016 pradenta limits should have a relationship with the Total Assets, Earnng Assets or Equity. In addition to the Interest rate gap limits the HFCs may set the prodental limits in terms of Earnings at isk (EAR) or Net Interest Marin (NIM) based on the views an interest rete movernents with the approval of the Board/ALCO. Acordngly, prudential limits on indvicual gaps in various time bucket set for the Company is presented in the table below PRUDENTIAL LIMITS TIME BUCKET ‘% OF MISMATCH | —% OF CUMULATIVE MISMATCH Tara days 5% =i5% ‘Over 14 days wo one month —_ 1596 =159%. (ver one month to 2 month “159% 2159 | (Over 2-3 months 215%. see. Over 3:6 months “15% =159% (ver 6-12 months 215% | __ 156 ‘Over 1-3 years = 40%. =409%. ‘Over 3= 5 years 20% =2035 ‘Overs 7 years 208% =20% ‘Over 7- 10 years 20%. =2086 ‘Over 10 years = 2096 =208% Interest Rate Sensitivity and Mismatches: “The mismatch is the difference’ between Rate Sensitive Assets (RSA) and. Rate Sensitive Uobilties (RSL) for each ime bucket, ‘The postive gap Incleaes that Nas ‘ore RSA than RSLs whereas the negative gap indicates that it has more RSLs, ‘Tne gap reports indicate whether the Institution isin a positon to bereft from the fing inerest rates by Naving ® pOsItve g8p (KSA > ROL) Or Is In's pason tO benefit from decining interest rates by negative gap (RSL > RSA). The gap can therefore, be used as @ measure of Interest rate sensitivity. When there isa postive ap and the market interest rate rises during @ specified time period, the Company ay higher rates on all Its repiceable labities and earns higher yid on al t= Fepriceable assets. If parallel shift in the yield curve s assumed, Interest income of the Company rise more than interest expenses because more assets are repriced at higher rates than tabiities ond the Net interest Income Increases, However, I tie Interest rate decines, lables ae reprced at lower rates, NI decreases. When there is a negative gap, and interest rate rises, imerest expense increases ‘more than interest income, Because more lbilties are repriced at higher level ang INIT decreases. Any decline In intrest rates has the opposite effect. dential Limit for Maximum Decline in Earning for @ 100 BPS Rate shock Te Maximum decline In Earnings or Earnings et Risk (GAR) for @ 100 bs rate shock shall not be more than 10% of the Actual earnings of the preceding fnancial year This risk limit shall Be used to assess the Impact of future Interest rate revisions. 8]PageOL commitments for planning purposes. Short-term Dynamic quay Statements may be prepared based an the format os presented in Annexure I XI. Interest Rate Risk Management Interest rate risk is the risk where changes in the market interest rates might ‘aversely affect an HFC's financial condition. The immediate impact of changes in Interest rates Is on HEC's earnings (ie. reported profits) by changing its Net Interest Income (NII). A long-term impact of changing interest rates ie on HFC's Market Value of Equlty (MVE) or Net Worth as the economie value of the assets, bilies and off balance sheet postions get affected due to variations In market interest Fates. ‘The interest rate risk wien viewed from these two perspectives is known as "earnings perspective’ {measured as changes inthe Net Interest Income (NII) oF Net Interest Margin (NIM)} and ‘economic value perspective’ respectively. ‘Gap analysis measures mismatches between rate sensitive liabilities and rate senstive assets including off-balance sheet positions over diferent tlme Intervals is ata gven date, An asset or lablity Is normally classed as rate senshve I 1. With inthe te interval under consideration, there i a cash flow; 2. The interest rate resets/reprices contractually during the interval 3, is contractually pre-payable or wthdrawable before the stated matures; 4 is dependent on the changes in the Bank Rate by REI; ‘Tne Gap Report should be generated by grouping rate sensitive liablites, assets and off lance sheet positions into time buckets according to fesidual matty oF nest Ferpricing period, whichever is earl. All Investments, advances, deposits, borrowings, purchased funds, etc. that mature/re-price within a specified time frame are interest rate sensitive. ‘Simlrly, any princal repayment of loan is also rate ensive ifthe HEC expects to recelve it wthin the time Rovzon. This includes final Drindpal repayment and interim installments. Certain assets and liablities carry floating rates of interest that vary with reference rate and hence, these Kerns get Fepriced at pre determined Intervals. Such sosels ane aptes aré rate sensitive at the time of re-pricing.. While the intorest rates on term deposits are generally Fxed during their curency, the tranches of advances are basically Noating. The interest ‘ates on advances could be re-priced any number of occasions, corresponding to the Changes n PLR ‘Te various items of rate sensitive assets and lablities and off-balance sheet Items tay be classed into various time-buckets, 25 explained in Appendos Il and the Reporting Formats for short term dynamic luldty end interest rate sensitvty are ‘Wen in Annexure and Annesure Ill, respectively. ‘The Gep Is the siffeence between Rate Sensitity Assets (RSA) and Rate Sensitivity LUsbilties (RSL) for each time Bucket. The positive gap indicates that ft has more As than RSLS whereas the negative Gap Indieates that thas more RSLS. The Gap reports indicate whether the institution Is in a postion to benef fom rising interest fates by having a positive gap (RSA > RSL) oF whether is In a positon to benefit ‘rom declining interest rates by & negative gap (RSL > RSA). The Gap can, therefore, be Used as a measure of interest rate sensitivity. ‘As per the NHB guidelines each HFC should set prudential limits on incividual Gaps in ‘various te buckets with the approval ofthe Boare/Management Committee. Such 71Page 3O14 ‘2 cash inflow. While determining the likely cash inflofoutows, HFCS have to make ‘3 number of assumptions according to thelr asset-labilty profiles based on ether Behavioral studies oF post trends like Impact of premature closure of deposits and pre-payment/takeover of loans and advances on the liquidity and interest rate risks profile of HFCs. A sutable mechanism to be evolved supported by empirical studies and behavioral analysis, to estimate the future behavior ‘of assets and ss and off-balance sheet items to changes in market variables and estimate the probability of options. Tolerance Limits for the Structural Liquidity mismatch Within each time bucket there could be mismatches depending on cash inflows and outflows. While the mismatches up to one year would be. relevant since these provide early warning signals of impending lull problems, the maln focus should Be on the short-term mismatches Viz., "1-day to 14 days and ‘Over 14 days t0 one month". HFCs, Nowever, are expected to monitor thair cumulative mismatches (Funning total) across all time buckets by estatishing internal prudential limits with the approval of the Board/Management Commitee. It shall be the responsibilty of the ALCO to ensure that the limits set are not beached. And it breached to appraise the Board of and the action intisted to overcome ‘As per the extant guidelines of NHB the mismaiches (negative gap) during "iday to 44 Ways" and “over 14 days to one month” in normal course, sould not exceed 15, per ent ofthe cash outfows in each time bucket ‘The NHB has stipulated thet “The HFCs shall with the permission of the Board lay ‘down on an annual basi the tolerance levels under each of the time bucket”. ‘The tolerance limits for mismatch (negative) an cumulative mismatch (negetive) as per cant of the cash outfows and cumulative cash outflows respectively Is stated in fhe fable below ‘TOLERANCE LIMITS: TIME BUCKET {OF MISMATCH ie 14 days “5 ‘ver 14 days tone month 215% ‘Over one month to 2 morte ss. (Over 2-3 months 15% ‘ver 3-6 months 15% ‘Qver 6-12 months a5 ‘Over = 3 years, 0. ‘Over 3 5 years 20% [over 5 = 7 years 220% 20%. 20% X. Short term Dynamic Liquidity Statements: In order to enable the HFCs to monitor their stor-term liquidity on a dynamic basis ‘over a time horizon spanning trom 1 day to 6 months, HFCs may estimate their Shoreterm iguisty profles on the basis of business projections and. ther 6iPage¥ 013 ‘The Maturty Profile, a5 detailed in Appendbe-t, could be used for measusng the future cash flows of HFCS in diffrent time buckets distributed as under 2 day to 14 days (Over 14 days to one month ‘ver ene month and upto 2 months ‘Over 2 months and up to 3 months ‘Over 3 months and up to 6 months (Over 6 months and up to 1 yea" ‘Over 1 year and-up to 3 years ‘Over 3 years and ip to § years ‘Over 5 years and up to 7 years 30, Over 7 years and up to 10 years 11, Over 10 years “The time buckets may be FCS holaing public deposits are required to invest a prescribed percentage oftheir deposits in approved securities in terms of liquid asset requirement under Sedtion 29 B of the NHB Act, 1987. There is no such requirement for HEC's, which are not holding deposit. ‘The various HFCS would be holding in their investment pertfllo securities, which could be broadly classiNable as ‘mandatory securities’ (under obligation of lw) and other nan mandatory securties: ‘sper NHB Guideline, the HFCS hollng deposits may be elven freedom to pace the mandatory securities in any time buckets as suitable for them. Accordingly, a the Company is holding deposts, It can place the mandatory secures in any time buckets as sultable. ‘The Company has 3 well defied investment policy approved by the Board and the Same is followed forthe puroose of ALM als In resbect of valuation, maturity orate ic. “The Investments of the Company. are mainly for tye purpose of SLR Fequirements and for short-term surplus funds, ond emphasis is given for saety and Tiguidty rater than returns, ‘The listed non-mandatory securtes: may be placed in any ofthe *iday to 14 days", “over 14 days to one month", “Over one month and up to 2 months” ane aver two ‘months and up to 3 months’ buckets depending upon the defeasance period Proposed by the Company. ‘The unlisted Non-mendatory secures (e.g. equity shares, securties without a fed term of maturity, etc.) may be placed in the ‘over 10 years" bucket, whereas unlisted non-mandatory securties having a fixed term of matury may be paced In the relevant time buckets per the residual maturty. The Mandatory secures and listed securties may be marked ta merket for the purpose of the ALM system, Unlisted securtios may be valued as per the Prudential Norns, ‘Structural Liquidity Statement: The statement of Structural Ligucty (Annexure 1) may be prepared by placing all ‘ash inflows and outflows in the maturity ladder according to the expected timing of ‘ash flows. A maturing labilty wil bea cash outflow while 2 maturing asse wll be S|Page012 ECS for similar services/product, ete. In edition to monitoring the ris levels ofthe HEC, the ALCO should review the results of and progress in implementation of the decisions made in the previous meetings. The ALCO would also articulate the feurrent interest rate view of the HFC and base is decision for future business Strategy on this. In respect of the funding policy, for instance, its responsibilty ‘Would be to decide onthe source and mix of fables 0” sale of assets. Towards ths end, will ave to devel a view on future direction of inkerest rate movements and ‘eelde on funding mixes between Ted Vs. Nesting raze funds, wholesale vs. retll funds, money market vs. capital market funding, demestic va, Foreign currency funding ete. Tndvidual HFCS wil have to decide the frequency of holding their ALCO meeting -VI. Committee of Directors: ‘The NHB has advised that the Management Committe of the Board or any other pectic committee constituted by the Board should oversee the Implementation of the ALM system and revie is functioning periodically. Overseeing of the implementation of the ALM system and review of its functioning periodically shall be done through the Audit Committes of Directors, by placing the [ALM position as at the end of every quarter during March, June, September end ‘December before the Audit Committe of Directors. VET, ALM Process: ‘The Scope of ALM functions shal be: LUquidty Risk Management Management of Market Risk Funding and Capital Banning Profit Planning and Growth Projection Forecasting and analyzing "what if scenario’ ard preparation of contingency +1, Liqui ty Risk Management: Measuring and managing liquidity needs are vital for effective operation of HFCs. By ‘assuring en HEC's ablity to. meet its labilties as they. become due, gusty ‘manegement can reduce the probablity of an adverse situation developing. The importance of liquidity transcends individual institutes, as lquidty shorfal in one Insttution can have repercussions on the entire syste HFCs! management shoula ‘measure not only the ligudty postions ef HFCs on an ongoing Basis but also ‘@zamine how liqulety requirements are likely to evolve under diferent assumptions, Experience shons that assets commonly considered to e liquid, such as Government securtes and other money market instruments, could also become iiquld when the ‘market and players are unidirectional. Therefore quidly has to be tracked through ‘matunty or cash Now mismatenes. For measuring and menaging ‘net funding ‘Fequirements, the use of 2 matuny ladder and calculation of cumulative surplus oF ‘efit of funds at selected maturty dates is adopted a a standard too. The format fof the Statement of Structural Liquidity is gven In Annexure 4iPage011 ALM exercise is the availabilty of adequate and accurate informatica with ‘expedience. Thus, information i the key tothe ALM Process ~ 1V. ALM Organization: As per the NHB guidelines, the Board should have overall responsibity for ‘management of risks and should decide the risk management policy of the HFC and set limits for lauiity,intorest rate, exchange rate and equity pice risks. Prudential limits are to be set for Liquidity Mismatch (Inflows minus Outflows in each time bucket) and interest Rate Gap (Rate Sensitive Asset minus Rate Sensitivity Lables ineach bucket) for managing liquty risk and interest rate risk respectively In accordance with the guidelines, the Board has vide our note submitted to the 85° ‘meeting held on 17-09-2002 entrusted oversesing ofthe Implementation ofthe ALM system and review of its functioning perdicaly to the Avat Committee of the Directors. “We propose that the ALM position as at the end of every quarter be laced before the succeeding meeting ofthe Audit committee of Directors. Asset Lablity Management committee (ALCO) consists of Managing Director asthe chaiman and Heads of Finance and accounts Depertment, CretitDepertment, Information Technology Department, Recovery and Legal Department and Planning and Development Department (who wil also be the ALCO convener) as permanent members and Company Secretary shall meet at least quarterly Intervals after finalization ofthe accourts as at June, September, December and March ond and when required and shall have the folowing responsibilities functions Monitoring and review of adherence to the limits set by the Aut Committee ‘of Directors as atthe end of each quarter. 2. Deciding the business strategy of the Company on the asset and labitties sie inthe line withthe budgets. 3. Disclosing te fllowing particulars in the Balance Sheet relating to () Capital To Risk welghted Asset Ratio (CRAR) es per Annex IV (i) Exposure to real estate sector, both creck and ingireck and (ii) Maturty pattern of assets and labilties 4 Submitting the quartety and half yearly statements of short-term dynamic liqutaty and halt yearly statement of structural liquidity and interes rate senstivity to NHB, [ALM Support Group consist ofan ofcer from Finance & Accounts Departmen: Crest Department, Planning and Development Department ana Information Technology Department shall analyze, monitor and report the risk profiles ena Impact of various possible changes in market conditions on the balance sheet to the ALCO end shal ‘80 recommend the action needed to adhere to the prudential its set. 4. Scope of the ALCO: ‘The ALCO Is. decision-making unit responsible for Integrated balance sheet management from riskcretun perspective including the strategie managenent of Interest rate and Hiqudty risks. Tt operates within the leits/parameters set by the Board. The business Issues that an ALCO would consider wil, inter ai, Incuce Product pricing for both deposi and advances, desired maturity profile and mix of the inerermental assets and lables, prevailing interest rates offered by other peer apCAN FIN HOMES LIMITED PLANNING & DEVELOPMENT DEPARTMENT. REGISTERED OFFICE: BANGALORE [ASSET LIABILITY MANAGEMENT POLICY - 2017 + 1objectives: Asset Liability Management (ALM) Policy serves two primary functions within the company To provide adequate liquidity ‘To Optimize the Net Interest Marcin Profit planning and maximize the shareholder’ wealth Management of Market risk Funding and capital planaing 11 Asset Liability Management System ‘Over the years the Indian financial markets have witnessed wide ranging changes at {ast poce, Intense competion for business involving beth the assets and haiti, together with Increasing volaity in the domestic Interest rates as well as forelan ‘exchange rates, has brought pressure onthe management of F's to maintain a good balance among spreads, proftabilty and lone-term wiablty. The Management of banks and F's nas to base thelr business decisions on a dynamic and integrated risk ‘management system and process, driven by corporate strategy. Banks and HFC's are fexposed to several major riske iy the course of ther Business ~ credit risk, Market Fisk intrest rate risk, equity, lquilty risk and operational risk. ‘These pressures cal for structured and comprehensive measures and not Just 24 hoc ‘dion. HFcs need to adaress these risks ina structured manner by Upgrading their ‘isk management and. adopting more comprehensive Asset-Liabilty. Management (Als) prectces thet fs oeely integrated withthe II's business strategy ‘The management of HFCs have to base thelr ausiness decisions on @ dynamic and integrated nsk management system and process driven by eorporate strateny {HIT ALM process and Information system ‘The ALM process rests on ALM feformation Sytem, ALM Organization and ALM Process. The ALM Information system covers Management information systems, ‘avaiablty, accuracy and adequacy ofthe information. ALM organization covers ALM Structure and responsitiies, and involvement of top management. '\ pre requisite for putting in place the ALM system is @ strong Management Information System (MIS). For quick aneiysit and consaidation of the data, 1 is necessary to computerize the MIS. and make use of spedalized software for ‘managing the assets and lables with respec: to the maturity mismatches and the ‘artous rete ascocated wlth such mismatches, [ALN has to be supported by 2 management pivlosophy that clearly specifies the risk Palces and tolerance limits. This framework needs to be bult on sound methodology with necessary supporting Information system, as the central element of the entire 2iPage 010009 ANNExuge-® ALM Policy of the Company Version No.og 2017 Planning & Development Department Registered Office #29/1, Sir MN Krishna Rao Road Basavanagudi BANGALORE - 560 004 ae