Arohan Financial Services Limited | Annual Report 2021-22

INDEPENDENT CREDIT VERTICAL Arohan runs an independent Credit function to strengthen its underwriting process while channelling sharp focus on quality till the last mile. The Credit function of the Company has two sub-verticals of Organic Credit and Inorganic Credit that ensures efficient management of the credit quality of its diversified business model. Organic Credit With the ultimate objective of minimising cost of credit, Arohan’s Organic Credit vertical has developed a four pronged approach: Credit Policy Formulation: Credit Policies at Arohan are designed based on a calculated risk approach that takes into account - i) individual customer behaviour (e.g. loan absorption capacity, repayment discipline, etc.), ii) risk associated with different customer segments (e.g, new-to or used-to-credit, female or male borrowers, etc.) and iii) performanceof industry portfolio in different operational geographies (pin-code level data of microfinance industry). This ensures a strong data-driven approach to design credit policies. CreditAdministration: CreditpoliciesatArohan are instrumentalised across three levels – i) branch-level underwriting: where the checks are inbuilt in the sourcing processes, such as Verification, Compulsory Group Training and Group Recognition Training, ii) IT-based system validationofKnowYourCustomer (KYC),Credit Bureau, mandates from the Reserve Bank of India, andadditional internal credit policies, and iii) Central-level exceptional approval based on alternative documentary proofs. Mitigation of Underwriting Challenges: With effective Early Delinquency monitoring, outlier branches are identified and taken into a three- month long mentorship programme. The concerned branch teams are guided to render improved quality of underwriting. Mitigation of external risks: The Credit vertical is an indispensable part of the decision- making process at Arohan to expand into newer geographies or opening of new branches in the existing geographies. Geographical risks are attributed by two factors: i) industry penetration, and ii) Arohan’s portfolio concentration and behaviour of Arohan’s portfolio vis-à-vis that of industry. Higher risks are mitigated by higher level of credit checks. Inorganic Credit For its inorganic business Arohan has an established credit appraisal procedure which is detailed out in the Company’s Inorganic Loan Policy. The policy helps outline appraisal norms including assessment of quantitative and qualitative parameters along with guidelines for various products (TermLoan and Sourcing & Collection). The policy also includes processes for approvals of loans which are subject to review and approval by the sanctioning committee. The borrower’s risks are evaluated by considering; The risks and prospects associated with the industry. The financial position of the borrower by analysing the quality of its financial statements, past financial performance, financial flexibility in terms of ability to raise capital and cash flow adequacy. Geo-concentration of the borrower. PAR movements and quality evaluation 74 Annual Report | 2021-2022