Striking a balance between prudent risks and humanized lending - The crucial role of a Chief Risk Officer.

On a hot summer day in the city of Ankleshwar, Gujarat, Mrs. Shilpa Solanki smiles for the first time in months and breathes a sigh of relief. “Congratulations! Your loan has been approved” – six words that have eased her woes and empowered her to become an entrepreneur. Without adequate credit backing and relevant documentation, Shilpa faced difficulties in expanding her business. With an INR 2.9 million loan from Capri Global, she is now a proud entrepreneur who provides mechanized tank cleaning services and water treatment services to the Gujarat Industrial Development Corporation (GIDC).

While this success story emphasizes the importance of creative methods of credit evaluation and a humanized approach to lending in the NBFC sector, the fact that risk is inherent in every transaction cannot be stressed enough. Recently, the Reserve Bank of India asked NBFCs with assets over INR 5,000 crore to appoint independent Chief Risk Officers (CROs), highlighting the need for prudent risk management. To quote William G T Shedd, “A ship in harbour is safe, but that is not what ships are built for.” However, how do we protect the ship from sinking due to massive icebergs and perilous storms? The answer lies in prudent risk management strategies.

At Capri Global, we welcome the regulatory norms in the NBFC sector, which are particularly crucial for the sustainable growth of any industry. With the right policies and guidelines from governing authorities like the Reserve Bank of India (RBI) and the National Housing Board (NHB), these increased checkpoints safeguard the interests of the investors and lenders, while also minimizing the possibility of huge NPAs and even bankruptcy. Given that some recent events have somewhat derailed the sector’s contribution, due to liquidity issues, mismatch between assets and liabilities, and over-leveraging, the Reserve Bank of India’s initiative is a welcome move in the right direction.

As drivers of economic inclusion, the stringent risk management policies of NBFCs must ensure that sentiment does not derail the democratization of finance. While following innovative credit policies and localized collection mechanisms across the underserved strata, the loan authorizing authorities must not get carried away by sentiments and soft news. Instead, each banker must be a risk officer by himself/herself and take data-backed decisions without being gullible. On the other hand, deserving individuals must get access to credit at the right time, which implies that we cannot paint everyone with the same brush. To this effect, the human judgement involved in the NBFC industry is very high, particularly relating to risk management.

Players in the sector have to voluntarily adopt such catalysts of change and ensure self-regulation at the highest echelons, to become trusted partners in the financial ecosystem. Further, the RBI mandate that the CRO is ‘required to function independently to ensure the highest standards of risk management,’ underpins the necessity of independent and data-driven approach to decision-making.

At Capri Global, with our AA industry rating, we steered through the rough seas comfortably, despite the IL&FS setback and subsequent takeover by the Indian government. Here is what I believe helped us tide through –

• While adequate financial liquidity was the backbone of our plans, selective, merit-based lending strategies have always been our core philosophy.
• We proudly managed capital adequacy (CAR) of 40%, even when the government mandates require a CAR of 15%, reinforcing our commitment to prudent risk management.
• With a capital cover of over INR 1300 crore, we have enjoyed a comfortable liquidity position and smooth operations.
• Our well-versed leaders take care of asset-liability management through sound lending policies and vigilant monitoring at every step of the way, shaping every employee into a risk officer.

The top management should ensure that the alignment of the firm’s risk appetite and business strategy minimizes the probability of significant, unexpected losses. Also, the company should train every employee to become a risk manager – equipped with the tools and knowledge required to decide whether to lend or not to lend.

To sign off, I quote one of my favourite lines from Raghuram Rajan’s Fault Lines: How hidden fractures still threaten the world economy – “Not taking risks one doesn’t understand is often the best form of risk management.”

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