51 | Annual Report | 2024-2025 2. Field-Level Credit Appraisal Acknowledging the inherent challenges in verifying income and savings of microfinance borrowers, Arohan emphasizes physical verification conducted by Sourcing Customer Service Representatives (CSRs) and crossverification by Branch Heads (BHs). This includes on-site visits to the borrowers’ residences or workplaces, where detailed demographic, economic, and credit behavior data is collected. The information gathered forms the foundation of the Household Income Assessment and the calculation of the Fixed Obligation to Income Ratio, both of which are integral to the microfinance loan decision- making process as per the RBI Master Direction on Microfinance, 2022. To ensure consistency and accuracy, CSRs and BHs undergo continuous training and refresher sessions focused on effective Customer Due Diligence (CDD) and Personal Discussions (PD). 3. Quality Checking of KYCs and Borrower Credentials The cornerstone of any successful loan appraisal is establishing the borrower’s identity. The process begins with e-validation of KYC documents, which helps confirm key details such as residential address, Credit Bureau reports, and bank account information. When all these data points align, the chances of incorrect borrower selection are minimized. Due to the critical nature of this step, the process is centrally managed, independent of business influence, ensuring unbiased judgments. Through this three-layered approach— combining automated rule-based checks, field-level verification, and stringent KYC validations—Arohan strives to optimize credit risk management. This reduces the cost of credit while maintaining the highest standards of customer protection and financial inclusion. Inorganic Credit The Inorganic Credit function at Arohan operates within a structured and well-defined credit appraisal process, adhering to the Inorganic Credit Policy, which is approved by the Credit Committee. These policies establish comprehensive appraisal standards, encompassing both quantitative and qualitative metrics, and provide clear guidelines for various financial products such as Term Loans, Direct Assignments, and Sourcing & Collection. In collaboration with underwriting, field, and relationship teams, the Inorganic Credit Team ensures effective implementation of these policies under the direct oversight of the Credit Committee. The evaluation of borrower risk is conducted through a comprehensive analysis, considering the following key factors: • Industry Risks and Prospects: An assessment of the overall risks and growth potential within the borrower’s industry. • Financial Position: A thorough review of the borrower’s financial health, including an analysis of financial statements, historical performance, flexibility in raising capital, asset- liability mismatches, and capital adequacy after stress testing. • Geo-Concentration: Examination of the geographical concentration of the borrower’s operations to gauge exposure to regional risks. • Delinquency and Portfolio Quality: Monitoring of PAR (Portfolio at Risk) movements and a quality evaluation using key delinquency metrics. • Collection Efficiency: Tracking of collection efficiency, validated with supporting bank statements. • Market Position and Efficiency: An analysis of the borrower’s market standing and operational efficiency. • Management Quality: An in-depth evaluation of the borrower’s management team, including their track record, payment history, and overall financial standing. • Rating Rationale: A detailed justification of the borrower’s assigned rating. • Cash Flow Analysis: A thorough review of cash flow, traced from bank statements, to assess liquidity and repayment capacity. • Industry Comparison: Benchmarking the borrower’s performance against industry peers for relative competitiveness. For Direct Assignments (portfolio purchases), the Inorganic Credit Team strictly adheres to RBI- approved policies, ensuring compliance and risk mitigation. The team also actively monitors the portfolio quality of Micro Enterprise Loans and MFI Alliances, providing regular updates to both management and the Board on key developments and any relevant changes.
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