Management Discussion & Analysis The Risk Management function of the Company is led by the Chief Risk Officer (CRO) 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. On the backdrop of the implementation of Riskbased pricing in FY 2023, Arohan has cleaned up the past’s stressed assets and returned to “Net NPA Zero” status of Pre-COVID times. Careful strategic planning and execution over the past few years is reflected in the overall performance of the Company and is also a testimony of the Risk resilience built into the organisation. The MFI sector has largely recovered from the impact of COVID-19. However, aggressive growth in certain quarters in the microfinance sector has had an impact on the Industry portfolio quality trends, especially for a few large lenders. The sector on the overall, remains stable & resilient with occasional nudge from the Reserve Bank of India for interest rate moderation in certain quarters in the current free risk pricing regime. Capital raise(s) from marquee investors, Credit Risk pricing and strategic planning deployed for spreading out the financial impact of the pandemic across the three financial years, within the regulatory and statutory domains, have ensured that Arohan emerged in much better health in FY 2024. Risk Analytics & Practices In FY 2024, Arohan worked on further strengthening its Incisive Risk Analytics, enhancing capabilities using various statistical tools, large data processing software, and visual analytic tools such as Python, R, and Tableau. This reinforces the position of Arohan’s risk management unit to provide sector-leading, critical, rationale-driven business intelligence inputs to the management and the stakeholders. Such inputs and insights enhance the Company’s strategic planning capabilities and provide key actionable for the Management. Arohan has acquired the license of a machine learning based modelling platform, Design Studio, which will leapfrog Arohan’s existing in-house capabilities & deep domain knowledge of statistical modelling, predictive & forecasting expertise. Credit Risk Management: Arohan’s ‘NIRNAY 1.0’, the MFI sector’s first credit acquisition scorecard which was deployed in April 2022 has been taken up for renewal & refresh with “NIRNAY 2.0”. NIRNAY 1.0 along with Arohan’s expertise in forecasting science ensured that Arohan was able to fully satisfy various auditor’s & most importantly the Reserve Bank of India’s risk pricing audits & scrutiny throughout the year with zero comments or observations. Building on these strengths, NIRNAY 2.0 is being built using Design Studio which will ensure that Arohan continues to optimise Risk-based pricing strategies & provision planning of the future. Operational Risk Management: Arohan’s proprietary Branch Risk (BRisk) assessment algorithm refreshed during the year, continued to proactively provide visibility of operational risks to the business team for effectively assessing operational risk all the way to the frontlines’ operating unit, the branches. The BRisk Grading of the entire Company at all levels up from the Branches provided the Business team, the Management and the Board of Directors with an impartial assessment of the operational health of Arohan’s active branches while indicating potential emerging risks. It is encouraging to observe that the overall BRisk grade of the Company has demonstrated positive trends throughout FY 2024. Operational Risk Management is expected to come under enhanced focus in the Reserve Bank of India’s Operational Risk regulations & guidelines in FY 2025 in the backdrop of various discussions and workshops through the year. Enterprise Risk Management: Arohan has been proactively working on the microfinance sector-specific ERM structure for a while now. That foresight started bearing fruits in FY 2024, with the Reserve Bank of India actively encouraging systemically important NBFCs, during their regular audits and in their specifically curated CRO Workshop, for the deployment of Enterprise Risk Management (ERM) systems. ERM is a globally well-established framework for effectively optimising Risk vis-à-vis Return, and providing accurate and insightful visibility on all risks inherent during the functioning of an organisation. As a mandate for the Risk unit, Arohan initiated the implementation of the Enterprise Risk Management (ERM) project using the COSO framework. Christened SANDESH, the project has made significant progress with the platform that was completely developed in-house. The platform is already operational with the respective Risk Owners approving the risk registers along with their controls and thresholds. Arohan is again the first in the sector for the development of ERM in true letter and spirit. Annual Report 2023-24 | 58
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