| 52 Annual Report | 2024-2025 Management Discussion & Analysis RISK MANAGEMENT Over the years the Risk Management function has evolved at Arohan in line with Regulatory mandates and stakeholder expectations. Risk management oversight is therefore, spread across all functions in the Company, in the light of the changing business and economic environment, especially in the microfinance segment in the year FY 2025. The Business & Risk strategies that were deployed not only ensured that Arohan remained well-prepared for facing and mitigating challenges throughout the financial year, but also reported a portfolio quality which is amongst the lowest across peers in the MFI segment. 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. The financial year of FY 2025 has been challenging for the microfinance sector. Aggressive growth by certain quarters in the microfinance sector has had an impact on the microfinance Industry’s portfolio quality trends. This was in the backdrop of a sluggish rural economy, geo-politics and other socio-political headwinds. Regulatory action by Reserve Bank of India also had a bearing on the sector outlook. With lending institutions slowing on advances to the sector liquidity remained tight impacting growth and money supply to the microfinance customers. The overall microfinance Industry shrunk for the first time since the Covid years. Arohan worked closely with our SRO, MFIN, prior to the release of Guardrail 1.0 in the second half of the financial year which recommended capping of number of lenders & indebtedness across all microfinance customers. With Guardrail 2.0 becoming effective in Q1 of FY 2026, the sector is expected slow down on growth further, a painful but essential correction required for the microfinance Industry. Reduction of Pricing in Q4 has also been one of the major headwinds faced by Arohan post the cease & desist order of October 2024. However, Arohan’s is well capitalised with a CRAR of ~34% to address these medium-term challenges. Risk Analytics & Practices Arohan continued the 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, Knowledge Studio, which strengthens Arohan’s existing inhouse capabilities & deep domain knowledge of statistical modelling, predictive & forecasting expertise. These meticulously acquired skillsets & expertise has been widely appreciated & commended by various stakeholders including investors & regulators. • Credit Risk Management Arohan’s proprietary microfinance specific acquisition scorecard ‘NIRNAY’, has been upgraded with the renewal & data refresh through “NIRNAY 2.0”. Modelling NIRNAY along with Arohan’s expertise in forecasting science ensured that Arohan was able to fully satisfy various auditor’s & most importantly RBI’s risk pricing audits & scrutiny throughout the year with zero comments or observations. Building on these strengths, NIRNAY 2.0 has been built using Knowledge 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. The overall BRisk grade trends of the Company has positively demonstrated a higher than
RkJQdWJsaXNoZXIy NTE5NzY=