KERALA STATE INDUSTRIAL

DEVELOPMENT CORPORATION LTD

CREDIT RISK MANAGEMENT POLICY

December 2023

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 TABLE OF CONTENTS

1. INTRODUCTION ............................................................................................................................ 3
2. OBJECTIVE ................................................................................................................................... 3
3. SCOPE OF THE POLICY: ............................................................................................................... 3
4. CREDIT RISK MANAGEMENT FRAMEWORK .............................................................................. 4
4.1 Credit Risk Management Structure ............................................................................................... 4
4.2 The Board of Directors ................................................................................................................. 4
4.3 Risk Management Committee of the Board (RMCB): ................................................................... 4
4.4 Credit Risk Management Division (CRMD) ................................................................................. 5
5. CREDIT RISK ASSESSMENT - POLICIES AND PROCEDURES ...................................................... 5
5.1 Credit Risk Assessment Process .................................................................................................... 5
5.2 Risk Identification ......................................................................................................................... 5
5.3 Credit Risk Measurement Parameters .......................................................................................... 6
5.4 Credit Risk Assessment (CRA) Models ......................................................................................... 7
6. CREDIT PORTFOLIO MONITORING ............................................................................................ 7
6.1 Credit Audit ................................................................................................................................... 8
7. CREDIT RISK CONTROL AND REPORTING ................................................................................. 9
7.1 Prudential Exposure Norms. ......................................................................................................... 9
7.2 Restrictions of lending: ............................................................................................................... 10
7.3 Restrictions relating to security for lending................................................................................ 10
7.4 Industry Research & Restricted Sectors ..................................................................................... 10
7.5 Rating-wise Exposure Ceilings ................................................................................................... 10
8. RISK REPORTING ....................................................................................................................... 11
9. POLICY REVIEW ........................................................................................................................ 11
10. VALIDITY/AUTHORITY OF THE POLICY .................................................................................. 11

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1. Introduction
Credit risk is the potential of loss due to failure of the borrower to meet its contractual obligation
to repay debt in accordance with the agreed terms. The effective management of credit risk is a
critical component of a comprehensive approach to risk management and essential for the long-
term success of any financial organization. Financial organization's risk-adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. RBI has directed all NBFCs to
devise a risk management framework oriented towards their requirements, dictated by size,
complexity of business, risk philosophy, marketing perception, etc.

RBI in the year 2021 had issued a circular (RBI/2021-22/112 DOR.CRE.REC.

No.60/03.10.001/2021-22 dated October 22, 2021) wherein NBFC’s shall be classified based on
their size, activity and perceived riskiness based on the asset size. As per the present Scale Based
Regulations of RBI, KSIDC is in the Middle Layer and shall be subject to various compliances
and regulations applicable to Middle Layer NBFCs. Accordingly, the Credit Risk Management
Policy of KSIDC encompasses identification, assessment, monitoring and mitigation of credit risks
in compliance with the norms laid down by Reserve Bank of India (Non-Banking Financial
Company –Scale Based Regulation) Directions, 2023 (RBI/DoR/2023-24/105-DoR.FIN.REC.
No.45/03.10.119/2023-24 dated October 19, 2023).

2. Objective
a) To take informed credit decisions based on adequate assessment of the relevant factors
involved in credit risk.
b) To screen credit proposals and assume only such credit risk that is acceptable to KSIDC as
per the Credit Risk Assessment guidelines.
c) To ensure diversification of the credit portfolio, by avoiding concentration in credit
exposures to individual/group borrowers, industry/sector etc. well within the RBI/KSIDC’s
prudential exposure norms and taking proactive and corrective action in the event of a likely
breach.
d) To attain and maintain standards of good practices in respect of credit risk management.
e) To monitor the quality of the portfolio at periodic intervals and suggesting mitigating
measures to prevent slippage in credit quality.
f) To enable risk-based pricing that facilitates optimization of the risk-return profile.
g) Compliance of applicable norms/guidelines/ policies concerning credit risk management as
specified by RBI and other regulatory authorities of NBFCs.

3. Scope of the Policy:

The Credit Risk Management Policy (CRM Policy), as enunciated herein, encompasses the entire
credit operations of KSIDC. While operating in line with these guidelines, KSIDC is required to
keep in view the regulations/ parameters laid down by RBI/other regulatory agencies and by
KSIDC's Board of Directors from time to time. KSIDC’s policy on credit appraisals, approval,
loan pricing, documentation, credit administration and monitoring, recovery process etc. have
been set out in the Credit Policy. The CRM policy provides a broad framework for management
of credit risks in the lending operations of KSIDC. Credit/Project Finance and other concerned
divisions are expected to devise products, formulate schemes and issue procedural instructions
within this broad framework keeping in view the credit risks inherent in these products, schemes
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 and instructions.
4. Credit Risk Management Framework
The overall frame work of credit risk management in KSIDC would comprise of following: -
a) Credit Risk Management Structure
b) Credit Risk Assessment Policies and Procedures.
c) Portfolio Monitoring
d) Credit Risk Controls and Monitoring.

4.1 Credit Risk Management Structure

The effectiveness of a risk management system depends on putting in place appropriate and
effective risk management architecture. In pursuance of RBI guidelines, necessary role centres
should be created in the organization structure to facilitate discharge of risk management
function. The organization structure for CRM in KSIDC would comprise of Board of Directors,
Risk Management Committee of Directors (RMCB), and the Credit Risk Management Division
(CRMD).

4.2 The Board of Directors

In pursuance of the RBI guidelines, the Board of Directors and RMCB shall oversee the
implementation of Risk management on the basis of the recommendations of the CRMD, CCO
and the Regulatory directions. The Board, as per the recommendations of RMCB, will approve
the CRM policy, credit exposures/ concentration limits, risk mitigation/ control policy and other
credit risk policy matters.

4.3 Risk Management Committee of the Board (RMCB):

A sub-committee of the Board of Directors is vested with the responsibility of monitoring and
overseeing enterprise-wise risk at apex level in the Institutions and apprising the Board at
periodic intervals. The Chairman and the Managing Director shall be mandatorily a part of the
Committee. The Committee shall meet on quarterly basis or as and when required with a minimum
quorum of 3 members. The broad responsibilities are:
(i) Overseeing risk management, clearly identifying the risks to which capital is exposed.
(ii) Defining the risk appetite of the Institution/setting up of prudential exposure/
concentration limits, etc.
(iii) Examine and recommend all risk-related policies of the Institutions before they are
presented before the Board of Directors for approval.

In respect of credit risk management, the RMCB shall have the followings responsibilities:
(a) To formulate the broad framework of the credit risk management system, which shall be
adopted, on approval of the Board of Directors. The CRMD shall monitor the credit
management system periodically and CCO shall ensure the compliance of the credit
management system on credit proposals for approval and sanction of Board/EC/MD.
(b) Modification of the guidelines for Risk Management System and prudential
exposure/concentration limits etc. (individual/ group borrowers, industries, sectors from
time to time, if required, to take care of the changing business environment, which will
be implemented by CRMD on approval of the Board of Directors.
(c) To update the Board at periodic intervals with KSIDC's credit risk exposure profiles-
concentration risk (borrower groups/industries/location/sectors), risk rating of the
obligors and to recommend corrective measures, if needed.
(d) To review the risk analysis reports from CRMD and provide necessary guidance for
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 future analysis.
(e) Approving exceptions to risk exposure/ limits, including Delegation of Powers approved
by the Board of Directors
(f) To ensure that the credit functions are managed in compliance with the extant Credit
Lending Policy of KSIDC.

4.4 Credit Risk Management Division (CRMD)

CRMD will be the Project Finance Division of the Corporation. The division assesses the various
credit risk associated with each project proposal and in compliance with the loan credit policy
and interest policy. The project finance division shall assess the various credit risk parameters
associated with each project proposals and compliance with the credit policy and other guidelines
/procedures issued by the Board/RMCB from time to time. CRMD shall submit an annual risk
analysis report to the RMCB for its review and guidance for changes in the policy parameters.

5. Credit Risk Assessment - Policies and Procedures

5.1 Credit Risk Assessment Process
KSIDC recognises that risk is inherent part of business of any financial intermediary and
accordingly feels that identification, measurement, monitoring and management of risk are
critical to build a sound asset-base. Accordingly, policy guidelines on comprehensive risk
management system have been developed and adopted by KSIDC which will be followed in
case of all the new business proposals. The risk assessment process would involve judgment
being made of the commitment, reliability, resilience and financial/other capability of the
prospective customer. This may include an examination of industry scenario, client's track
record, financial history, competitive position, skills of promoters etc.

The credit risk would reflect the risks involved both in the borrower and in the facility being
considered and would represent an evaluation of the credit customer's intrinsic strengths and
weaknesses. The proposals are assessed on the following parameters:

i. Entrepreneur Assessment
ii. Technical analysis for project feasibility
iii. Market Assessment and commercial viability
iv. Financial viability assessment including sensitivity analysis
v. SWOT analysis in case of loans above Rs. 5 crores.
5.2 Risk Identification
Identification of risk is the first step in the Credit Risk assessment system. The credit risk
inherent in credit proposal is a function of certain risk factors, such as function of certain factors,
some of which are specified below: -
• Financial Risk - This would include assessment of the entity's overall financial strength
based on performance and financial indicators, as derived from its financial statements-
historical and projected. Some of the key parameters would be:
• Debt Equity Ratio
• Interest Coverage Ratio
• Debt Service Coverage Ratio (DSCR)
• Current Ratio
• Fixed Asset Coverage Ratio
• Security margin

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 • Profit Volume/Contribution Ratio
• EBIDT
• Cash Profit & Net Profit Ratio
• Break-Even Analysis
• Payback period
• Return on Capital Employed
• Return on Investment
• Internal Rate of Return
While assessing the overall financial strength of the unit, the financial ratios and future
prospects of the unit would be considered.

• Business risk: Business risk analysis assesses the business fundamentals of the unit, the
competitive market position in the industry and its operational efficiency. Key factors
would include its geographic reach, distribution and selling arrangements, capacity
utilization, nature of the technology employed. The business risk associated with the unit
would be reflected in its financial risk ratios and their comparison with the industry
average, which are covered under financial risk parameters.
• Industry Risk: This relates to the industry of which the unit is a constituent. The unit/
firm will be subject to the risk factors to which the industry is exposed. In assessing the
industry risk, the key parameters would be competition, entry barriers, cyclicality,
industry outlook, regulatory risk/ government policies and other contemporary issues.
• Management Risk: It involves evaluation of the management of the enterprise, their risk
philosophy, competence and past track record. The key parameters are the integrity
(corporate governance), managerial competence and commitment, credibility (ability to
meet the sales/income and profit projections), payment track record, management system,
capability of the management to bailout the entity in case of distress, and the structure and
length of relationship with KSIDC.
• Transaction Specific Risk/Security Risk:The risk parameters would be tenor of the
facility, nature of the security, value of the security and type of the charge over the
security.
• Project Related Risk: This risk would apply only to project loans, as distinct from
corporate loans. The key parameters for risk assessment would be completion risk,
technology risk, environment risk, market/supplier risk, availability of raw
material/power/utilities, project execution & management capability etc.

5.3 Credit Risk Measurement Parameters

Credit Risk measurement and providing Expected Credit Loss involves identification of certain
risk components described in Ind AS 109 as under:
• Probability of Default (PD) - The likelihood that the borrower will fail to make full
and timely repayment of its financial obligations.
• Exposure at Default (EAD) -The expected value of the loan at the time of default.
• Loss Given Default (LGD) - The amount of the loss suffered in the event of a default
occurring on an exposure, expressed as a percentage of the EAD
• Expected Loss (EL) - That part of the credit loss in a portfolio that happens in the
normal course of business due to default in exposures and for which institutions have
to either make provision or load a factor for the same in the pricing of the loans.
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 • Unexpected Loss (UL) -The part of the credit loss that cannot be estimated or priced
into the product and hence institutions have to provide after risk-weighting their assets.

In line with Ind AS 109 requirements and extant RBI guidelines, as the Institution moves from
current scoring model towards the Advanced Approaches for Credit Risk Management, with
sufficient credit history, it would be necessary to correctly measure PD, EAD, LGD, EL & UL
for determining the extant of capital to be maintained for credit risk. These would be computed
after generating sufficient historical data. For the existing loans, sufficient information from the
date of sanction is available with KSIDC. The projects finance division shall collect the required
data from assisted units on a quarterly basis as well as collate information from Credit
Information Utilities for a continuous evaluation of risks associated with loan exposures.
Project Finance Division shall review the data and make use in the credit risk measurement of
proposals and also for monitoring credit exposures for appropriate risk mitigation actions.

5.4 Credit Risk Assessment (CRA) Models

Prior to sanctioning a credit facility to any client/obligator, the risk level should be measured as
per institution's credit risk assessment framework. The credit risk assessment framework in
KSIDC includes the use of internal risk assessment model and use of credit rating from external
credit rating agencies, wherever necessary.

Priority sector related proposals would continue to be examined, in terms of the risk-rating
module developed and implemented in KSIDC. The internal risk-rating module evaluates each
proposal for various risks, such as industry business risk, project risk, management risk, external
risk as also security available, income value to KSIDC, profitability/ financial projections, etc.
All proposals are scrutinized for various parameters as laid down under the module which assigns
score on a scale of 1 to 100.
The rates are worked out based on the following parameters and scoring methodology;
1. Line of Experience
2. Proposed Business Activity
3. Debt Equity Ratio
4. Value of tangible securities in proportion to the loan
5. Past Performance in terms of turnover growth, profit growth, return on equity
6. Track record with Bank/FIs
7. Repayment period of the loan
8. Profitability indicators like Payback Period, DSCR

In case of exposure in excess of Rs. 25 crores, external rating from any of the RBI approved
Credit Rating Agency is made mandatory.
6. Credit Portfolio Monitoring
As per RBI guidelines on risk management for NBFCs, the company should evolve proper
systems for identification of credit weaknesses well in advance. Project Finance Division shall
ensure periodic visit to loanee units and undertake performance review, financial health review,
management review and security coverage review. Slippages from SMA 0 to SMA 1 shall be
trigger point for field inspections and reporting. Slippages from STD to Substandard shall have
mandatory Default Review Meeting by divisional head for immediate actions. Each divisional
head (AGM/DGM) shall have a monthly review on all exposures under their monitoring and
shall provide a consolidated action taken report to General Manger of Project Finance Division.
The functional head (GM) shall review all exposures on a quarterly basis for appropriate recover
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measures in the case of loan slippages. The slippages shall be analysed and reported to ALCO
and Executive Committee on a quarterly basis. The summary of slippages shall also be reported
to Board along with agenda on Quarterly Performance reporting.

6.1 Credit Audit

RBI guidelines on loan review mechanism for NBFCs propose periodic credit review for
constantly evaluating the quality of credit portfolio and to bring about qualitative improvements
in the credit administration process. Eventually, the Credit Audit function shall be the basis of
implementing Risk Based Internal Audit in future once RBI make it mandatory for Middle
Layer NBFCs.
The main objectives of credit audit are:
a) To identify prompt loans which develop credit weaknesses and initiate timely corrective
action
b) To evaluate portfolio quality and isolate potential problem areas
c) To provide information on adequacy of loan loss provision
d) To assess the adequacy of and adherence to, loan policies and procedures, and to monitor
compliance with
e) To provide information on credit administration covering all loans and review of high value
loans usually within six months of full disbursement.
In addition, KSIDC should also target other accounts that present elevated risk characteristics
and at least 25% of the portfolio should be subject to credit audit in a year to provide reasonable
assurance that all the major credit risk embedded in the balance sheet have been tracked.
The credit audit, however, will not include the following aspects:
• Adequacy and correctness of legal documentation and security creation (Scope of Legal
Division)
■ Inspection/valuation of assets/stocks/securities under mortgage or pledge (Scope of Credit
Officers/Project Finance division - However, exceptional findings, if any, of the legal division,
would be brought out in the credit audit report.)

It is proposed to nominate an officer in the Manager cadre and above to act as the Credit Auditor.
The scope of Credit Audit shall include:
• Audit examination of the Approval/Sanction Process
• Adherence to policies and procedures stipulated by KSIDC
• Compliance with RBI regulatory guidelines and loan covenants
• Sufficiency of loan documents and security creation.
• Post-sanction follow-up and supervision
• Effectiveness of credit monitoring and control
• Early warning signals
• Asset quality and portfolio concentration.
Following shall be parameters for the selection of cases for Credit Audit:
i. All first and final disbursed loans sanctioned by EC & Board
ii. All slippages from Standard to Substandard category
iii. All slippages from Substandard to D1 category
iv. Loan outstanding > 5 Cr – On sample basis under direction of CFO
v. Loan outstanding =< 5 Cr – On sample basis under direction of CFO
The reports of the Credit Auditor categorised under High/Medium/Low shall be submitted to
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 the CFO and MD. The summary reports shall be placed before the Executive Committee &
Audit Committee by MD. The Credit Audit report may be the basis for Policy amendments,
compliance check, improvements in SOP, internal systems & control etc. After credit audit of
an account, any major change in financials, conduct of account, management, security,
additional liability, etc. in such accounts, would be tracked and reported to higher authorities
by monitoring division. In case where additional loan is sanctioned to an existing borrower and
credit audit for earlier facility has already been carried out, the credit audit would be carried out
once again on full disbursement of additional loan. The credit audit in such cases would include
the existing loan(s) of such borrower.

7. Credit Risk Control and Reporting

7.1 Prudential Exposure Norms.
The Credit Risk Management policy recognizes the need for implementing measures aimed at
improving risk management and avoiding risks associated with concentration of credit. For this
purpose, limits have been prescribed for exposure to individual/group borrowers. The objective of
credit risk management at portfolio level is to achieve and maintain a portfolio that is well
diversified across companies, sector, geographical areas etc.
KSIDC has been categorized as "Systemically Important Non-Deposit taking NBFC (NBFC-ND-
SI)". KSIDC's exposure to different business segments i.e. for Individual borrower and group
borrower are primarily guided by exposure norms prescribed for NBFC-ND-SI by RBI.
The Framework for Scale Based Regulation issued in October 2021, has merged the credit
concentration limits into a single exposure limit of 25% for single borrower and 40% single group
of borrowers. In line with aforesaid RBI guidelines, the maximum exposure based on the Tier -1
Capital would be as follows:
Single Group
Particulars
Borrower Borrower
25% of Tier 40% of Tier
Concentration of credit/ investment
1 Capital 1 Capital

The undisbursed commitment should also be reckoned for arriving at the exposure. KSIDC
would continue to work within the exposure ceiling fixed as above in respect of individual
borrower as well as group, while considering the proposal(s) for financial assistance. The
exposure ceiling would be revised annually based on the owned funds of KSIDC, as on the year
ending, after the finalization of accounts.

Definition of Group
In terms of RBI guidelines, "Companies in group" shall mean an arrangement involving two
or more entities related to each other through any of the following relationship: subsidiary-
parent(defined in terms of IND AS 110), Associate(defined in terms of IND AS 27), Joint
venture(defined in terms of IND AS 27/IND AS 111), promoter-promotee (as provided in the
SEBI (Acquisition of Shares and Takeover) Regulations, 1997), related party(defined in terms
of IND AS 24), common brand name and investment in equity shares of 20% and above.
The concept of 'Group' and the task of identification of the borrowers belonging to specific
industrial groups are left to the perception of the banks/ financial institutions. Banks/financial
institutions are generally aware of the basic constitution of their clientele for the purpose of
regulating their exposure to risk assets. The group to which a particular borrowing unit
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 belongs, can be decided by them on the basis of the relevant information available with them,
the guiding principle being Commonality of management and effective control.

7.2 Restrictions of lending:

1. Without the prior approval of the Board, KSIDC shall not lend to a connected party to
KSIDC, i.e., Director/employees/or their relatives or entities where KSIDC’s directors/
employees or their relatives are the directors/ shareholders having major shareholding.
(However, loans to employees shall be covered under staff Rules of KSIDC)
2. KSIDC will not sanction any financial assistance in the form of share investments to a
company in which any Director of KSIDC is interested. However, this clause shall not be
made applicable in the case of additional assistance by way of right issue of existing
investments and also in cases of subsidiaries/ associates/ assisted companies where the
MD/ Directors is/are a part of the Board in the nominated director capacity.
3. KSIDC will not grant loans and advances to industries producing or consuming Ozone
Depleting Substances, in terms of Montreal Protocol to which Government of India is a
party.
4. KSIDC will not sanction additional facility to the borrowers or their associates appearing
in the defaulter’s list/ caution list/ blacklist circulated by RBI/CICs/FIU from time to time.

7.3 Restrictions relating to security for lending

KSIDC will not grant loans and advances against the security of
1. Its own shares
2. Partly paid shares of a company;
3. Certificates of Deposits (CDs); and
4. Money Market Mutual Funds
5. Bullion and other precious metals, gems, stones, diamonds

7.4 Industry Research & Restricted Sectors

While prudential guidelines for avoiding excessive concentration of credit serve as broad
indicators, the risk impact of other dynamic elements such as market conditions, government
policies, legal changes, economic indicators, stock market movements etc. are to be assessed
on a regular basis to ascertain risks that are intrinsic to different exposures. Since KSIDC's
exposure is increasing across the various sectors, at a later stage there might be need for a
dedicated Industry Research Division in KSIDC to monitor industry specific developments
and provide key inputs to ensure a healthy credit portfolio. However, at present, to keep
abreast of industry developments, KSIDC may subscribe industry research report of being
published by professional agencies / Credit Rating CRISIL or other renowned credit rating
agencies.

7.5 Rating-wise Exposure Ceilings

As part of RBI guidelines on CRM (Customer Relationship Management), the NBFCs have
to eventually move over to Internal Rating Based approach for Capital Adequacy standards.
Accordingly, as a best practice, KSIDC shall endeavour to restrict its exposure under the lower
rated categories of borrowers.
In the case of industries/ sectors that are not performing well or in which the outlook in the
near future is not likely to improve, the exposure shall be taken only in respect of better rated
clients as determined/advised by Board.

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8. Risk Reporting
Project finance division shall examine the credit risk exposures of KSIDC on a regular basis and
shall furnish report to ALCO for a periodic review. The annual review report on credit risk
exposure shall be placed before the RMCB and Board of Directors. While the reports may vary
based on the Institution's Risk Profile and regulatory requirements, they shall include the
following:
a) Prudential Exposure Norms Status Report
b) Monitoring of in-house Exposure Norms, if any
c) Risk based analysis of KSIDCs Credit Portfolio
d) Review of Industry/Sector wise exposures

9. Policy Review
The CRM Policy would ideally be reviewed on an annual basis. However, the policy can be
reviewed at short notice depending on the exigencies/ extraordinary situations, which may
emanate during the course of KSIDCs business. Such extraordinary situations may include
significant changes in Government/ Reserve Bank of India policies, global/national macro-
economic conditions, financial performance, etc.

Being a developmental finance institution of the State and a Government company, the priorities
and the schemes announced by Government will have to be incorporated in policy document as
and when required.

10. Validity/Authority of The Policy

The CRM Policy would be the principal document for the credit risk management function of
KSIDC. The CRM Policy shall become effective from the date of its approval by the Committee.
This CRM Policy shall remain in force till the next revision is carried out and disseminated. This
policy is to be read in consonance with the extant Credit Policy, Credit/ other manuals in the
company and extant regulatory prescriptions.

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