Risk 360

NBFC- Shift from Financial risk to Enterprise risk

The NBFC segment has been going through a transition since 2019. First facing liquidity issues in 2019 followed by pandemic and lockdown in 2020. When things started looking to shore up the country was hit by a second wave of covid in 2021.

The Last three years have been a roller coaster ride both in terms of squeeze in supply as well as the demand side of credit.

With the rapidly changing business environment, the risks faced by the companies in the financial sector has forced them to start looking beyond financial risk.

Business continuity and survival of personnel has become a bigger risk today than the defaults on loans.

Due to the spread of infection, all collection activities have been restrained only to calling up the customers asking for payments. NBFCs have no option but to restructure the loans in case of covid impacted customers.

In light of these developments, the scope of risk faced by companies has evolved to encompass a wider range of activities beyond just the probability of controlling financial loss.

In the new scheme of things, the NBFC risk category is required to cover the following additional risk faced by the organisations

1. Business continuity on the backdrop off workforce moving to work from home model
2. Data security of customers and the organisation
3. Stability of tech systems and customer onboarding platforms
4. Ensuring the safety of employees by limiting human exposures and finding new ways to connect with customers digitally
5. Migration from physically recording financial transactions to digitally recording and storing financial transactions
6. Cybersecurity and protection of systems from virus malware and frauds

The Erstwhile definition of risk was to manage financial risk now it encompasses a much broader scope of activities under the umbrella of enterprise risk management.

Key tools used in risk management were
Risk mitigation by way of avoidance
Risk transfer by way of insurance

While the fundamentals of risk management have not changed what has changed systematically are the tools using which these techniques are implemented.

For example, the risk transfer method is broadly understood to purchase insurance to reduce liability in the event of financial loss. Today NBFC are doing risk transfer by hosting their IT assets and infra on the clouds owned by large corporations who provide the NBFC risk management team with data security and protection from cyber-attacks.

The Risk approach at financial institutions has evolved from direct risk management to holistic enterprise risk management through collaboration and cooperation with the larger eco-system.

Article Published by: Mr. Sukesh Tandon, CRO at Eduvanz

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