PAISALO DIGITAL LIMITED

Formerly Known as S. E. Investments Limited

Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

5. Common Risk Factors

The Company is subject to a variety of external and internal risks in the course of its
operations which includes:

In recent times every business, specifically NBFCs have been found to be constantly
facing problems with managing their liquidity positions owing to multiple factors such as
an increase in borrowing costs, asset -liability mismatches, repricing risks, nature of
assets and reluctance of lenders/investors. Hence, considering the balance sheet size of
PDL above risks though seems trivial issues are to be taken care of very vigilantly.
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

6. Types of Risks

6.1 Credit Risk

The key risk for NBFC or any other institution involved in lending business is Credit
Risk. According to RBI, credit risk is defined as

Possibility of losses associated with a decline in the credit quality of borrowers or

counter-parties,
Default due to inability or unwillingness of a customer or counter-party to meet
commitments in relation to lending, trading, settlement and other financial
transactions, or
Loss from the reduction in portfolio value (actual or perceived)

Hence, it is imperative for PDL to have a robust credit risk management system to
address the above risk. The effective management of credit risk is a critical component of
PDL’s comprehensive risk management and is considered essential for the long-term
success of the company.

PDL’s Credit policy includes:

Target segments,
Risk acceptance criteria such as Debt Burden Ratio, Loan-to-Value, etc
Credit approving authority,
Collateral management, and
Legal scrutiny of collateral documents.
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

6.1.1 Concentration risk

Risk which arises from the composition or concentration of companies’ exposure to

particular geography or borrower is the concentration risk. The details of the measures
are:
Particulars Companies Cap
Borrower concentration risk: This risk
represents an uneven distribution of Single borrower Less than 15% of
PDL’s net owned
exposures to its borrowers. As a prudential
fund
measure aimed at better risk management
and minimizing credit concentration risk, Single group of Less than 25% of
the company has fixed prudential exposure borrower’s PDL’s net owned
limits as follows: exposure funds

6.1.2 Complexity of exposures

This is the risk which arises from a variety of collateral, target customer segments, type
of loans, etc. In this regard, the PDL has taken the following measures to address the
same:
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

6.1.1 Concentration risk

Risk which arises from the composition or concentration of companies’ exposure to

particular geography or borrower is the concentration risk. The details of the measures
are:
Particulars Companies Cap
Borrower concentration risk: This risk
represents an uneven distribution of Single borrower Less than 15% of
PDL’s net owned
exposures to its borrowers. As a prudential
fund
measure aimed at better risk management
and minimizing credit concentration risk, Single group of Less than 25% of
the company has fixed prudential exposure borrower’s PDL’s net owned
limits as follows: exposure funds

6.1.2 Complexity of exposures

This is the risk which arises from a variety of collateral, target customer segments, type
of loans, etc. In this regard, the PDL has taken the following measures to address the
same:
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

Particulars Comments

Target customer The credit policy shall cover details of

Eligible borrowers,
Positive & negative sectors
Collateral related risks The company shall have a detailed guideline on selection
of collaterals, valuations, inspections, safe custody, etc
Loan products The credit policy shall define the nature of loans to be
offered and the permissible end use of the loan.
Additionally, the policy also covers the following with
regard to loan terms:

Quantum of loan
Acceptable Debt burden ratio
Repayment terms, etc.
Frequency of EMI

6.1.3 Default risk

Risk that a borrower is unable to meet it’s periodic commitments. The company primarily
caters to small businesses in urban, semi-urban and fast growing rural markets. All the
loans are provided after due assessment of incomes. Certain section of borrowers are
from unorganised segment and may not have formal proof for income generation even
though they may have sufficient cash flows to repay the debt.
Hence the company adopts the following robust credit appraisal process:
Multiple and Independent evaluation of credit worthiness and bankability of credit
proposals. While appraising the credit proposal, the company shall ensure that
the financial statements / cash flows and income assessments of borrowers are
reviewed diligently. The company relies on both quantitative parameters and
various qualitative proxies while assessing the income.
Every credit proposal will also be subjected to evaluation and assessment of credit
risk and measures proposed to minimize the risk.
Comprehensive and transparent presentation would be made while making the
credit assessment and approval duly adhering to various policy guidelines/
requirements/ benchmark parameters.

6.1.4 Recovery risk

Risk that lender is unable to recover the loan from the borrower. Considering the basic
characteristics of our lending, in which collateral value is critical, an unduly intensive
post disbursement supervision of the loan with the borrower shall not be considered
desirable under normal circumstances. Despite the availability of good security to cover
the credit exposure, the Company recognises the importance of a well-calibrated
approach for recovery. Maintaining a fine balance in the recovery / collection procedure
is relevant for 3 important reasons: i) To consider customer sensitivities in such
collateral driven loans. ii) To minimize the forced realization of the collateral through
auction. iii) To comply with the income recognition and asset classification norms of the
RBI.
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

6.2 Operational Risk

Another risk that is prevalent to many institutions is the inadequacy of processes to

maintain checks and balances in its operations. Necessary controls are essential to
ensure that there are no intentional or unintentional errors that creep into the process.

In this regard, the company has set up an Operations and Finance Committee
department, which is responsible for maintaining the necessary controls over the various
processes. The operational staff shall independently carry out or check the various
processes like data entry, preparation and verification of data, necessary checks before
disbursals, scrutiny of documents at each stage as required, maintain safe custody of
the property documents and the like. With such independent checks, it is envisaged that
the errors would decrease significantly.

6.3 Liquidity & Interest rate risk

Another risk that is very specific to NBFCs or other institutions involved in the activity of
lending is liquidity risk or the risk of inadequate liquidity to further the business. NBFCs
depend on banks, financial institutions and other NBFCs for their funding needs. In
addition, NBFCs also resort to issue Non-convertible debentures, Commercial papers,
Securitization transactions for meeting their funding requirements. Lack of adequate
liquidity or non-availability of liquidity on time would seriously hamper the business
prospects of NBFCs.

Our Company is also dependent on banks and financial institutions and other funding
structures for its funding and hence the liquidity risk needs to be managed efficiently in
order to ensure smooth functioning. Availability of liquidity alone is not sufficient but
managing the cost of funds is a very important indicator to ensure company profitability.
The cost of funds charged by the banks and financial institutions to NBFC depends on a
multitude of factors (listed below) and it is the responsibility of the Risk Management
Committee to keep a track of these factors and ensure that they stay in favour of the
Company at all times.
Company size - the larger the company size, the lower the cost of funds
Portfolio quality - Demonstration of a strong portfolio quality over long periods of
time would help the company get cheaper funds
Capital adequacy and Leverage- the higher the capital adequacy and lower the
leverage, the company will be able to attract lower cost funds for its operations
Credit rating - the better the credit rating of the company, the lower would be its
cost of funds
Multiple sources of funds - A company which has access to multiple sources of
funds will be able to rationalize its costs better than a company which is
dependent predominantly on a single source of funds

Another aspect to the liquidity risk is matching the asset-liability profile such that there
is no negative asset-liability mismatch. In the event of the assets having a longer tenor as
compared to the liabilities, the Company would have a negative ALM resulting in cash
flow issues. While this risk needs to be monitored and managed by the Risk Management
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

Committee, given the sophisticated nature of the risk, Asset Liability Management
Committee is constituted and manage the ALM.

6.4 Financial Risk

Every Company especially NBFCs, which are in the process of lending and collecting
moneys, needs to manage its finance risk in a prudent fashion. Financial risk could take
the following forms:
Compliance of applicable Accounting Principal- this is essential to ensure that the
Company’s financial including the balance sheet and profit & loss account reflect
the true and fair picture of the Company’s financial position.
Adequacy of Internal Financial Controls – every company needs to develop its own
set of Internal Financial Controls, which will serve as the check and balance to
ensure the orderly and efficient conduct of its business.
Clearly documented and consistent accounting policy- it is essential for every
company to develop its set of accounting policies in line with the applicable
accounting standards and maintain consistency in the adoption of such
accounting policies over the course of financial years.

6.5 Human resources risk

The success of any institution lies in the strength of its people. It is essential for a
company to attract and recruit the right set of people, manage their monetary and non-
monetary expectations so that they are able to contribute towards the growth of the
Company. Some of the tenet of the risk management framework to manage the HR risk
are given below:

Ensure availability of dedicated workforce of good vintage

Ensure a pool of resource which can be tapped into should there be a need for
additional resource
Benchmarking salaries and incentives with the industry standards so that the
attrition levels are managed
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

7. Risk Management through various Committees

In line with better corporate governance, effective risk management system and subject
to provisions of applicable laws the Board of Directors of the Company shall constitute
following committees:

7.1. Audit Committee

The audit committee is a central pillar of effective corporate governance and is in the best
position to offer effective oversight of the performance, independence and objectivity of
the auditor and the quality of the audit.

Audit committee members are drawn from the independent members of the board of
directors, with a Chairperson selected from among the committee members. We believe
periodic review is a more appropriate and effective approach for risk mitigation, which is
the main objective of audit committee.

The audit committee is responsible for overseeing the entire financial reporting process
and determine that they are designed effectively. Also, it helps in establishing and
maintaining adequate internal control over financial reporting, and evaluating the
effectiveness of the same.
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

7.2. Risk Management Committee

The role of this committee is to perform an oversight function. In doing so, it considers
the risk policy and plan, determine the company’s risk appetite and risk tolerance,
ensure that risk assessments are performed regularly, and ensure that the company has
and maintains an effective on-going risk assessment process, consisting of risk
identification, risk quantification and risk evaluation. This risk assessment process
(using a generally recognised methodology) should identify risks and opportunities, and
measure their potential impact and likelihood. The committee receives assurance from
internal and external assurance providers regarding the effectiveness of the risk
management process.
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

Among other responsibilities, this committee performs following functions:

7.3. Asset Liability Management Committee

The committee primarily performs the role of Risk Management in pursuance of the Risk
Management guidelines issued periodically by RBI and the Board. This Committee
focuses on areas mentioned below:
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

7.3.3. Liquidity Risk Management

Appropriate governance is imperative for the implementation of a sound Liquidity risk

management framework. In order to integrate the day-to-day operational aspects and
strategic decisions with Liquidity risk management, a comprehensive governance
structure is created. Liquidity risk tolerance limits are created for each business
segments which are articulated in both quantitative and qualitative terms.

Another important aspect is effective Liquidity risk management is that of funding. The
NBFC sector is dependent on low-cost short-term funding and for non-deposit taking
NBFCs like PDL there is heavy reliance on bank and market borrowings. If supply from
these two sources dries up, problems may arise. A funding strategy is established with
effective diversification in terms of sources and tenor. There is no over-reliance on a
single source and concentration in sources of funds are monitored in a regular fashion.

In terms of monitoring, the amount of funds raised from each source are represented as
a percentage of total funding to provide a true picture of the funding mix and any
concentration (that may arise) to the senior management, alerting them to take any
necessary action.
 PAISALO DIGITAL LIMITED
Formerly Known as S. E. Investments Limited
Reg. Off.: CSC Pocket-52, CR Park
Near Police Station, New Delhi -110019
CIN: L65921DL1992PLC120483

7.3.4. Maturity profiling

The entire book debts is segregated across various time limits starting from as low as
loans maturing within 7 days, for determining the short term or long-term liquidity of the
company. This information is available on real time basis to the management to facilitate
them in making an informative decision about various financial situations.

7.3.5. Stock approach

PDL monitor liquidity risk based on the ‘stock approach’ that essentially measures
comparable positions of different parameters at a particular point.

Suitable indicators/ratios pertaining to liquidity risk are calculated and set as predefined
internal limits upon board approval. The desired levels are decided based on their
significance to the business of the PDL as well as industry averages—for example,
regulatory ratios like total liabilities and total assets, non-convertible debentures (NCDs;
original maturity less than one year) to total assets, debt equity ratio etc.

7.3.6. Management Information

Institutions with immediate access to all pertinent liquidity risk information are always
in a better position to manage their liquidity profile more effectively. PDL has created a
reliable MIS system to provide timely and adequate information on the liquidity position
of the institution both under normal and stress situations.
Daily, fortnightly, monthly and quarterly MIS is generated for each business process of
the company.

7.3.7. Stress testing

It is a good practice to make stress testing an integral part of the overall liquidity risk
management culture. Stress tests are conducted periodically for a set of short-term
scenarios comprising institution-specific, general market and combined scenarios. Also,
PDL have developed mechanisms to survive the minimum stress period.

8. Role of the Board of Directors

The Board of Directors of the Company shall discharge its roles and responsibilities in
following manner to manage risk appropriately:

The Board shall be responsible for framing, implementing and monitoring the
risk management plan of the Company.

The Board of Directors shall define the role and responsibility of the Risk
Management Committee and may delegate monitoring and reviewing of the risk
management plan to the committee and such other functions as it may deem
fit. Such function shall specifically cover cyber security.