Page 92 - Demo

internaL controL systeMs and adeQuacy
risk Management
The Bank has a strong risk management framework in place to identify, mitigate and monitor material risks across all its functions. Directed by the Risk Management Committee of the Board (RMCB), the Bank has an adequately staffed risk management team led by its Chief Risk Officer (CRO), to implement the directions of the Board. The team is mainly placed in the Bank’s corporate office, and also has a presence in each of the regional offices, primarily to aid in cascading the operational risk framework at a granular level. The key risks that the Bank is exposed to in the course of its business are Credit Risk, Market Risk, Liquidity Risk, Operational Risk and Information security. The hallmark of the Bank’s Risk Management function is its independence from business sourcing units with the convergence only at the Board level.
credit risk
Credit Risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. Losses stem from outright default or reduction in portfolio value. Through continuous monitoring and enhancement, the Bank has established a distinct risk architecture, policies and procedures for managing its credit risk. Predominantly a retail bank, with exposure in Microfinance, MSe loans, Housing loans, Personal loans and Vehicle loans, the key focus of the Bank is on retail lending, given the granularity of individual exposures, and is managed largely on a portfolio basis across various products and customer segments. There are robust front-end and back-end systems in place to ensure credit quality and minimise loss from defaults. The Bank has also been selective in building its institutional lending portfolio to establish meaningful relationships with financial institutions.
The factors considered while sanctioning retail loans include income, demographics and repayment track records of the borrower and tenor of the loan. Credit risk is managed by capping exposures on the basis of borrower group and ticket size amongst others. This is backed by portfolio diversification, stringent credit approval processes and periodic post-disbursement monitoring and remedial measures.
The Credit Risk Management Committee (CRMC) of the Bank meets at monthly intervals to review the credit portfolio, including review of performance of all loans approved within a defined deviation matrix, or issues relating to loan documentation. During the year under review, the credit risk team was engaged in developing risk scorecards and Early Warning Systems (EWS), enhancements to documentation and loan appraisal standards, collateral management and credit spread computation. The team was also engaged in assessing Expected Credit Loss (ECL) on credit portfolio as required under Ind AS 109 principles. While application of Ind AS in banks has been deferred, the Bank nonetheless was required to compute ECL as its books are consolidated
with that of its holding Company, Ujjivan Financial Services Limited, an NBFC and this necessitating application of Ind AS standards.
The Bank has a conservative and prudent policy for specific provisions on NPAs. Our provision for NPAs is higher than the minimum regulatory requirements, while adhering to regulatory norms for the provision of Standard Assets.
Market risk and Liquidity risk
Market Risk arises largely from the Bank’s statutory reserve management and trading activity in the interest rate market. During the year, the Bank had commenced trading in Government of India securities, (G-Sec) in a calibrated manner through its HFT portfolio. G-Sec trading activity was mainly undertaken on an intraday basis, though towards the end of the last quarter, the Bank had started keeping open positions on an overnight basis. Trading profit booked during the year was small, but the Bank is poised to build on the experience and step up its trading book in the next financial year. The risks are managed through real time monitoring by the Bank’s Treasury Mid Office, which works within a well-defined limit Management Framework that caps risk in various securities through limits/triggers. The risk measures include sensitivity limits, namely, PV01, Modified Duration of HFT/HTM Portfolio, Value-at-Risk (VaR) Limit, Stop Loss Trigger Level (SLTL), monitored on end-of-day basis.
Liquidity Risk is the risk when a bank may not be able to meet its short-term financial obligations due to an asset– liability mismatch or interest rate fluctuations. The Bank managed its liquidity requirement and the associated risks efficiently during the year. As a part of this process, the Bank has established various limits to mitigate both liquidity and interest risks. While the maturity gap and stock ratio limits help manage liquidity risk, the Net Interest Income (NII) and Market Value on Equity (MVE) impacts help mitigate interest rate risk. The Bank had also maintained a comfortable Liquidity Coverage Ratio (LCR), well above the regulatory limits during the year. As a prudent risk management practice, the Bank has been also been monitoring the Net Stable Funding Ratio (NSFR), and is thus adequately prepared to meet the RBI mandated requirements. The Asset Liability and Market Risk Committee (ALCO) of the Bank, meets on a monthly basis or at more frequent intervals to evaluate the liquidity situation. Amongst the multiple, impactful measures introduced during the year, was the monitoring of deposit concentration and the resultant stress, if any. There was a concerted effort made during the year to diversify the liability profile of the Bank, with reliance on CDs as a funding source, progressively reducing from 9% of overall borrowings and deposits in March 2019 to 6% in March 2020. and replacing it with institutional deposits and refinance from financial institutions. The AlM situation of the Bank remained healthy through the year, and was tested for efficacy in simulated stress situations. The Bank had also enhanced and tested its Contingency Funding Plan (CFP).
90 | ANNuAl RePORT 2019-20