Arohan Financial Services Limited | Annual Report 2022-23

165 | Annual Report | 2022-2023 Note 41: Financial risk management Risk Management The Company’s activities expose it to market risk, liquidity risk and credit risk. The Company’s board of directors has overall responsibility for the establishment and oversight of the Company risk management framework. The Company manages the risk basis policies approved by the board of directors. The board of directors provides written principles for overall risk management. This note explains the sources of risk which the entity is exposed to and how the entity manages the risk and the related impact in the financial statements. Risk Exposure arising from Measurement Risk management Credit risk Cash and cash equivalents (excluding cash on hand), other bank balances, investments, loans, trade receivables and other financial assets. Credit limit and ageing analysis Highly rated bank deposits and diversification of asset base. Liquidity risk Borrowings, debt securities, subordinated liabilities, trade payables and other financial liabilities. Cash flow forecasts Committed borrowing and other credit facilities and sale of loan assets (whenever required). Market risk - interest rate Change in interest rate of variable rates borrowings, debt securities and subordinated liabilities. Sensitivity analysis Review of cost of funds and pricing disbursement. Market risk - security price Investments in equity securities, mutual funds, security receipts and certificate of deposits and commercial papers. Sensitivity analysis Diversification of portfolio, with focus on strategic investments. In order to avoid excessive concentration of risk, the Company’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. (A) Credit risk Credit risk is the risk that the Company will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Company’s exposure to credit risk is influenced mainly by cash and cash equivalents excluding cash in hand, other bank balances, investments, loan assets, trade receivables and other financial assets. The Company continuously monitors defaults of customers and other counterparties and incorporates this information into its credit risk controls. a) Credit risk management Based on business environment in which the Company operates, a default on a financial asset is considered when the counter party fails to make payments within the agreed time period as per contract. ‘The Company assesses and manages credit risk based on risk monitoring and measurement metrics and well defined loan appraisal process. Internal credit rating and monitoring is performed for each class of financial instruments with different characteristics. The Company has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties. The Company assigns the following credit ratings to each class of financial assets based on the assumptions, inputs and factors specific to the class of financial assets. (i) Low credit risk (ii) Moderate credit risk (iii) High credit risk Arohan Financial Services Limited Summary of significant accounting policies and other explanatory information for the year ended 31 March 2023 (Contd.) (All amounts in ` lakhs unless otherwise stated)