Arohan Financial Services Limited | Annual Report 2022-23

• Branch Level: These underwritings are based on checks that are inbuilt into the sourcing processes, such as verification, Compulsory Group Trainings (CGTs) and Group Recognition Tests (GRTs). Branch grades and other risk profiling also play a key role in the specific allowance of products and thresholds for the underwriting, specific to the branch. • Geographic Level: Arohan ensures adequate measures to administer credit policies in accordance with geographic risks. These include a strategic approach to new and existing geography penetration and credit underwriting based on concentration. Additionally, ring- fencing measures are also implemented for identified challenges such as ring leaders, negative areas, etc. 3. Mitigation of Geographic Risks: Arohan’s Credit Team is an indispensable part in the decision- making of expansion to new geographies or opening of new branches in the existing geographies. Geographical risks are attributed to three factors – i) industry penetration, ii) Arohan’s portfolio concentration, and iii) behaviour of Arohan’s portfolio vis-à-vis that of the industry. Higher risks are mitigated by higher levels of credit checks. Besides, portfolio concentration beyond the approved tolerance level is mitigated by continuous scanning of the district and state-level concentration of the portfolio and by developing balancing measures in discussion with the business team. 4. Mitigation of Underwriting Challenges: With the help of Early Delinquency traction, the 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. Inorganic Credit The Inorganic Credit function of Arohan has an established credit appraisal procedure in line with the inorganic loan policy. The policies outline appraisal norms include assessment of quantitative and qualitative parameters along with guidelines for various products (Term loan and Sourcing & Collection). Arohan has a Credit Committee which helps formulate overarching credit policies which are put into practice by the Inorganic Credit Teamwith the help of underwriting, field, and relationship teams. The borrower risk is evaluated by considering the following: • The risks and prospects associatedwith the industry • The financial position of the borrower by analysing the quality of its financial statements, its past financial performance, its financial flexibility in terms of ability to raise capital, and its cash flow adequacy • Geo-concentration of the borrower • PAR movements & quality evaluation using key delinquency metrics • Collection efficiency movement & validation with bank statement • The borrower’s relative market position and operating efficiency • The quality of management by analysing their track record, payment record, and financial conservatism. RISK MANAGEMENT The Risk Management function at Arohan continues to play an enhanced role in risk mitigation across all functions in the Company, in the light of the changing business and economic environment, as well as expectations from Stakeholders and Regulators. The Business & Risk strategies that were deployed appropriately, enabledArohan to remainwell-prepared for facing and mitigating challenges throughout the financial year of FY 2023. The Risk Management function of the Company is led by the Chief Risk Officer and has independent reporting to the Risk Management Committee of the Board of Directors, headed by an eminent Independent Director, with regular administrative guidance from the Managing Director of the Company. Coming out of the trailing impact of COVID-19, Arohan has strategically calibrated and strengthened its risk management framework around the evolving new normal. The favourable harmonisation guidelines from the Reserve Bank of India for the Microfinance Sector was put into practice from the very first working day of the FY 2023, marking a positive start to the business year. One of the most important 57 | Annual Report 2022-23