Regulatory and Compliance Landscape: Navigating the way

Depending on the business, asset type, vintage of the business, various techniques and tools are implemented which may evolve over the period, shares Amit Gupta, Chief Financial Officer, Arka Fincap Limited in an exclusive interaction with Srajan Agarwal of Elets News Network (ENN)

As the Chief Financial Officer, what strategies have you implemented to effectively manage the cost of borrowed funds for Arka Fincap Limited? How do you ensure optimal utilization of treasury funds?

I joined Arka Fincap Limited in Feb 2019, when market was going through a rough time and funding to NBFCs was hardly available. Furthermore, for a start-up NBFC, it was much more difficult to get leverage, as it becomes important to on board lenders, start borrowing and manage cost of funds. However, considering the market scenario and taking the long-term view, I devised my strategy to start leveraging and parallelly manage cost of funds for Arka Fincap Limited. In first year, we were able to start relationship with some lenders. Over a short span of four years, our company has already established relationship with more than 30 lenders and we have been able to onboard almost all large public sector, private sector, small finance banks, and other financial institutions. During the year, we have raised money via issue of NCDs, MLDs and commercial paper as well. In the last year itself, we raised Tier II Capital as well.

There is a conventional saying that, “An idle fund is a liability”. It is very important that idle funds have been put to proper utilisation so that we can earn risk adjusted return on that. In market, multiple options are available. As an NBFC, one has to work within regulatory framework and ensure capital protection & liquidity simultaneously. In ARKA, I follow “S L R” approach and proper monitoring mechanism has been built to ensure that no money is left idle at the end of the day. In Treasury, we also have to be competitive in term of treasury yield and it is being monitored against market returns on various treasury instruments. So, we take a balanced approach towards utilisation of treasury funds with multiple targets in mind.

Could you elaborate on the budgeting process at Arka Fincap Limited? How do you ensure that budgets are aligned with the company’s strategic goals and objectives?

Budgeting process plays a crucial role in Arka and it is important from a monthly performance monitoring point of view.

Sharing the steps, we follow at Arka Fincap Limited:

1. Each business division is considered as a separate independent unit. Overall, five business units are identified
2. Income from business units are estimated considered market rate, existing portfolio and disbursement numbers
3. Direct expenses are charged to units separately like manpower cost, among others
4. Indirect expenses are charged on various factors considering nature of expenses
5. Capital is allocated considering nature of business and accordingly leverage is loaded to the business unit
6. Profit is calculated at individual unit level and considering central cost, overall profits are derived
7. As productivity is crucial for us it is measured with a very focussed approach
8. Employee onboarding is estimated considering productivity of the individual employee
9. For our retail unit, branch level profitability remains high priority
10. Expenses are allocated nature wise, branch wise on a monthly basis
11. Business unit performance is evaluated on a monthly basis and appropriate action is taken at an appropriate time, in case of any deviation from the budget is noticed

In conclusion, it is always an endeavour to give maximum returns to our stakeholders, while maintaining asset quality & each activity is organised in that direction only. Budgeting, as stated earlier, is very crucial step towards that. Strategically, all expenses and incomes heads are aligned business unit wise.

Given your experience in the BFSI segment, particularly in handling the SME portfolio during your tenure at ICICI Bank, what unique insights or strategies do you bring to Arka Fincap Limited to effectively support small and mediumsized enterprises?

My previous role with ICICI Bank has been helping me immensely in my current role. Being a Relationship Manager in ICICI Bank, particularly in their SME and Agri division, I got rich experience of credit as well as client relationship during my tenure there. That experience has given me an insight about the business side holistically. I have learned it the hard way; how important is it to manage a client relationship to ensure growth of business and how it needs an attitude of responsibility, responsiveness, and accountability. Same is my approach in my current role as a CFO at Arka Fincap Limited and I understand, any stakeholder is key, be it external or internal. If your approach is right wherein you have been able to provide the right solutions with the best possible turnaround time, you are sure to get their longterm commitment.

With my core role aligned towards the overall financial strategy, I try and contribute as much as possible in the MSME segment. It always feels nostalgic, whenever we discuss about the business strategy, productivity, monitoring, monthly performance, securitisation and others of the retail loan segment. The team itself is very capable in planning and execution and I contribute wherever required.

How does Arka Fincap Limited navigate the regulatory and compliance landscape in the non-banking financial sector? What measures have you taken to ensure the company’s adherence to relevant regulations and maintain a strong compliance framework?

We have been building our business with strong fundamentals. Considering our group legacy (Arka is a subsidiary of Kirloskar Oil Engines Group), compliance is of high importance while conducting our business. We follow the mantra of “No Compromise” from a compliance perspective and a separate department has been formed to ensure smooth implementation of all regulations. RBI’s Scale-Based-Regulation [S B R] has been implemented seamlessly. Considering the size and scale of business, we believe, we have the best practices adopted to ensure regulatory compliances.

Internally, each and every department head is responsible for compliance of their respective unit. Our compliance team acts as a bridge between the regulator and different business units. Company is being run on various compliance policies and products. Every policy is run past through compliance to ensure relevant guidelines are being complied with. Further, period internal audit, hind sighting, ensures compliance of those policies and any deviation is acted upon immediately. Any new guideline/ regulation, issued by the regulator is discussed at relevant department levels to ensure that it is being implemented within the stipulated time frame.

In your role as Chief Financial Officer, what specific financial analysis techniques or tools do you employ to assess the performance and profitability of Arka Fincap Limited’s various business lines or product offerings?

Depending on the business, asset type, vintage of the business, various techniques and tools are implemented which may evolve over the period. In the initial stage of operations, analysis can be handled simply on an excel sheet also, however, as the organisation matures, certain tools should be implemented to expedite the process and be technologically at par with peers in the industry.

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I believe, in retail business, it is critical to control your operating expenses and to do so it is of utmost important to monitor expenses with a different lens. Now-a-days, various tools are available to monitor the same. We have got some of these tools implemented and are in the process of upgrading those.

Considering the scale and size of operation, it is also recommended to have appropriate accounting package to ensure further control over financial reporting. Business dashboards are being implemented at Arka to ensure proper monitoring of various relevant parameters of each business segments.