The Assets and Liabilities of SML Finance Limited shall be managed in order to maximise shareholders value, to enhance profitability and to serve customer and community needs. The Board of Directors believes that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. The responsibility of managing the asset/liability management procedures will be directed by the Asset/Liability Management Committee (ALM). SML Finance’s funding pattern consists of both short term and long term sources with different maturity patterns and varying rates of interest. Its Loan assets also are of varying duration and interest. Hence, maturity Mis-matches can occur which has an impact on the liquidity and profitability of the company. It is therefore necessary that the Company constantly monitor and manage its Asset and Liabilities in such a manner that asset liability mismatches remain within reasonable limits. This is also a statutory obligation as RBI as the regulating agency for NBFCs has stipulated that NBFCs should have an effective Asset-Liability Management (ALM) system as part of their overall system for effective risk management.
The composition of the ALM Committee of SML Finance Limited shall consist of
a) Mr. Griger Cherry Williams ( Managing Director)
b) Mr. k.I.Varghese (Director)
c) Mrs. Susanna Isaac
d) Mr. Joseph Bavin Davis (VP Operations)
e) Mr. Shree Kumar.S (Sr.AVP Tax Compliance)
f) Mr. Shajan.A.D (CFO)
g) Ms. Naveena P Thampi ( Company secretary)
h) Mr.Tony.K.F (Sr.AVP - Investments)
Managing Director shall serve as the Chairman of the Committee.
The Committee shall meet once quarterly or more frequently when necessary to discuss asset/liability management issues.
The ALM Committee is responsible for recommending to the Board of Directors prudent asset/liability management policies and procedures that enable the Company to achieve its goals while operating in full compliance with all state and central laws, rules, and regulations. Objective of this policy is to create an institutional mechanism to compute and monitor periodically the maturity pattern of the various liabilities and assets of the Company to
a) ascertain in percentage terms the nature and extent of mismatch in different maturity buckets, especially in the time buckets from 1 day to 6 months, which would indicate the Short term dynamic liquidity
b) the extent and nature of cumulative mismatch in different time buckets indicative of Structural liquidity and
c) the amount of interest payable on borrowings & liabilities and the interest receivable on loan assets in different time buckets indicative of Interest rate sensitivity.
The assets and liabilities shall be managed to attempt to achieve a return on Equity capital above 20%.
The Board of Directors will review reports and procedures to ensure adherence with this policy statement. As necessary, the Board will modify or grant exceptions to the policy for recommended action that are in the best interest of the Company.
Reserve Bank of India has stipulated templates for reporting Structural liquidity (ALM-1). Dynamic Liquidity (ALM-2) and Interest Rate Sensitivity (ALM-3). ALM Committee will use the indicative formats for compiling the figures and the Reports on ALM 1, ALM 2 and ALM3 for reviewing the liquidity and interest rate risk.
At its quarterly meeting the ALM Committee shall review the following:
1. As on date operating results.
2. As on date Balance sheet and Profit & Loss account
3. Portfolio position as on date
4. Portfolio Delinquency information
5. Anticipated Growth in Portfolios for next quarter
6. Portfolio Maturity information classified into different time buckets
7. Current position of Debentures/Subordinated debts/Term loans
8. Anticipated Growth in Debentures/ Subordinated debts/Term loans for next quarter
9. Maturity pattern of Debentures/ Subordinated debts/Term loans classified in different time buckets
10. Interest receivable on loan portfolio classified under different time buckets
11. Interest payable on Debentures/ Subordinated debts/Term loans classified in different time buckets
12. Maintenance of adequate Capital adequacy ratio
13. Current funding strategies.
14. Interest rates for New Advances
15. Interest rates for New Debentures/ Subordinated debts
16. Amount of Provisions in respect of bad debts
17. Position of Investments and Fixed assets.
ALM Committee will use the following time buckets as suggested by RBI
1. 0 to 7 days
2. 7 to 14 days
3. 14 days to 30/31st day
4. Over 1 month to 2 months
5. Over 2 months to 3 months
6. Over 3 months to 6 months
7. Over 6 months to 1 year
8. Over 1 year to 3 years
9. Over 3 to 5 years
10. Over 5 years
ALM Committee will deliberate on the ability of the Company to meet its maturing liabilities as they become due and ensure against any adverse situation from developing. ALM Committee will review on an ongoing basis how the situation is likely to develop under different assumptions. For measuring and managing net funding requirements, ALM Committee will use as a standard tool the maturity pattern and calculation of cumulative surplus/mismatches in each time buckets. For this purpose, the templates ALM-1 will be made use of. ALM Committee will use the same time buckets suggested above for measuring the net funding needs. Reserve Bank of India has stipulated that the cash outflows in the 1-30/31 buckets should not normally exceed the cash inflows by more than 15%. To fix a higher ceiling, for any special reason, specific approval of the Board is necessary. As a prudent liquidity management measure, Company will restrict the negative mismatch in the 1-30/31 days bucket to a maximum of 10% of cash inflows. The cumulative negative gap will be restricted to not more than 15% of the cash inflows. The Reporting Format ALM-1 will be used for computing the mismatch in each time bucket. Company has an overwhelmingly positive mismatch in the short term buckets and also a positive cumulative Gap in all the buckets upto 5 years.
Vehicle loans constitute a major portion of loan assets of the company. RBI has given operational flexibility to NBFCs for pricing most of the assets and liabilities.
Board, however, has fixed interest rates for all categories of loans extended by the company and has clearly mentioned the interest rates on various loans extended by the company in Interest rate Policy as well as in FPC and Loan Policy.
The major portion of Company’s liabilities consists of Non-convertible Debentures, Subordinated Debts and Bank borrowings. The Pricing of New issue of Non-Convertible Debentures and Bonds are done without any lag and is based on the prevailing interest rates in the industry and is fixed only after determining the effect on profitability of the company.
Company’s Net Interest Margin and Profitability therefore rises when interest rate on borrowings decreases.
The interest sensitive assets and liabilities will be clubbed into the time buckets mentioned above for ascertaining the mismatch in individual buckets and the cumulative mismatch.
The Reporting Format ALM-3 will be used for computing the mismatch in each time bucket. Company has a positive mismatch in all the short term buckets upto one year. If at any time a negative mismatch were to arise in short term time buckets upto one year, ALCO will ensure that such Gap, individual as well as cumulative, do not exceed 15%.
The ALM Committee shall provide the following to the Board of Directors on a quarterly basis:
1. Quarterly Balance sheet
2. Quarterly Profit & Loss account
3. Interest income and interest expense statements
4. Non-interest income and non-interest expense statements
5. Interest spread statement
6. Bad Debts Position and delinquency information
7. Projected flow of funds analysis
8. Expected Increase in Portfolio and Borrowings for the next quarter and the recommended source of funds.
9. Review and comparison of past quarters performances
10.Recommended Asset/Liability Management plan including a quarterly strategy for the management of interest rate risk and liquidity risk