associates. These measures encompass the facilitation of remote work arrangements, particularly for operations and call centres during periods of enforced lockdowns. Equipping employees with requisite technological infrastructure has ensured the secure and efficient delivery of services to borrowers.
Throughout the fiscal year, the company has fostered robust communication channels via virtual sessions with branches, employees and business associates, thereby sustaining proactive engagement with customers. Services such as Door Step Sourcing and Servicing have been meticulously executed, adhering to stringent safety protocols and implementing essential non-pharmaceutical interventions. Despite prevailing challenges, the majority of branches, employees and business associates have remained operational, playing a pivotal role in extending essential credit to borrowers.
Furthermore, Paisalo Digital Ltd. has swiftly adapted to evolving circumstances, innovating digital and analog tools to facilitate credit requests and optimize loan recovery mechanisms.
c) During the financial year 2023-24, no significant governmental, regulatory, or banking frameworks were introduced explicitly targeting COVID-19 relief or aid for Non-Banking Financial Companies (NBFCs) like Paisalo Digital Ltd. However, NBFCs have increasingly served as conduits for governmental and major banking institutions, leveraging their local presence to directly support households in need.
The stability in funding and liquidity afforded to Paisalo Digital Ltd. is fortified by its entrenched local footprint, robust credit and risk assessment methodologies and enduring partnerships with esteemed banking entities.
60. Paisalo Digital Ltd demonstrated robust performance in the fiscal year 2023-2024, achieving a notable non-fund based
income of Rs. 1102.288 Lakhs. This income category encompasses various revenue streams such as fees, commissions
and ancillary activities, reflecting the company's diversified approach towards income generation.
In its pursuit of optimizing non-fund based income, Paisalo Digital Ltd strategically deployed a range of initiatives:
a) Business Correspondent Services: Acting as a Business Correspondent for esteemed institutions like State Bank of India and Bank of India, Paisalo Digital extended comprehensive banking and financial services to underbanked or unbanked regions and demographics. By serving as an intermediary, facilitating banking transactions and providing services on behalf of partner institutions, the company garnered commissions and fees, thereby enhancing its non-interest income.
b) Ancillary Financial Services: Complementing its core lending operations, Paisalo Digital Ltd ventured into ancillary financial services. These encompass a spectrum of activities such as transaction-based services, which generate fees and commissions based on the value of transactions or assets under management. This diversification strategy contributed significantly to the augmentation of non-fund based income.
c) Cross-Selling of Products: Recognizing the potential for revenue growth within its existing customer base, Paisalo Digital implemented targeted cross-selling strategies. By promoting additional financial products and services to its clientele, the company aimed to capitalize on existing relationships and deepen customer engagement. This strategic approach not only fosters customer loyalty but also serves as a lucrative avenue for increasing nonfund based income.
These initiatives underscore Paisalo Digital Ltd's commitment to innovation and diversification, positioning the company for sustained growth and profitability in the dynamic financial landscape. Through strategic foresight and proactive market engagement, Paisalo Digital Ltd continues to explore avenues for maximizing revenue generation and creating long-term value for stakeholders.
62. Risk Management Framework:
The company operates within a landscape of diverse risks that could significantly impact its business, operations and financial performance. These risks include Credit Risk, Liquidity & Funding Risk, Market Risk and Operational Risk. To address these challenges, the management has developed a comprehensive risk management framework aimed at identifying, analyzing and mitigating potential threats while ensuring adherence to predefined risk limits.
i) Creating a Stable Business Planning Environment
One of the primary objectives of the risk management framework is to establish a stable business planning environment by minimizing the impact of interest rate fluctuations on the company's business plan. This involves assessing the potential effects of interest rate changes on the company's financial position and operations, enabling more accurate forecasting and strategic decision-making.
ii) Achieving Greater Predictability to Earnings
Another key goal is to achieve greater predictability in earnings by determining the financial value of expected earnings in advance. This entails forecasting future earnings based on various factors such as market conditions, customer behaviour and economic trends. By accurately predicting earnings, the company can better allocate resources, plan investments and manage its financial performance effectively.
A) Credit Risk
Credit risk represents the potential financial loss to the company if a customer or counterparty fails to fulfill its contractual obligations. This risk primarily emanates from trade and other receivables, cash equivalents and bank balances. To assess credit risk, the company utilizes various metrics such as installment default rate, overdue position and debt management efficiency.
Credit risk is closely monitored through the analysis of credit exposures, portfolio monitoring and evaluation of customer and portfolio concentration risk. Moreover, the risk management unit employs a robust control framework to manage credit risk effectively. This framework involves aligning credit and debt management policies, leveraging external data from credit bureaus and conducting regular reviews of portfolios and delinquencies by senior and middle management teams.
By implementing these strategies, Paisalo Digital Ltd aims to proactively identify and mitigate credit risks, thereby safeguarding its financial stability and ensuring the continuity of its operations.
(a) Loans, Trade & Other Receivables
Managing credit risk from loans, trade and other receivables is a multifaceted process that involves a
comprehensive approach to mitigate potential financial losses and uphold the company's financial
stability. Here's a detailed overview of how the company manages credit risk:
1. Establishing Credit Limits: The company meticulously sets credit limits for each customer, taking into account various factors such as creditworthiness, financial history and repayment capacity. These credit limits serve as a safeguard against excessive borrowing and minimize the risk of default.
2. Credit Approvals Process: Every credit request undergoes a stringent approval process that evaluates the creditworthiness of the customers and assesses associated risks. This process involves analyzing financial statements, credit reports and other relevant information to determine the likelihood of repayment. Only credit requests meeting predefined risk criteria are approved.
3. Continuous Creditworthiness Monitoring: The company continuously monitors the creditworthiness of its customers to identify any changes in their financial circumstances that may impact their ability to repay loans or fulfill obligations. This ongoing monitoring involves regular reviews of credit reports, financial statements and market trends to assess credit risk profiles accurately.
4. Regular Monitoring of Receivables: The company maintains a vigilant stance by regularly monitoring outstanding receivables to ensure timely repayment by customers. This includes tracking payment schedules, identifying overdue accounts and implementing effective collection strategies for delinquent accounts. By closely monitoring receivables, the company can promptly identify potential credit risks and take appropriate actions to mitigate them.
5. Ageing Analysis: The company conducts thorough ageing analysis of loans and trade receivables to categorize outstanding receivables based on their ageing profile. This analysis helps identify
(b) Cash & Cash Equivalents & Other Bank Balances
Regarding the management of cash and cash equivalents, the company maintains a robust evaluation process for assessing the creditworthiness of banks and financial institutions where funds are held. This evaluation occurs regularly and involves comprehensive assessments of financial stability, regulatory compliance and risk management practices. By ensuring the creditworthiness of banking partners, the company mitigates the risk associated with cash holdings and safeguards its liquidity position. The company holds cash and cash equivalents and other bank balances of Rs. 1356.32 Lakh at 31st March 2024.
B) Liquidity & Funding Risk
Liquidity risk poses a substantial threat to the Company's ability to fulfill its financial obligations, particularly those settled
through cash or other financial assets. This risk encompasses several dimensions, including funding risk, which manifests
in various scenarios:
1. “Inability to Raise Incremental Funds**: The company faces the risk of being unable to secure additional borrowings or deposits to meet its operational needs or fulfill repayment obligations. This could arise due to limitations in accessing capital markets or reluctance from lenders amidst uncertain economic conditions.
2. **Cash Flow Mismatches**: Funding risk also emerges when long-term assets cannot be financed over their expected term, leading to discrepancies in cash flows. Such mismatches may arise from unexpected changes in market conditions or disruptions in the funding environment.
3. “Market Volatility Impacting Funding**: Volatility in financial markets can further exacerbate funding risk by hindering the company's ability to source funds from banks and money markets. Fluctuations in interest rates, credit spreads, or investor sentiment may impede access to funding avenues, heightening liquidity concerns.
Measuring liquidity risk involves several key metrics and assessments:
1. “Identification of Structural and Dynamic Liquidity Gaps**: The company analyzes structural and dynamic liquidity statements to identify gaps between available funds and near-term liabilities. This entails assessing the maturity profile of assets and liabilities to gauge liquidity adequacy.
2. “Assessment of Incremental Borrowing Needs**: Evaluating the incremental borrowings required to fulfill repayment obligations and support the company's business plan amidst prevailing market conditions is crucial. This assessment considers factors such as interest rate environment, credit availability and funding costs.
3. “Monitoring Liquidity Coverage Ratio (LCR)**: The company tracks its liquidity coverage ratio in adherence to regulatory guidelines, ensuring sufficient high-quality liquid assets are held to cover short-term liquidity needs under stress scenarios.
Managing liquidity risk involves proactive measures implemented by the treasury team:
1. **Gap Analysis and Scenario Testing**: The company continuously assesses the gap between fund visibility and near-term liabilities, considering evolving liquidity conditions and regulatory requirements for non-banking financial companies (NBFCs). Stress tests and scenario analyses are conducted to evaluate potential liquidity shortfalls and compare them against available buffers.
2. “Adaptive Funding Strategies**: A dynamic approach to funding involves aligning funding sources with emerging market conditions in banking and money markets. The company adjusts its funding mix and borrowing strategies to optimize liquidity and mitigate funding risks.
3. “Maintaining Liquidity Buffers**: Building and maintaining liquidity buffers is essential to mitigate liquidity risk. These buffers serve as a cushion during periods of funding stress and provide resilience against unexpected liquidity shocks.
4. “Strategic Asset-Liability Management**: The company employs positive asset-liability management practices to match asset and liability durations, reducing the risk of cash flow mismatches. This entails aligning asset maturities with liability obligations to minimize funding gaps.
5. “Diversification and Relationship Management**: Diversifying funding sources and cultivating strong relationships with banks and financial institutions enhance the company's ability to access funding under diverse market conditions. Maintaining a robust pipeline of sanctions and approvals ensures access to funding avenues when needed.
In essence, the management of liquidity risk is a dynamic and multifaceted endeavour, requiring a proactive and strategic approach from the treasury team. Through the judicious application of liquidity buffers, longterm funding strategies, asset-liability management, pipeline management and prudent loan assignments, the treasury team fortifies the Company's liquidity position, safeguards against funding uncertainties and fosters financial resilience in an ever-evolving financial landscape.
C) Market Risk
Market risk, a critical facet of financial risk management, underscores the potential for future earnings, fair values,
or cash flows to incur losses due to adverse fluctuations in market rates and prices, or the values of market
risk-sensitive instruments. This encompasses Currency Risk, Interest Rate Risk and Price Risk, each demanding
meticulous assessment and proactive management strategies.
1. “Measurement Techniques**: Market risk is quantified through a suite of sophisticated metrics and methodologies, including Value at Risk (VaR), basis point value (PV01) and modified duration analysis. These tools facilitate a comprehensive evaluation of portfolio dynamics and the potential impact on income streams, particularly in terms of net interest income. The Company's exposure to market risk is analyzed across various dimensions, encompassing equity investments, interest rate fluctuations within investment portfolios and the implications of floating rate assets and liabilities with varying maturity profiles.
2. **Monitoring Protocols**: Rigorous monitoring protocols are employed to track fluctuations in equity prices and interest rate sensitivities under diverse stress test scenarios. Through simulated simulations of probable interest rate movements, both fixed and floating assets and liabilities are scrutinized to gauge resilience under adverse market conditions. This proactive monitoring framework enables the identification of vulnerabilities and informs timely risk mitigation strategies.
3. “Management Strategies**: The management of market risk is entrusted to the Company's treasury team, operating under the guidance of the Board. This dedicated team implements a multi-faceted approach tailored to address specific risk exposures:
- “Currency Risk**: Given the Company's exclusive operations within India, exposure to foreign currency risk is mitigated.
- “Interest Rate Risk**: The Company actively manages interest rate risk by closely monitoring market interest rate movements and their potential impact on interest-bearing liabilities and assets. This proactive stance enables the Company to adapt swiftly to changing interest rate environments and optimize its interest rate exposure.
- “Price Risk**: Equity price risk arising from investments is managed through prudent portfolio
diversification strategies. The Company strategically diversifies its investment portfolio within predefined limits to mitigate concentration risk and optimize risk-adjusted returns.
4. “Governance Framework**: The management of market risk is conducted under the oversight of the Board of
Directors. The treasury team, comprising seasoned professionals with expertise in financial risk management, implements risk mitigation strategies in alignment with the Board's directives and risk appetite. This ensures that market risk management practices are consistent with the Company's strategic objectives and regulatory compliance obligations.
In essence, the management of market risk requires a judicious blend of quantitative analysis, robust monitoring mechanisms and proactive risk mitigation strategies. By leveraging sophisticated measurement techniques, rigorous monitoring protocols and strategic management frameworks, the Company navigates the complexities of market risk dynamics while safeguarding its financial stability and optimizing long-term performance.
D) Operational Risk
Operational risk, a multifaceted challenge inherent in the company's operational landscape, arises from a spectrum of sources, encompassing internal processes, human resources, technological systems and external factors. To effectively manage operational risks, the Company has instituted a comprehensive framework of internal controls and procedures, meticulously designed to govern critical activities across various functional domains, including loan acquisition, customer service, IT operations and finance functions.
1. “Internal Control Systems**: At the heart of operational risk management lies a robust system of internal controls, meticulously crafted to mitigate the risk of inadequate or failed internal processes, people, or systems. These controls span a myriad of functions, facilitating proactive identification and remediation of potential vulnerabilities. Through continuous monitoring and assessment, the Company endeavours to strengthen its internal control environment, ensuring operational resilience and efficiency.
2. “Internal Audit Oversight**: Internal Audit plays a pivotal role in operational risk management, conducting comprehensive reviews of all operational functions at least annually. This diligent scrutiny serves to unearth process gaps and deficiencies in a timely manner, enabling corrective actions to be implemented promptly. By providing independent assurance and insights, Internal Audit reinforces the Company's commitment to sound governance practices and operational excellence.
3. “Compliance and Control Units**: Within the IT and Operations functions, dedicated compliance and control units operate in tandem to uphold the integrity and security of internal processes. Through continuous monitoring and evaluation, these units assess adherence to regulatory requirements and internal policies, proactively identifying and addressing operational risks. By fostering a culture of compliance and risk awareness, these units contribute to the Company's resilience in the face of evolving operational challenges.
4. “Disaster Recovery and Business Continuity Planning**: Recognizing the imperative of business continuity in the face of unforeseen events, the Company has established robust Disaster Recovery (DR) and Business Continuity Plans (BCP). These plans are meticulously crafted to ensure the seamless continuation of operations and services to customers in the event of natural disasters, technological outages, or other disruptive incidents. Regular testing and analysis of these plans enable the Company to identify and rectify any gaps in the framework, bolstering its readiness to navigate unforeseen disruptions effectively.
In essence, operational risk management is woven into the fabric of the Company's governance framework, underpinned by a relentless commitment to process excellence, regulatory compliance and business continuity. Through the concerted efforts of internal control systems, audit oversight, compliance units and robust disaster recovery planning, the Company strives to fortify its operational resilience and safeguard its business operations against a spectrum of potential risks and contingencies.
3. Additional information pursuant to Ministry of Corporate Affairs notification dated March 24, 2021 with respect to amendments in Schedule iii of Companies Act, 2013:
i) The Company has made provision for dividend @ Rs. 0.10 each per share and the same will be declared & paid after the approval of the shareholders in their Annual General Meeting.
ii) All the borrowings of the Company are used for the specific purpose for which it was taken.
iii) There are no proceedings which have been initiated or pending against the Company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder.
iv) The Company is not a wilful defaulter as declared by any bank or financial Institution or any other lender.
v) The Company does not have any transactions with the companies struck off under section 248 of Companies Act, 2013 or Section 560 of Companies Act, 1956.
vi) There are no charges or satisfaction yet to be registered with Registrar of Companies (ROC) beyond the statutory period.
vii) The Company has complied with the number of layers prescribed under clause (87) of section 2 of the Act read with Companies (Restriction on number of Layers) Rules, 2017.
viii) There are no transactions which are not recorded in the books of accounts that has been surrendered or disclosed as income during the year in the tax assessments under the income Tax Act, 1961 (such as, search or survey or any other relevant provisions of the Income Tax Act, 1961).
xi) The Company has not traded or invested in Crypto currency or Virtual Currency during the year.
Notes:
1. Provisioning norms shall be applicable as prescribed in the Non-Banking Financial Company-Systemically Important Non-Deposit Taking Company and Deposit Taking Company (Reserve Bank) Direction, 2016.
2. All Accounting Standards and Guidance Notes issued by ICAI are applicable including for valuation of investments and other assets as also assets acquired in satisfaction of debt. However, market value in respect of quoted investments and break up/fair value/NAV in respect of unquoted investments shall be disclosed irrespective of whether they are classified as long term or current in column (5) above.
Signed in terms of our Report of even date For and on behalf of the Board
For Manish Goyal & Co. Sd/-
Chartered Accountants (SUNIL AGARWAL)
Firm Reg. No. 006066C Managing Director
DIN : 00006991
Sd/-
(CA. MANISH GOYAL) Sd/-
Partner (HARISH SINGH)
Membership No. 074778 Executive Director & CFO
UDIN : 24074778BKAPEP5265 DIN : 00039501
Place : New Delhi Sd/-
Date : 26th April 2024 (MANENDRA SINGH)
Company Secretary Membership No. : F7868
| 