John Deere Financial – India Policy

Department: Finance
This policy is CONFIDENTIAL

RISK MANAGEMENT POLICY

1 Scope
This document aims to lay down a broad framework for Risk management at John Deere
Financial India Private Limited (referred to as “JDFIPL”) as required by the Reserve Bank
of India vide notification RBI/2021-22/112 DOR.CRE.REC. No.60/03.10.001/2021-22 -
Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs

The Finance Department shall be responsible for maintaining this document in

consultation with Legal, Treasury, Credit and Secretarial team. The review and updates
to this policy shall be done annually and approved by Board of Directors of JDFIPL.

The information in this policy is confidential and should not be transmitted outside the
company due to the sensitive nature of policies such as this (Information Classification
chart)

2 References
Document Number Description Revision/Date
RBI/2021-22/112 DOR.CRE.REC. Scale Based Regulation October 22, 2021
No.60/03.10.001/2021-22 (SBR): A Revised Regulatory
Framework for NBFCs
Internal Capital Adequacy Master Circular – Basel III
Assessment Process (ICAAP) Capital Regulations dated
July 01, 2015
JDF044 SOP 1 ICAAP working

RBI/2013-14/390/ Guidelines on Stress Testing

DBOD.BP.BC.No.75/21.04.103/2013- circular DBOD.No.BP.BC.
14 dtd 2 Dec,2013 101/21.04.103/2006-07 dated
June 26, 2007
Annex 1 Stress Test working

3 Policy
The purpose of this policy is to address unanticipated and unintended losses to the
Company. The effective management of risk is vital to the continued growth of the
Company since an NBFC is prone to inherent risks while operating in the financial sector.
The company has introduced effective risk management systems that address the issues
relating to various risks

3.1. Broad Categories of risks:

The following broad categories of risks have been identified in our risk management
framework along with possible mitigation factors:

A. Credit Risk

A risk of loss due to failure of a borrower/counterparty to meet the contractual obligation

of repaying his debt as per the agreed terms, is commonly known as risk of default.

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John Deere Financial – India Policy
Department: Finance
This policy is CONFIDENTIAL

Risk Mitigation

• Credit risk shall be managed using a set of credit norms and policies. The
Company shall have defined roles and responsibilities for originators and
approvers. All credit exposure limits shall be approved by authorized persons.

• Annual review of credit policy is done.

• There shall be a structured and standardized credit approval process to

ascertain the credit worthiness of the borrower.

• The Company shall develop internal evaluation team to make credit decisions
more robust and in line to manage collateral risk.

• The Company shall follow a process of time-to-time revisiting the credit

policy and processes, on the basis of experience and feedback.

Also refer “India Retail Credit Policy” for JDFIPL.

B. Operational Risk

Any eventuality arising from the act relating to people, technology, infrastructure, and
external factors, which can give rise to some type of loss in the organization, is termed
as Operational Risk. Majorly it is internal and unknown. Therefore, the persons
responsible shall keep continuous watch and shall gather the symptoms/warning signals
to manage Operational risk.

Risk Mitigation

 Document Storage and Retrieval: The company recognizes need for proper
storage of documents as also their retrieval for audit and statutory requirements.
The Company is maintaining all the original documents adequately and at safe
location. Annual records retention certification is carried out by all employees to
ensure retention is in accordance with regulatory and/or company guidelines.
 Whistle Blower Policy: This policy is in place to report any non- compliance to the
company policies and procedures noted by the employees.
 Internal audit – Annual internal audit is conducted by an external firm. The scope
of this Internal Audit covers all key functions including HR, Operations, Credit,
Administration, Finance and Accounts. The firm also audits the company’s
adherence to all Statutory and Regulatory Guidelines that have been prescribed
for NBFC. The scope of these audits is reviewed periodically and modified as
needed. All significant audit observations of Internal Audits and follow-up actions
are presented to the Board Audit Committee.
 Technology Infrastructure: An IT security policy is in place. Refer JDF 033 IT
Policy and JDF034 Information Security Policy.

C. Market risk

This is majorly external market dynamics, which gives rise to Risks like Liquidity risk,
Interest Rate risk and Funding risk. Liquidity risk is the inability to meet financial
obligations in a timely manner and without stress. The Company shall resort to proper
ways to manage such risks.

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John Deere Financial – India Policy
Department: Finance
This policy is CONFIDENTIAL

Risk Mitigation

• As a contingency plan the Company shall maintain sufficient approved but un-
drawn credit lines on a continuous basis as buffer to manage eventuality of
liquidity constraints.

D. Financial Risk
The financial risk includes interest rate risk, liquidity risk. Interest rate risk is the
risk where changes in market interest rates might adversely affect an NBFC's
financial condition. Liquidity Risk arises largely due to maturity mismatch
associated with assets and liabilities of the company. Liquidity risk stems from the
inability of the company to fund increase in assets, manage unplanned changes in
funding sources and meet financial commitments when required.

Risk Mitigation
 The company has the following policies in place to mitigate the financial risks-
JDF 038 Liquidity Risk Management Framework Policy and JDF035 Resource
planning policy.

E. Regulatory Risks
The Company shall be compliant in terms of regulatory norms and therefore shall
effectively manage regulatory risk. Effective Customer redressal mechanism and fair
practices shall keep legal risk under control. The Company shall have processes in place,
to manage the risk of fraud and the suspected frauds are reported, wherever necessary.

Risk Mitigation

The company has a Customer Charter Committee in place monitoring customer grievances
and issues and meets on a periodic basis. The company tracks regulatory updates in the
monthly legislative compliance review meeting. Periodic checks are done by Risk and
Compliance team to identify frauds. Process is in place for escalation and reporting of
fraudulent incidents.

3.2. Capital Adequacy framework

Reserve Bank issued Guidelines based on the Basel III reforms on capital regulation on
May 2, 2012, to the extent applicable to banks operating in India. Basel III reforms
strengthen the bank-level i.e. micro prudential regulation, with the intention to raise the
resilience of individual banking institutions in periods of stress. These new global
regulatory and supervisory standards mainly seek to raise the quality and level of capital
to ensure banks are better able to absorb losses on both a going concern and a gone
concern basis, increase the risk coverage of the capital framework, introduce leverage
ratio to serve as a backstop to the risk-based capital measure, raise the standards for the
supervisory review process (Pillar 2) and public disclosures (Pillar 3) etc.

Reference”

3.2.1 Scope of application of capital adequacy framework:

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John Deere Financial – India Policy
Department: Finance
This policy is CONFIDENTIAL

JDFIPL is required to do the standalone (“Solo”) level capital adequacy ratio requirements,
which measure the capital adequacy of a unit based on its standalone capital strength and
risk profile.

JDFIPL will quarterly evaluate of capital adequacy and consider different business case
scenarios to see minimum threshold capital requirement maintained even at worst case
scenario.

3.2.2 Three pillars of capital adequacy

The Capital Adequacy Framework rests on three components or three Pillars. Pillar 1 is
the Minimum Capital Ratio while Pillar 2 and Pillar 3 are the Supervisory Review Process
(SRP) and Market Discipline, respectively.

 Pillar 1: Minimum Capital Requirements - which prescribes a risk-sensitive calculation of

capital requirements that, for the first time, explicitly includes operational risk in addition to
market and credit risk.
 Pillar 2: Supervisory Review Process (SRP) - which envisages the establishment of suitable risk
management systems in banks and their review by the supervisory authority.
 Pillar 3: Market Discipline - which seeks to achieve increased transparency through expanded
disclosure requirements for banks.

The main aspects to be addressed under the SRP, and therefore, under the ICAAP, would
include:
(a) the risks that are not fully captured by the minimum capital ratio prescribed
under Pillar 1;
(b) the risks that are not at all taken into account by the Pillar 1; and
(c) the factors external to the bank/NBFC.

Since the capital adequacy ratio prescribed by the RBI under the Pillar 1 of the Framework
is only the regulatory minimum level, addressing only the three specified risks (viz., credit,
market and operational risks), holding additional capital might be necessary for Regulated
Entity (RE), on account of both – the possibility of some under-estimation of risks under
the Pillar 1 and the actual risk exposure of a bank vis-à-vis the quality of its risk
management architecture.

3.3 Internal Capital Adequacy Assessment Process (ICAAP):

Piller2 requires RE’s to implement an internal process, called the Internal Capital Adequacy
Assessment Process (ICAAP) for assessing their capital adequacy in relation to their risk
profiles as well as a strategy for maintaining their capital levels.

The ICAAP comprises a bank’s procedures and measures designed to ensure the following:

 (a) An appropriate identification and measurement of risks;

 (b) An appropriate level of internal capital in relation to the RE’s risk profile; and
 (c) Application and further development of suitable risk management systems in the
Company.
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John Deere Financial – India Policy
Department: Finance
This policy is CONFIDENTIAL

Detail process of ICAAP as suggested in BASELIII has been considered in JDF044

SOP 1.

Based on the outcome of the ICAAP as submitted to and approved by the Board, the ICAAP
Document, in the format furnished at Annex 15, should be furnished to the RBI (i.e., to
the CGM-in-Charge, Department of Banking Supervision, Central Office, Reserve Bank of
India, World Trade Centre, Centre I, Colaba, Cuffe Parade, Mumbai – 400 005). The
document should reach the RBI latest by end of the first quarter (i.e. April-June) of the
relevant financial year.

Board of Directors Meeting and Review

The Board of Directors, in their board meetings, will oversee the implementation of the
system and review its functioning periodically.
The ultimate responsibility for designing and implementation of the ICAAP lies with the
Company’s board of directors of the bank and with the Chief Executive Officer

4 Records Management and Retention

4.1 Record Management and Retention
This document shall be kept in compliance with JDF record retention policy

4.2 Document Change Records

Document Change Records
Sr. Revision no./ Section Reason For Change Description
No. date Revised/ change
Page No.
1

Need to know departments

Finance Operations IT Legal Credit
Yes No No Yes Yes
Sales Collection HR Wholesale Risk and
Compliance
No No No No Yes
Bank
Relationship
No

End of document

Effective Date: 01 Oct 2022 JDF044

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Confidential with no Personal Information

John Deere Financial – India Policy
Department: Finance
This policy is CONFIDENTIAL

STANDARD OPERATING PROCESS ON ICAAP (Refer JDF Policy JDF044 Risk Management Framework)

1.1 SCOPE

Internal Capital Adequacy Assessment Process (ICAAP):

While working on ICAAP unit is taking an integrated, firmwide perspective of a regulated entity’s (RE) risk
exposure, in order to support its ability to identify and react to emerging and growing risks in a timely and
effective manner.

The purpose of this guidance is the need to enhance firm-wide oversight, risk management and controls
around REs’ capital markets activities, including securitization, off-balance sheet exposures, structured
credit and complex trading activities.

This system is developed considering the following key features:

 Active board and senior management oversight;

 Appropriate policies, procedures and limits;
 Comprehensive and timely identification, measurement, mitigation, controlling, monitoring and
reporting of risks;
 Appropriate management information systems (MIS) at the business and firm-wide level;
 Comprehensive internal controls.

1.2 Purpose

The board and senior management must first have an understanding of risk exposures on a firm-wide
basis. To achieve this understanding, the appropriate members of senior management must bring
together the perspectives of the key business and control functions. There is Credit and Risk
committee formed which meets at regular intervals to assess the risks related to business.

The Board should ensure that the senior management of the RE:
(i) establishes a risk framework in order to assess and appropriately manage the various risk
exposures of the RE.
(ii) develops a system to monitor the RE’s risk exposures and to relate them to the RE's capital
and reserve funds.
(iii) establishes a method to monitor the RE's compliance with internal policies, particularly in
regard to risk management.
(iv) effectively communicates all relevant policies and procedures throughout the RE.

1.3 Objective: ICAAP to Include Stress Tests and Scenario Analyses

As part of the ICAAP, the management of a RE shall, as a minimum, conduct relevant stress tests
periodically, particularly in respect of the RE’s material risk exposures, in order to evaluate the potential
vulnerability of the RE to some unlikely but plausible events or movements in the market conditions that
could have an adverse impact on the RE. In this context, the attention is also invited to the RBI circular
DBOD.No.BP.BC.101/21.04.103/2006-07 and DBOD.BP.BC.No.75/21.04.103/2013- 14 dated June 26,
2007 and December 2, 2013, respectively on stress testing.

Company Use
John Deere Financial – India Policy
Department: Finance
This policy is CONFIDENTIAL

The first objective of an ICAAP is to identify all material risks. Risks that can be reliably measured and
quantified should be treated as rigorously as data and methods allow. The appropriate means and
methods to measure and quantify those material risks are likely to vary across RE’s.

Some of the risks to which REs are exposed include credit risk, market risk, operational risk, interest rate
risk in the banking book, credit concentration risk and liquidity risk.

Additionally, if REs employs risk mitigation techniques, they should understand the risk to be mitigated
and the potential effects of that mitigation, reckoning its enforceability and effectiveness, on the risk
profile of the RE.

ICAAP Risk Scenarios (Sensitivity Analysis – Shocks):

Scenarios Assessment Indicators

Credit Risk: Assess the impact of Macro- - Credit Downgrades
Shock 1: increase in NPA economic cycles AND Unit - Deterioration of Asset
Shock2: Slippage of Restructured specific factors quality
assets - Erosion of collateral
value
- Underpricing of risk
- Excessive growth in
sensitive sectors
Market Risk: Evaluate the impact of exchange
A. Foreign Exchange Risk: rate variations on net open - Depreciation of INR
position and on profitability - Appreciation of INR
B. Interest Rate Risk Conduct sensitivity analysis - Upward/downward
using gap analysis or simulation shift of Yield curve in
techniques to assess long term BPS
and short-term impact of - Steepening of Yield
market interest rate changes curve
- Inversion of Yield
curve
C. Equity Price Risk NA to JDFIPL as not listed in
stock exchange
Liquidity Risk: In addition to cash flow - Potential liquidity
projections, unit should perform strain
stress tests based on ‘what if’ - Liquidity within Risk
scenarios on liquidity positions. tolerance
*Please see Annex 1 for Stress test model

Company Use
Assessment as of Mar-2022 Mar-22
Particulars Actual (Mar-22) Reference Portfolio Total Portfolio ECL Provision Gross %
Portfol i o 3,875.93 \\npunexc1a\JDFIPL_Data\Accounts_n_Finance\Private\Reporting\Local
Sta ge I 343,754 4,248Reporting\2022
1.2% 03\Ind AS Financ
Others 38.79 Sta ge II 20,361 1,408 6.9%
Reduce Li feti me ECL provi s i on (114.40) Tota l Sta nda rd 364,115 5,656 1.6%
Total 3,800.32 Sta ge III
Ca pi ta l Fund Ti er I, Equi ty 535.90 '\\npunexc1a\JDFIPL_Data\Accounts_n_Finance\Private\Reporting\Local
Subs ta nda rd 21,336 7,346 Reporting\2022
34.4% 03\Ind AS Financ
Res erves 266.48 Doubtful (1Yr) 3,637 2,546 70.0%
Deferred Revenue Expendi ture 0.09 Doubtful (1-3Yr) 56 56 100.7%
Deferred ta x As s et (54.48) 25,028 9,949 39.7%
Total 747.99 Total 389,143 15,605 4.0%
Ti er II Sta ge III portfol i o net off s ta ge III provi s15,080
i on 0
1.25% of RWA 47.50 Tota l portfol i o net off s ta ge III provi s i on
379,195 0
12 ECL provi s i on 43.80 Gros s NPA 6.43%
Lower of a bove 43.80 Net NPA 3.98%
CRAR 20.83%
Required for JDFIPL 15.00% Ti er II ca pi ta l 4,169.00
Net worth -Ti er I capi ta l 74,769.00
Total Net Worth 78,938.00
RWA 380,031.00
CRAR as on Mar 2022 20.77%

# Company Use
QUANTIFIABLE RISKS
Stress Test Scenarios - Credit Risk
Credit Risk - Shock 1 Increase in NPA Baseline (50%) Medium (100%) Severe (150%)
Net NPA 15,079.98 15,079.98 15,079.98
Increase in NPA 7,539.99 15,079.98 22,619.97
Increase in Prov because of Increased NPA 2,997.05 5,994.10 8,991.15

Adjusted Net worth 75,940.95 72,943.90 69,946.85

Stressed CRAR under Shock 1 19.98% 19.19% 18.41%

Baseline (50%)
Credit Risk - Shock 2 Increase in NPA in top 5 Industries Medium (100%) Severe (150%)

This scenarios is not applicable for JDFIPL being captive unit

Baseline (50%)
Credit Risk - Shock 3 Increase in NPA in specific Sector Medium (100%) Severe (150%)

This scenarios is not applicable as JDFIPL deals in only Agriculture Farm equipments and Roadline equipments

Baseline (20%) Medium (30%)

Credit Risk - Shock 4 Slippage of Restructured Std Assets Severe (40%)
Restructured Loan as of March 2022 973.37 973.37 973.37
Provision as of March 22 on restructured portfolio 264.24 264.24 264.24
Increase in Prov as per Stress test 52.85 79.27 105.69

Adjusted Net worth 78,885.15 78,858.73 78,832.31

Stressed CRAR under Shock 4 20.76% 20.75% 20.74%

Credit Risk - Shock 5 Depletion in collateral Baseline (10%) Medium (15%) Severe (20%)

Current ECL provision Mar 22 15,605 15,605 15,605

ECL Provision under stress scenario 17,094 17,848 18,603

# Company Use
Increase in provision as per stress test 1,489 2,243 2,998

Adjusted Net Worth 77,449.23 76,694.74 75,940.26

Stressed CRAR under Shock 5 20.38% 20.18% 19.98%

Credit Risk - Shock 6 Downgrade in counter-party Baseline

rating (5%) Medium (10%) Severe (20%)

This scenarios is not applicable as JDFIPL deals with Farmers and B2C segments

Baseline (Top 1) Medium (Top 2) Severe (Top 3)

Credit Risk - Shock 7 Concentration Risk (Top Borrowers)
Outstanding of Top Borrowers as of Mar-2022 36.44 59.43 79.64
100% loss if default 36.44 59.43 79.64

Adjusted Net worth 78,901.56 78,878.57 78,858.36

Stressed CRAR under Shock 1 20.76% 20.76% 20.75%

Baseline (Top 3) Medium (Top 5)

Credit Risk - Shock 8 Concentration Risk (Group Borrowers) Severe (All)

Adjusted Net worth

This scenarios is not applicable as JDFIPL does not have group borrowers

Baseline (Top 3) Medium (Top 5)

Credit Risk - Shock 9 Concentration Risk (Industry/sectors) Severe (All)

Adjusted Net worth

This scenarios is not applicable as JDFIPL deals in only Agriculture Farm equipments and Roadline equipments

Stress Test Scenarios - Market Risk

Market Risk - Shock 1 Forex Risk Baseline (15%) Medium (20%) Severe (25%)

# Company Use
 This scenarios is not applicable for JDFIPL being very minimal forex exposure

Market Risk - Shock 1 Interest Rate Risk Baseline (2.5%) Medium (3%) Severe (4%)
Interest cost as of Mar-22 18,250.95 18,250.95 18,250.95 Fin cost from Mar 22 Profit and loss account
Average borrowing cost Mar 22 6.41% 6.41% 6.41%
Stressed Avg Interest rate 8.91% 9.41% 10.41%
Stressed Interest cost 25,369.11 26,792.74 29,640.00
Impact on gross income 7,118.16 8,541.79 11,389.05
Adjusted Net worth 71,819.84 70,396.21 67,548.95
Stressed CRAR under Shock 1 18.90% 18.52% 17.77%
* JDFIPL gives loans at fixed rate and borrowings are also at fixed rate. Considered
increase in average rate by the stress rates provided.

Market Risk - Shock Equity Price Risk Baseline (40%) Medium (50%) Severe (60%)

This scenarios is not applicable for JDFIPL being not Equity Listed company

Stress Test Scenarios -Liquidity Risk

Liquidity Risk Baseline (10%) Medium (30%) Severe (50%)
Available credit lines March 22 189,000.00 189,000.00 189,000.00
Stressed availability 170,100.00 132,300.00 94,500.00

Amount payable in next 1 months (principal) 1,417.50 1,417.50 1,417.50

Additional funding required in 1 month 0 0 0

Stress Test Scenarios -Liquidity Risk 2

Liquidity Risk Baseline (10%) Medium (30%) Severe (50%)
Available credit lines March 22 189,000.00 189,000.00 189,000.00
Stressed availability 170,100.00 132,300.00 94,500.00

Amount payable in next 3 months (principle) 19,842.50 19,842.50 19,842.50

Additional funding required in 3 months 0 0 0

# Company Use
Stress Test Scenarios -Liquidity Risk 3
Liquidity Risk Baseline (10%) Medium (30%) Severe (50%)
Available credit lines March 22 189,000.00 189,000.00 189,000.00
Stressed availability 170,100.00 132,300.00 94,500.00

Amount payable in next 6 months (principle) 58,555.00 58,555.00 58,555.00

Additional funding required in 6 months 0 0 0

Stress Test Scenarios -Liquidity Risk 4

Liquidity Risk Baseline (10%) Medium (30%) Severe (50%)
Available credit lines March 22 189,000.00 189,000.00 189,000.00
Stressed availability 170,100.00 132,300.00 94,500.00

Amount payable in next 12 months (principle) 140,217.50 140,217.50 140,217.50

Additional funding required in 12 months 0 7,917.50 45,717.50

# Company Use