Bhartiya Samruddhi Finance Limited Asset-Liability Management Policy I. Goal: The assets and liabilities of Bhartiya Samruddhi Finance Limited of Hyderabad shall be managed in order to maximize shareholders value, to enhance profitability, to serve the underserved and to protect the institution from any disastrous financial consequences arising from changes in interest rate risk, liquidity risk and other risks. It involves assessment of various types of risks and alerting the asset-liability portfolio in a dynamic way in order to manage risks. These objectives shall be pursued within the framework of the credit, capital, and investment policies of the Company as approved by the board from time to time. The Board of Directors believes that accepting some level of interest rate risk especially in the micro-finance sector is necessary in order to achieve realistic profit goals keeping in view its large client base with small loan size at an average of Rs.15,000-20,000 where the operational cost is high. However the Company would continuously put its efforts to bring down the operational cost across the units. Keeping in view the above, the Board of Directors of the Company constituted Asset-Liability Management Committee (ALCO). II. Role Of Asset-Liability Management Committee (ALCO): A. The Board is responsible for management of various risks and set limits for liquidity, interest rate, foreign exchange and equity price risks. The composition of the ALCO of Bhartiya Samrudhi Finance Limited shall consist of at least three Board members A Majority of members of the Committee shall be independent nonexecutive directors and Board shall appoint the Committee Chairman. B. The Committee shall meet twice in a year (Oct, Apr) and when necessity arises Committee Chairman shall call for ALCO to discuss the issues of asset-liability management detailed as under: i. Develop, review and maintain a long term funding strategy; ii. Review negotiated facilities periodically; iii. Review and implement short term funding plans; iv. Review and approve term loan sanctions received from various banks / financial institutions and pass necessary resolutions for executing agreements, documents related thereto v. Review and approve proposals for securitization / assignment / sale of loan portfolio received from various banks / financial institutions and pass necessary resolutions for executing agreements, documents related thereto 1
vi. Formulate short and long term views on interest rate movements and decide on appropriate courses of action; vii. Determine liquidity portfolio risk profile within the parameters set by the Board from time to time; viii. Assess the risks in the balance sheet and determine the appropriate hedging / mitigation; ix. Be responsible for coordinating the Company s borrowing and lending strategy, and funds acquisition to meet profitability objectives as interest rates change. x. Monitor structure of the Company s Assets and Liabilities xi. Lay down and monitor the borrowing and investment guidelines in terms of balance sheet structure and risks xii. Review the credit performance and xiii. Operational Guidelines of the Company xiv. Approve and ratify opening/ modification in signatories/ closing of bank accounts of the Company The Board of Directors will review the reports and procedures twice in a year (October and April) to ensure adherence with the ALCO policy. As necessary, the Board will modify or grant exceptions to the policy and recommend action that is in the best interest of the institution. III. ALM Process: The ALM process rests on three pillars a) ALM Information Systems Management Information Systems (MIS) Information availability, accuracy, adequacy and expediency b) ALM Organization Structure and Responsibilities Level of top management involvement c) ALM Process Risk parameters Risk identification, measurement and management Risk policies and procedures, prudential limits and auditing reports and review The scope of ALM function can be described as follows: Liquidity risk management Management of Market Risks Funding and capital planning Profit planning and growth projection 2
IV. Objectives: The assets and liabilities shall be managed to achieve the following objectives for the financial year ending 2009-10, which shall be reviewed by the board and if required shall consider changes: 1. A Return on Assets of 3.7 % 2. A return on equity of 25.00 % 3. A Minimum Capital Adequacy Ratio of 12.00% 4. Gross NPA to Gross Advances Ratio of less than 1.00% V. Duties: At it s half yearly (October and April) meeting the ALCO shall discuss and place the same to the board the following for its review: 1. Structural Liquidity Statements 2. Interest Rate Sensitivity 3. Anticipated Funding Needs, if any 4. Anticipated Credit Demands 5. Capital Adequacy 6. Ratio of Loan Loss Reserves to Outstanding Portfolio 7. Current Loan Portfolio 8. An explanation of any known expectations, if any, to this policy as well as an action plan and timeframe to bring the Company into compliance with such policy limits and any other specific requirements VI. Liquidity Risk Management: Measuring and managing liquidity needs are vital for effecting operation of the Company. By assuring the Companies ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing. The liquidity shortfall can have repercussions on the entire system. The Company should measure not only the liquidity position on an ongoing basis but also examine how liquidity requirements are likely to evolve under different assumptions. Liquidity measurement should be done through cash flow approaches. The analysis of liquidity involves tracking of cash flow mismatches. For measuring and managing net funding requirements, the use of a maturity ladder and calculation of cumulative surplus/deficit of funds at selected maturity dates is to be adopted as a standard tool. The formats of the Dynamic liquidity and Structural Liquidity Statement is given in Annexure-I and Annexure II. 3
The maturity profile as given in Annexure-I could be used for measuring the future cash flows of the Company in different time buckets. The time bands, given the Statutory Reserve cycle of one month may be distributed as under: i. 1 to 14 days ii. Over 14 days to one Month iii. Over 1 Month to 2 Months iv. Over 2 Months to 3 Months v. Over 3 Months to 6 Months vi. Over 6 Months to 1 Year vii. Over 1 Year to 3 Years viii. Over 3 Years to 5 Years ix. Over 5 Years Within each time bucket there could be mismatches depending on cash inflows and outflows. While the mismatches upto one year would be relevant (since these provide early warning signals of impending liquidity problems) the main focus should be on the short-term mismatches viz., Next Month; 1 Month; over 1 month to 2 months and over 2 months to 3 months. The net cumulative negative mismatches during the 1 month; 1 year buckets should not exceed 15% and 15% of the cumulative cash outflows in the respective time buckets. In case the negative cumulative mismatches exceed the prudential limits as above, explanation as to how the gap is proposed to be financed to bring the mismatch within the prescribed limits. Any higher tolerance level should be put forward to the Board/Management Committee with specific reasons for sanction of higher limit. VII. Funding: 1. The Company shall keep 3 months Bank sanctions well in advance. VIII. Loans: 1. Loan commitments will be consistent with separate written loan policies. The maximum amount of loans outstanding shall not exceed 7 times the gross capital funds (capital, surplus, undivided profits reserves for loan losses, and capital debentures). 2. The Board of Directors seeks to keep the amount of assets classified as substandard, doubtful, or loss by the regulatory authorities at less than 1% of the Gross outstanding advances. 4
IX. Investments: Security purchases will be consistent with the stipulations of investment policy (as per annexure). The objectives of the investment portfolio are to (a) provide liquidity (b) provide for interest rate risk management, and (c) provide additional profit. Keeping in view the recovery cycle of the Company from 1 st to 12 th of every month and the Disbursement schedule in the later two weeks of the month, there are some Surplus Funds in the first two weeks of the month, the management is hereby permitted to put fixed deposits as per investment policy. X. Interest Rate Risk: Interest rate risk is the risk where changes in market interest rates might adversely affect a Companies financial condition. Company shall keep the sanctions in hand 3 months well in advance and negotiate banks towards interest rates. XI. Capital Adequacy: Company will maintain a capital to risk adjusted asset ratio of 12% as on March 2010 and 15% as on March 2011. The committee shall use its best efforts to ensure that the Companies total Risk Based Capital ratio, Tier 1 Risk Based Capital ratio and Tier 1 Leverage Ratio are maintained at levels which will afford the Company "Well Capitalized" status for the regulatory purposes. XII. Asset Allocation / Strategies Interest rate risk will be managed through (1) investments and (2) loan pricing. Asset-Liability policies and strategies will be formulated upon the examination of how interest rate risk affects overall business risk, i.e., capital risk, and liquidity risk, credit risk, interest rate risk. After review of the current situation, the ALCO will devise various strategies to minimize risk while maximizing earnings and net worth. XIII. Other Short-Term Borrowings The Committee will select and utilize other short-term borrowing sources as appropriate. The decision for utilization will be based on the needs of the Company, alternative sources, the profitability of usage as well as the requirements or conditions in accessing these funding sources. 5
. XVI. Provisions For Exceptions In those situations where it seems prudent to act contrary to this policy, and when it is impossible for the entire ALCO Committee to convene, two members of the ALCO, one of whom should be a member of the Board of Directors, may act for the entire Committee. This policy is intended to be flexible to deal with rapidly changing conditions; any variations from policy shall be reported at the next Board of Directors' meeting with recommendations for approval and amendment. Approved by the Board of Directors in its meeting held on April 25, 2009 6