bharat financial inclusion ltd Management discussions

Overview

Bharat Financial Inclusion Limited (‘BFIL or ‘the Company) is the largest NBFC-MFI in India by Gross Loan Portfolio (as per MFIN March 2018 Report) and the first MFI to be publicly listed in India. The Company is primarily engaged in providing microfinance to households belonging to Economically Weaker Section of India. The Company focuses its operations in 16 states (excluding Andhra Pradesh and Telangana) in India, and has 1,567 branches and 16,021 employees, as on March 31, 2018.

The core business of the Company is to provide small value unsecured loans and certain other basic financial services to its Members (Women from EWS households who are clients of the Company are classified as "Members", and those Members whose loans are outstanding are classified as "Borrowers"). These individuals often have no, or very limited, access to loans from institutional sources of financing. The Company believes that non-institutional sources lending to these borrowers typically charge them very high rates of interest. The Company aims to bridge this gap by providing financial services at the doorstep of its Members. The Members are predominantly located in rural areas in India, and the Company extends loans to them mainly for use in small businesses or for other income-generating activities and not for personal consumption.

In its core business, the Company follows a village-centric, group-lending model to provide unsecured loans to its Members. This model relies on a form of ‘social collateral, and ensures credit discipline through peer support within the group. The Company believes this model makes its Members prudent in conducting their financial affairs and encourages them to be prompt in repaying their loans. Failure by an individual Borrower to make timely loan repayments will prevent other Members in the group from being able to borrow from the Company in future. Therefore, the group will use peer support to encourage the delinquent Borrower to make timely repayments or will often make a repayment on behalf of a defaulting Borrower, effectively providing an informal joint guarantee on the Borrowers loan.

In addition to its core business of providing micro-credit, the Company uses its distribution channel to provide certain other financial products and services that its Members may need. The Company offers loans for the purchase of products which help its borrowers to enhance their productivity such as mobile phones, solar lamps, sewing machines and bicycles, among other products. The Company also operates a number of pilot programs that may be gradually converted into separate business verticals subject to satisfactory results of pilot programs. The existing pilot programs primarily relate to giving loans to its Members for the purchase of certain additional productivity-enhancing products such as water purifiers, mixer-grinders, refrigerators and for the purchase of two-wheelers. The Company intends to expand its involvement in these other financial products and services to the extent consistent with its mission, client-focus and commercial viability.

In 2005, the Company registered with, and has since been regulated by, the RBI as a Non-Deposit Taking Non-Banking Financial Company (NBFC-ND). In 2009, it became a Public Limited Company. It completed its Initial Public Offering (IPO) and its equity shares were listed on the Bombay Stock

Exchange (BSE Limited) and the National Stock Exchange of India Limited in August 2010. In November 2013, the

RBI re-classified the as an NBFC-MFI, permitting it to carry on the business of a Non-Banking Financial Company - Micro Finance Institution, a separate category of Non-Deposit Taking Non-Banking Financial Companies engaged in microfinance activities.

For FY18, BFILs total revenue and profit after tax was 2,102.0 crore and 455.5 crore, respectively. As on March 31, 2018, the Company had 72.7 lakh Members, including 61.9 lakh Borrowers with a Gross Loan Portfolio of 12,594.4 crore and 1,567 branches. The Company charges an interest rate at 19.75%, one of the lowest among all private sector NBFC-MFIs.

Merger of the Company with IndusInd Bank Limited

The Board of Directors of the Company, at its meeting held on October 14, 2017, had approved the Composite Scheme of Arrangement ("Scheme") between the Company, IndusInd Bank Limited ("Bank") and the wholly owned subsidiary of the Bank (under process of incorporation as on the date of this Report) ("Subsidiary") and their respective shareholders and creditors under Sections 230-232 of the Companies Act, 2013, subject to receipt of applicable regulatory approvals.

In this regard, as on date of this report, the amalgamation has been approved by the Competition Commission of India on December 19, 2017 and no objection has been issued by the Reserve Bank of India, the National Stock Exchange of India Limited and the BSE Limited on March 13, 2018, June 1, 2018 and June 4, 2018, respectively.

The Scheme remains subject to the receipt of approval from the National Company Law Tribunal, the respective shareholders and creditors of the Company and the Bank and other applicable statutory and regulatory approvals.

I. Industry Structure and Developments

The Micro-Credit Industry

According to MFIN report, the micro-credit total loan portfolio was 1,36,633 crore as on March 31, 2018. NBFC-MFIs contributed 33% of the overall portfolio, while SFBs had a 22% share and Banks (including BC Portfolio) had a 37% share.

Portfolio Growth - SHG

During FY17, the SHG portfolio grew by 8% to 61,581 crore from 57,119 crore in FY16. Between FY14 and FY17, the SHG portfolio grew at a CAGR of 13%.

NBFC – MFI Industry

The NBFC-MFI industry reported strong growth in FY18. During

FY18, the industry disbursed loans worth 59,629 crore, representing a 49% increase over previous year. This resulted in a 50% growth over previous year in Gross Loan Portfolio ("GLP") to 48,094 crore. During the same period, the number of clients increased by 25% to 2.53 crores, while the number of people employed by the industry grew by 25% to 82,004 and the number of branches also rose by 25%. Average loan amount disbursed per account was 22,273.

Particulars	FY18	FY17	% increase
Disbursements ( crore)	59,629	39,986	49%
Gross Loan Portfolio	48,094	32,039	50%
( crore)
No. of Clients (In crore)	2.53	2.02	25%
No. of Employees	82,004	65,839	25%
No. of Branches	10,077	8,032	25%

Note: The NBFC-MFI industry data does not include data for SFBs.

Source: MFIN Micrometer Mar 2018

Geographical Mix – SHG V/S NBFC-MFI

The SHG industry portfolio remains concentrated in the states of Andhra Pradesh, Telangana, Karnataka and Tamil Nadu, with a 71% share. The SHG exposure in these states is given in the graph below.

NBFC-MFIs now cover 30 states / union territories of India. The coverage of these microfinance institutions is now geographically well dispersed with Gross Loan Portfolio in East and North East at 44%, South at 20%, North at 14%, West at 11% and Central at 11%.

Karnataka has the largest NBFC-MFI exposure at 13% of the total Gross Loan Portfolio.

Source: MFIN Micrometer March 2018

Asset Quality of NBFC-MFIs

The Industry witnessed higher Portfolio at Risk (PAR) since December 2016 owing to events subsequent to demonetisation. However, the PAR has shown a declining trend in FY18.

Portfolio at Risk figure (PAR 30 days) for the NBFC-MFI industry dropped to 4.44% as on March 31, 2018, from 11.05% as on March 31, 2017. PAR figures

(PAR 90 days and PAR 180 days) were at 3.64% and 2.83%, respectively, as on March 31, 2018.

Source: MFIN Micrometer March 2018

Debt Funding to NBFC-MFIs

During FY18, NBFC-MFIs received a total of 20,695 crore in debt funding from banks and other financial institutions.

Debt funding through securitisation of MFIs portfolio was at 8,120 crore.

Source: MFIN Micrometer March 2018

NBFC-MFIs and Market Share

As on March 31, 2018, top five (5) NBFC-MFIs accounted in aggregate for approximately 56% of the GLP of all NBFC-MFIs. Top 2 MFIs were BFIL (GLP - 12,594 crore) and Satin (GLP * - 4,304 crore).

* As on Dec-17

Source: MFIN Micrometer March 2018

Overview of the

Regulatory Framework and recent Regulatory Developments

The Non-Banking Financial Company - Micro Finance Institutions

(Reserve Bank) Directions, 2011 ("NBFC-MFI Directions") were issued in December 2011 by the Reserve Bank of India (RBI) pursuant to the Reserve Bank of India Act, 1934 ("RBI Act"). The

NBFC-MFI directions apply to all Non-Deposit taking Non-Banking

Financial Companies ("NBFCs") (other than companies registered under Section 25 of the Companies Act, 1956) that satisfy certain conditions.

The Company satisfies these conditions and was re-classified as a Non-Banking Financial Company - Micro Finance Institution ("NBFC-MFI") on November 18, 2013. As a result, the Company is required to comply with the applicable directions given in ‘Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016. These directions include guidelines on qualifying assets criteria, asset classification and provisioning, pricing of credit, capital adequacy and fair practices.

Specific directions applicable to NBFC MFIs

Key guidelines are highlighted below:

NBFC – MFIs	Qualifying assets to constitute not less than 85% of its total assets (excluding cash and bank balances)
	At least 50% of loans for income generation activities
Qualifying Assets Criteria
Annual Income of Borrowers	Rural <= 1,00,000
Household	Non-Rural <= 1,60,000
Ticket Size	<= 60,000 - 1st cycle
	<= 1,00,000 - subsequent cycle
Indebtedness	<= 1,00,000
Tenure	If Loan amount > 30,000, then >= 24 months
Collateral	without collateral
Repayment Frequency	Weekly, Fortnightly and Monthly
Pricing Guidelines
Interest Rate	A. Margin cap - 10% above cost of borrowings With effect from April
	1, 2017 - Average interest rate on loans sanctioned during a quarter
	shouldnt exceed the Average borrowing cost during the preceding
	quarter plus margin cap.
	B. Avg. base rate of top 5 commercial banks X 2.75
	Lower of the A and B
Processing Fee	<= 1% of the loan amount
Insurance Premium	Actual cost of insurance can be recovered from borrower and spouse
	Administrative charges can be recovered as per the Insurance Regulato- ry and Development Authority
Security deposit	No security deposit/ margin to be taken
Capital Adequacy	15%
Margin Cap	10% for MFIs with loan portfolio > 100 crore

Note: As per RBI FAQ for NBFC-MFIs, the pricing regulations including variance norms are not applicable to non-qualifying assets.

Priority Sector Lending (PSL)

Priority Sector funds have been a major contributor to the funding source for the overall MFI sector. Key guidelines for PSL are as follows:

Sector	Category	Target for Banks %*
1 Agriculture	Target	18%
- Direct Agriculture	Sub-Target	~13.5%#
- Direct Small & Marginal Farmers	Sub-Target	8%
2 Weaker	Target	10%
3 Micro-enterprises	Target	7.5%

* Target details given in the table are applicable to domestic scheduled commercial banks and foreign banks with 20 branches and above

# As per RBI notification dated July 16, 2015, Banks are directed direct lending to non-corporate farmers does not fall below the system wide average of last three years achievement. In an RBI notification dated September 21, 2017, the system wide average figureforFY17-18 was notified as 11.78%. Banks should also continue to maintain all efforts to reach the level of 13.5% direct lending to beneficiaries

The guidelines envisage banks to monitor their PSL compliance every quarter with effect from FY17, instead of annually, which will lead to a flow of PSL funds throughout the year and not merely towards the end of the fiscal year.

Directions on Managing risks and Code of conduct in outsourcing of Financial services by NBFCs ensure that overall

On November 9, 2017, the RBI applicable vide Notification DNBR.PD.CC.

No.090/03.10.001/2017-18 issued directions to put in place necessary safeguards applicable to outsourcing of activities by NBFCs. The underlying principles behind these directions are that the regulated entity shall ensure that outsourcing arrangements neither diminish its ability to fulfill its obligations to customers and RBI nor impede effective supervision by RBI. NBFCs, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as is expected to be employed by the NBFCs, if the activities were conducted within the NBFCs and not outsourced. Accordingly, NBFCs shall not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened. In this regard, the Company has adopted Outsourcing Policy in accordance with the directions.

Ombudsman scheme for Non-Banking Financial companies, 2018

On February 23, 2018, the RBI vide Notification DNBR.PD.CC.No 091/03.10.001/2017-18 brought into operation the Ombudsman Scheme for Non-Banking Financial Companies, 2018. The NBFCs are advised to ensure that a suitable mechanism exists for receiving and addressing complaints from their customers with specific emphasis on resolving such complaints expeditiously and in a fair manner. The Company has an independent Ombudsman since January 2012, under the Comprehensive Customer Grievance Redressal Mechanism.

MFIN - Mutually agreed Code of conduct (MACC) in provision of micro-credit

According to MFIN- Mutually Agreed Code of Conduct, in provision of micro-credit released in September 2017, if a customer has a loan from 3 different providers (entity agnostic), the provider must not become the 4th lender to a customer. This should be validated by the Credit Bureau report prior to sanction of the loan.

MFIN Directive - Cap on total indebtedness of the borrower under group lending

In a Directive issued by MFIN on April 1, 2018, the MFIN Board required all its members for all the loans disbursed under the group lending (JLG/SHG) to cap total indebtedness per borrower at 80,000 effective April 1, 2018. This was revised from 60,000 earlier.

Credit Bureau Reporting

As per the MicrofinanceIndia Performance Report 2014 (an Social ACCESS publication), CRIF High Mark Credit Information Services Private Limited and Equifax Credit Information Services Private Limited collect and collate data from MFIs and Banks which lend directly to the client segment of MFIs. These MFIs use credit bureau data for checking regulatory compliances.

In February 2015, the RBI mandated all NBFCs to become members of all credit bureaus, viz Credit Information Bureau (India) Limited BFIL, in addition to being member of all the above-named credit bureaus, provides data to these bureaus with respect to lending to its clients (including historical data) on a weekly and monthly basis.

Andhra Pradesh and Telangana – The AP MFI Act

In January 2011, the then Government of the erstwhile undivided Andhra Pradesh state enacted the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011 (the "AP MFI Act") promulgated as an ordinance in October 2010, to regulate the activities of the microfinance institutions in the State of Andhra Pradesh. The AP MFI Act imposed significant restrictions on the business and operations of microfinance companies in the erstwhile undivided State of Andhra Pradesh, and several companies, including BFIL, challenged the validity of the AP MFI Act. The proceedings are pending before the Honourable Supreme Court of India and, pursuant to the interim orders of the Honourable Supreme Court in March 2013, the Company is required to comply with only Sections 9 and 16 of the AP MFI Act to carry on its business in the erstwhile undivided Andhra Pradesh. These provisions limit the amount of interest recoverable on loans to no more than the principal amount loaned as well as prohibit coercive actions in connection with the conduct of microfinance business.

The Company complies with the interim orders of the Honourable Supreme Court by following the two provisions (9&16) of the AP MFI Act. Subsequent to the reorganisation of the State of Telangana, as per GO MS No. 45, Law(F), 1st June 2016, ‘The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011.

(AP Act 1 of 2011) is adopted as ‘The Telangana Micro Finance Institutions (Regulation of Money Lending) Act, 2011. (Act 1 of 2011).

MFI as Business Correspondents

The Reserve Bank of India permitted Non-Deposit Taking NBFCs to act as Business Correspondents for banks with effect from June 2014. The

Company has an arrangement to act as a Business Correspondent with a leading private sector bank and had a managed loan portfolio of 1,034.2 crore as on March 31, 2018 under the said arrangement.

Governments Promotion on Financial Inclusion Schemes

Pradhan Mantri Jan-Dhan Yojana (PMJDY)

The Pradhan Mantri Jan-Dhan Yojana (PMJDY) is a National

Mission for Financial Inclusion to ensure access to financial services, namely, banking/ savings and deposit accounts, remittance, credit, insurance and pension in an affordable manner. Accounts can be opened in any bank branch or Business Correspondent (Bank Mitra) outlet. PMJDY accounts are being opened with zero balance.

These accounts can help the MFI industry to implement cashless disbursements directly to customer bank accounts and help MFIs reduce the related operating cost.

As on March 28, 2018, 31 crore bank accounts have been opened under this scheme (Public Sector Banks opened 25.4 crore accounts, Regional

Rural Banks 5.0 crore accounts and Private Sector Banks opened 1.0 crore accounts). The Balance per Jan Dhan Account has risen from 1,065 as on March 31, 2015 to 2,497 as on March 28, 2018.

Source: http://www.pmjdy.gov.in/

Micro Units Development & Refinance Agency Ltd. (MUDRA)

The Government of India proposed to set up a Micro Units

Development and Refinance Agency (MUDRA) Bank through a statutory enactment. Pending the enactment it has been set up as a subsidiary of Small Industries Development Bank of India (SIDBI). MUDRA will be responsible for developing and refinancing all MFIs which are in the business of lending to micro/ small business entities engaged in manufacturing, trading and service activities. MUDRA would not only help in increasing access to finance to the unbanked but also bring down the cost of finance for the last-mile financers and, in turn, to the micro/ small enterprises, most of which are in the informal sector.

The Secretary of the Department of Financial Services clarified in

January 2016 that MUDRA will not be the regulator of NBFC-MFIs. NBFC-MFIs will continue to be under the supervision of RBI.

Source – Indian Express http://indianexpress.com/article/business/business-others/ mudra-not-to-regulate-micro-finance-institutions-govt/

During FY18, the amount sanctioned under Prime Minister Mudra Yojana (PMMY) scheme was 2.53 lakh crore and the amount disbursed was 2.46 lakh crore.

Source - MUDRA

In Budget 2018-19, the lending target under Prime Minister Mudra Yojana has been set at 3.0 lakh crore.

Source – India Budget 2016-17

II. Opportunities And Strengths

Microfinance

The Microfinance industry has the potential for sustainable growth, based on industry reports. According to MFIN Micrometer, during FY18, the NBFC-MFI industry GLP grew by 50% YoY, while the disbursements grew by 49%. The industry grew by 28% in FY17 and 102% in FY16. As on March 31, 2018, the NBFC-MFI industry served 2.53 crore clients. GLP outstanding for MFI industry* and SHG together was 1,98,214 crore (GLP for SHG - 61,581 crore as on March 31, 2017 and GLP for MFI – 1,36,633 crore as on March 31, 2018). Micro-credit demand in India is estimated at 5,40,00 crore.

Source –MFIN Micrometer March 2018; March 2017; NABARD - Status of Microfinance 2017, Company estimates

*GLP outstanding for MFI industry includes GLP of NBFC-MFI, SFB, Direct Bank lending including Managed loans, NBFCs and Non-Profit

The financial inclusion schemes introduced by the government complement the existing MFI outreach. The accounts opened through PMJDY can help the MFI industry to implement cashless disbursements directly to customer bank accounts and help MFIs reduce the related operating cost. Through the Pradhan Mantris

Mudra Yojana, MFIs will have access to low cost refinancing from MUDRA.

NBFC-MFIs will continue to enjoy the following benefits:

• Generate Agri-Allied/ Priority Sector Lending for banks.

• Leverage their distribution network through Business Correspondent (BC) model to offer bank accounts and saving products to customers without CRR and SLR drag.

The Company is well placed to reap the benefits as an NBFC-MFI. With the increase in demand for micro finance, the Company believes that, with its operating strength and focus on 16 states (excluding Andhra Pradesh and Telangana), it will be able to capture a significant share of the demand for micro credit in India.

Home Improvement

The Company believes Home Improvement in rural areas is still an un-accessed market segment, and hence, foresees a huge opportunity. As per Census 2011, there are 166 million rural households in India. The Company estimates 120 million rural households addressable after discounting for service difficulties and rented households. Based on NSSO survey (NSS Survey 65: Housing Condition and Amenities in India, 2008-09) it has been observed that approximately 12% of the addressable households spent on construction annually. With an average ticket size of 1,00,000, the Company estimates an annual demand of 1,40,000 crore, representing a significant opportunity.

Two-Wheeler

Based on a ‘Need Assessment Survey conducted by the Company among its existing members, the Company observed interest among the respondents towards purchasing a two-wheeler. It was the most preferred product in the survey.

Post this survey, the Company started providing two-wheeler loans on Pilot basis and has since disbursed 4.4 crore worth loans among 990 members (representing 0.02% of total borrowers), as on March 31, 2018. The Company plans to gradually extend this pilot and offer this product to the larger customer base.

Benefits of Merger with IndusInd Bank

• Access to Savings & Deposits Products: The Company believes that the merger will help in addressing the other financial needs of the members such as access to Savings Account & Deposit Products. The merger will act as a gateway to a gamut of financial products / services to the Companys members which will enhance member relationship furthering financial inclusion. This will provide a competitive edge with significant head start vis--vis SFBs.

• Access to Lower Cost of Funds: The Company believes the merger will provide the business with access to funds at much lower costs than the existing funding rates.

• Reduced Impact of Political Risk: The Company believes that the merger with IndusInd Bank Limited will enable the Company to be under a more secured banking framework. In the past, it has been observed that during extreme events like demonetisation or any other regional political conflicts, banks which were effectively managed returned to normalcy sooner than other financial institutions. The Company believes that the merger with IndusInd Bank Limited will help in reducing the impact of political risk.

• Create a Robust Secured Lending Platform: Over the years, the Company has been offering collateral-free loans to its members through the JLG model. To address the other financial needs of the members such as loans for home improvement, two-wheeler, among others, the Company believes that the merger with IndusInd Bank Limited will help it in leveraging the banks expertise in secured lending, which when coupled with the Companys extensive distribution, will create a significant opportunity.

• Retail Distribution Service Points (RDSP) Rollout: During FY18, the Company disbursed 95% of the loan amount directly to the bank account of its borrowers. As part of the Companys endeavour to move to Cashless Collections, the Company piloted the RDSP model under the Business Correspondent arrangement with IndusInd Bank Limited to offer its members basic banking services like cash deposits and loan repayments through a retail store (For e.g., RDSP-Kirana store). The Company believes that the merger with IndusInd Bank Limited will help it to scale up the RDSP model which will increase the engagement with its members, thereby providing more insights about the members financial behaviour.

By moving towards Cashless collections, the Company expects improvement in Sangam manager productivity which will further improve the Companys overall operational efficiency. The RDSP model will also create cross-selling opportunities (e.g. Solar, Mobile, Sewing machines, among others) to Non-MFI customers, apart from existing members. This will further enhance the Companys outreach.

Competitive Strengths

The Company believes the following competitive strengths will enable it to better leverage the opportunities:

Market Leadership

The Company is the largest NBFC-MFI in India by Gross Loan Portfolio. The Company believes that its consistent position among the leading MFIs in the microfinance sector enhances its reputation and credibility with its members and its lenders. This enhanced reputation and credibility has numerous benefits, including the ability to secure capital at lower costs, recruit and retain skilled employees, optimise staff productivity, retain existing Borrowers and add new Members, and also expand into new regions and product areas.

Low Cost Lender

The Company has one of the lowest lending rates (19.75%) amongst private sector NBFC-MFIs. The lending rate of the Company is lower than the lending rate of other major NBFC-MFIs in India. The low lending rate enables the Company to enhance the value proposition of its products by bringing down the cost to its Borrowers.

Expertise in the Microfinance Industry

The Company believes that its long-standing experience in the Microfinance industry has given it a specialised understanding of the needs and behaviour of the borrowers and lenders in this industry, particularly in rural areas across India, the complexities of lending to these individuals and issues specific to the Microfinance industry in India. The Company believes this expertise gives it a competitive advantage in this industry.

The Company has developed skills in training its members. The Company uses its knowledge of its members, including their culture, habits and education, to design customised financial products and pricing plans. Further, consultation and dialogue with regulators and policy-makers has provided the Company with an opportunity to understand their concerns, while growing its business in a prudent manner.

Stable Financial Condition

Although the Companys financial condition deteriorated in the aftermath of events in Andhra Pradesh and the Company incurred losses during FY12 and FY13, the Company believes it has maintained sufficient financial as well as a relative degree of financial strength during these periods. For instance, the Company satisfied all its debt repayment obligations even during the Andhra Pradesh microfinance situation, that is, in FY12 and FY13, and thereafter its revenues grew at a CAGR of 42.9% from FY13 to FY18, and the Company reported a profit of 455.5 crore for FY18, the 5th consecutive year of profit post the turnaround.

As on March 31, 2018, the Companys net worth was 2,998.8 crore and its debt to equity ratio was 2.5. The Companys capital adequacy ratio was 33.2% of risk-weighted assets, as on March 31, 2018, which is well above the requirement of 15% of risk-weighted assets prescribed by the RBI under the specific directions applicable to NBFC-MFIs. The Company believes that these factors provide it with a competitive advantage when borrowing funds for its operations.

In addition to traditional cash flow management techniques, the Company also manages its cash flows through an active asset and liability management strategy. The Company has structured its model to primarily borrow for a longer tenure while lending for a shorter tenure, and hence, the Company has a positive asset liability management structure. As on March 31, 2018, the average maturity of its Gross Loan Portfolio as assets was 6.1 months, while the average maturity of its outstanding borrowings including principal amounts outstanding for securitisation and assignment transactions was 9.0 months. The Company believes this strategy allows it to better manage liquidity and meet the growing loan demands of an increasing membership, even if external borrowings and funding sources face temporary disruption.

Access to several sources of Capital and Cost-Effective Funding

The Company constantly strives to diversify its sources of capital.

During FY11, the Company raised 722.2 crore through its ( and IPO, followed by a Qualified Institutional Placement preferential allotment, raising a total of 263.5 crore in FY13.

The Company further raised 397.6 crore in May 2014 and 750 crore in September 2016 through QIPs. Its incremental borrowings from banks and financial and other institutions, including net proceeds from securitisations/assignment between April 1, 2011 and March 31, 2018 were 37,076.9 crore. As on March 31, 2018, the Company had an outstanding debt in principal amount of 7,616.7 crore ( 10,602.9 crore outstanding in principal amount, including securitisation and assignment transactions) from more than 32 banks, financial and other institutions.

In FY18, the Company received sanctions for 12,401 crore, as compared to 8,022 crore during FY17. The Company availed funds of 9,977.2 crore in FY18, as compared to 6,900.2 crore in FY17. Funds availed in FY18 include 1,018.5 crore and 3,161.9 crore through securitisation and assignment of portfolio loans respectively. Historically, the MFI sector has significantly relied on PSL funds from commercial banks. The Company believes that the cost of such funds is considerably lower than the cost of other bank funds. The Company is eligible to borrow PSL funds from banks as an NBFC-MFI.

The Company has been assigned a rating of "C1" for Code of Conduct Assessment by ICRA, which is the highest rating in that assessment. ICRA has upgraded Corporate Governance Rating of the Company to "CGR2+" from CGR2 earlier (the second highest available rating on a ten-point scale) which implies a "high level" of assurance on the quality of corporate governance matters.

The Company has obtained bank debt ratings for a funding exposure of 7,500 crore as CARE ‘A1+ (for its short-term facilities) and CARE ‘A+ (for its long-term facilities). The Company has a long-term NCD rating of ‘A+ for 400 crore and short-term (CP/ NCD) rating of ‘A1+ for 200 crore from CARE. The Company has also obtained long term debt rating of A+(on watch with positive implications) and short-term debt rating of ‘A1+ for a total sum of 750 crore (subject to long-term borrowings limit of 300 crore) from ICRA.

The Companys securitised transactions during FY18 were rated by CARE at ‘AA(SO) and by ICRA at ‘AA(SO) (one- provisional and one- final rating). CARE upgraded ratings for 2(of total 3) transactions from ‘AA(SO) to ‘AAA(SO). AAA(SO) rating signifies highest degree of safety regarding timely servicing of financial obligations and carry lowest credit risk and AA(SO) rating signifies high degree of safety regarding timely servicing of financial obligations and very low level of credit risk.

Streamlined and Scalable Operating Model with effective use of Technology

The Company recognises that establishing and growing a successful rural microfinance business in India involves the significant challenge of addressing a borrower base that is quite large and typically lives in remote locations. To address this challenge, the Company believes it has designed a streamlined and scalable model, and developed systems and solutions for the following three components, which the Company believes are required to effectively scale up its business:

• Capital: Historically, the Company has successfully obtained a variety of funds required to finance its lending operations;

• Capacity: With its pan-India presence and extensive distribution network, the Company believes it has the capacity to provide products and services to a large number of members;

• Cost reduction: The Company believes it has implemented process-based systems and customised software that reduce the cost of conducting transactions across a widespread branch network and a substantial member base. To manage its operating expenses and increase efficiency, the

Company has deployed ‘SKS Smart (a significant upgrade to the earlier Portfolio Tracker), a customised and comprehensive software which simplifies data entry and targets to improve accuracy and efficiency of collections and fraud detection. The Company has provided all loan officers with TABs (handheld devices) to increase efficiency, data integrity and ease of operations.

The Companys business processes, from member acquisition to cash collections, have been standardised and documented. Its branch offices are similarly structured, allowing for quick rollout of new branches. In addition, the terms and conditions of its loan products are generally uniform throughout India. Further, the Company has standardised its recruitment and training programmes and materials, so that they are easily replicated across its entire organisation. This standardised approach also allows employees to efficiently move from one region to another based on demand and growth requirements.

Pan-India Presence and Extensive Distribution Network

As on March 31, 2018 the Company had 72.7 lakh Members, including 61.9 lakh Borrowers and 1,567 branches. The Company focuses its operations across 16 states in India. Further, as on March 31, 2018, the Company had 13,841 Branch Managers, Assistant Branch Managers and Sangam Managers, including Trainees, who comprise 86.4% of its total workforce. As of March 31, 2018, each of its Sangam Managers managed 744 members on an average in states other than Andhra Pradesh and Telangana. The Company believes that its presence throughout India and its distribution network in rural India results in significant competitive advantages, particularly in the following areas:

Distribution Platform: The Companys pan-India presence allows it to lend across the country and enables it to mitigate its exposure to local economic factors and disruptions resulting from political circumstances or natural disasters. Furthermore, its well-developed distribution network in rural India gives it the capability to offer a variety of financial products nationally in areas that the Company believes most companies do not currently reach.

Product Pricing Power: The Company believes that its national presence and the ability to access a large member base gives it the leverage to negotiate favourable terms with institutions which would like to distribute their products through its network. This, in turn, results in lower pricing for the products that are distributed to its members.

For instance, the Company currently works with TNS Mobile India Private Limited for the financing of Nokia mobile phones; with D. Light Energy Private Limited and Green Light Planet India Private Limited for the financing of solar lamps; with Usha International Limited and Singer India Limited for the financing of sewing machines; with Eureka Forbes Limited for the financing of water purifiers; with Hero Cycles Limited and T. I. Cycles of India for financing of bicycles; with TTK Prestige Limited for financing of Pressure Cookers; with Usha International Limited and TTK Prestige Limited for financing of Mixer Grinders; with Godrej & Boyce Mfg. Co. Ltd. and Samsung India Electronics Private Limited for financing of Refrigerators. The Company financed 8.1 lakh solar lamps, 6.2 lakh mobile phones and 2.6 lakh mixer grinders during FY18. The Company also partnered with HeroMotoCorp for financing of two-wheeler loans on a pilot basis.

EXPERIENCED MANAGEMENT TEAM AND BOARD

The Companys Board comprises experienced bankers, investors, industry experts and management professionals. Out of a total of eight Directors on the Company Board, six are Independent Directors. The Company believes that it has a strong Senior Management team under Mr. M. R. Rao, Managing Director and Chief Executive Officer.

The Companys Senior Management team has members who have significant experience in the microfinance and financial industry. The team has developed the knowledge to identify and offer products and services that meet the needs of its members, while maintaining effective risk management and competitive margins. The Companys mid-level management personnel also have years of experience, in-depth industry knowledge and expertise.

III. Business Strategy

Emphasis on Customer Acquisition

Client acquisition remains the key factor for the Companys growth. During the last decade, the number of borrowers grew at a CAGR of 25%. FY18 saw loan clients grow by 16% YoY at 61.9 lakhs.

The Company expects client acquisition to be the key driver to overall growth going forward.

Given the huge gap in demand and supply in micro credit in India and that a large part of this gap is serviced by informal sources, including moneylenders, this represents an attractive business opportunity for NBFC-MFIs such as BFIL. The Company believes that, with its operating strength and focus on 16 states (excluding Andhra Pradesh and Telangana), it will be able to capture a significant share of the demand for micro credit in India.

Continue to remain Rural Focused

According to Micrometer, the MFI industry growth remained skewed towards Urban. The "Urban" share of the total portfolio rose from 33% as on March 31, 2013 to 57% as on March 31, 2017. BFIL, however, has remained rural focused with 80% of the Companys portfolio being "rural". The Company intends to continue building on this competitive advantage and focus on opportunities in rural areas.

Low Cost Provider to NBFC-MFI Borrowers

The Company has reduced the interest rates it charges on loans, with the objective of bringing down the cost to its borrowers. With diversification cost of funding sources and further reduction in borrowing, the Company reduced the interest rate on its income-generating loans to 19.75% effective from December 7, 2015. The

Company has been successful in achieving its intended strategy of lowering the interest rate charged to its borrowers to sub-20%. The Company intends to leverage opportunities in future to further reduce the interest rates to NBFC-MFI borrowers.

Continue to Strengthen Client Protection Initiatives

The Company continues to implement several client protection initiatives. They have helped to ingrain the client protection practices and customer grievance redressal mechanism which are aligned with globally recognised benchmarks, deep in all its processes, policies, and culture. These two are now the guiding principles for design, development, and implementation of all the processes and policies. The Company has identified five elements for these initiatives:

• Strengthening privacy of its client data: Ensuring that clients data is kept confidential at all levels and shared only with government agencies, government appointed agencies, or on approval of the concerned member.

• Transparent and responsible pricing of loans: Pricing of the products are well explained to members and done within the regulatory framework of RBI. BFILs interest rate of 19.75% interest rate is one of the lowest among private sector NBFC-MFIs.

• Timely redressal of queries and grievances of its members:

BFIL has a well-defined and fully automated Complaint Grievance

Redressal Mechanism (CGRM) for ensuring timely redressal. It also proactively reaches out to members for their feedback on different products through "Voice of Customers" program.

• Avoidance of over-indebtedness and multiple borrowing among its borrowers: Adherence of strict KYC policy and Credit Bureau and automated systems ensures the seamless implementation with controls, thereby avoiding over-indebtedness and multiple borrowing among the Companys borrowers. The Company has launched e-KYC service for all the clients to ensure customer authentication. Instant CB is done and members are informed about outcome of rejection. The Company follows a conservative approach in its lending criteria.

• Establishing appropriate collection practices by its employees: Design and Implementation of collection practices, in alignment with the RBI and SRO guidelines and regulatory frameworks.

The Company has been conducting Client Protection awareness programmes for its members and employees pan-India in major vernacular languages with greater focus in the last five years.

The Client Protection Programme (CPP) of the Company has been certified by Smart Campaign, USA. In FY18, around 95% of members as well as staff were trained on various CPP modules.

Client awareness of the CPP module consistently stands at >90%. The Company has also voluntarily adopted a ceiling of 3% Return on Assets (RoA) from its micro-credit business.

During FY18, the Companys well-established inbound toll-free member helpline successfully serviced 11,49,905 customer calls.

Inbound calls increased by 22% over the previous year, indicating growing awareness amongst customers about the member helpline.

Effective CGR processes have ensured that 99.64% of these calls were closed within the defined turn-around time (TAT). Turn-around times and CGR performance is regularly reviewed by Mr. Verghese Jacob who has been appointed as an independent Ombudsman since January 1, 2012. The Company has also established a dedicated follow-up team and quality team, which ensures timely closure and quality call monitoring. Due to timely closure, the Company received Zero Ombudsman Calls in FY18.

The Company has also proactively reached out to its customers through Voice of Customer programme to identify their needs and collect their feedback on existing products. More than 4,53,234 customers were surveyed under different surveys, across geographies. Areas of assessment include need assessment, satisfaction with existing products and process, perception of BFIL and Competitor analysis. Customer Satisfaction across products is around 99% which is a clear indicator of right products being offered by BFIL. Majority of members perceived BFIL as "Financial Support" followed by "Best MFI". Need assessment study was conducted which enables BFIL to explore new opportunities for providing new products to its clients.

MFIN had conducted a third-party Evaluation in the month of June 2017 and the Company has been categorised as "Excellent Compliance" as per MFIN standards. Also, the Company has been assessed at "C1" (highest in that rating) by ICRA, further endorsing the Companys "Customer-centric" approach.

The Company was awarded by MFIN as part of MFIN Micro finance Awards, 2018 for implementing outstanding initiatives in the category "Effective Grievance Redressal Systems".

Diversification of Revenue Streams and Cross-Selling of Products & Services

The Company has built a large distribution network in rural India. The Company believes it can leverage this network to distribute financial and non-financial products of other institutions to its members at a cost lower than competition. Its network also allows such distributors to access a segment of the market to which many do not otherwise have access.

While the Company continues to focus on its core business of providing micro credit services, it seeks to diversify into other businesses by scaling up certain pilot projects involving fee-based services, and will gradually convert them into separate business verticals or operate them through subsidiaries. Its objective in these other businesses is to focus on lending that will allow it to maintain repayment rates, increase member loyalty and also provide economic benefits to its members and their families. The Company believes that such other products and services may offer higher operating margins as compared to micro credit under the new regulatory framework and will help it increase its overall RoA.

The Companys existing initiatives in relation to financial products and services other than micro credit include providing:

• Loans to its members for the purchase of Nokia mobile handsets in association with TNS Mobile India Private Limited, and for solar lamps in association with D. Light Energy Private Limited and Green Light Planet India Private Limited.

• Loans to its members to facilitate the purchase of sewing machines in association with Usha International Limited and Singer India Limited; bicycles in association with Hero Cycles Limited and T. I. Cycles of India; water purifiers in association with Eureka Forbes Limited; and two-wheelers in association with Hero MotoCorp Limited.

• Loans to its members for the purchase of pressure cookers in association with TTK Prestige Private Limited; mixer grinders in association with Usha International Limited and TTK Prestige Private Limited; and refrigerators in association with Godrej & Boyce Mfg. Co. Ltd. and Samsung India Electronics Private Limited.

Two-Wheeler Loans: The Company has launched a Two-Wheeler loans pilot product for its members who have been with the Company for a minimum of two years. Loans range from 33,044 to 54,950.

The Company plans to roll out Two-Wheeler loans on a larger scale based on their pilot performance. As on March 31, 2018, Two-Wheeler loans comprised 0.03% of the Companys Gross Loan Portfolio.

Home Improvement Loans: The Company has started a pilot on loans for home improvement. The loans are provided for purposes such as repair of houses, for e.g., changing a thatched or asbestos roof to RCC, or make improvements such as building a toilet or adding an extra room.

Enhance Operating and Financial Leverage

The Company provides collateral-free credit to a majority of its members in their neighbourhood, and its Sangam Managers assist with the processes related to credit verification. While this helps its borrowers save on travel costs, it results in high operating expenses for the Company, particularly personnel and administrative costs. Personnel costs accounted for 75.0% of its operating expenses during FY18.

The Company has embarked on cost-optimisation initiatives by improving its ratio of Borrowers per Sangam Manager, while realising the benefits of economies of scale. The Borrowers per Sangam Manager ratio was 312 as on March 31, 2012 and has since improved to 633 as on March 31, 2018. In addition, the Company grew its loan portfolio from FY14 to FY18 without adding a significant number of new branches or incurring significant capital expenditure. There was a net reduction of approximately 200 branches during FY13, six branches during FY14 and net addition of 13 branches in FY15, 56 branches in FY16, 75 branches in FY17 and 168 branches in FY18. As on March 31, 2018, the Company had 1,567 branches. Its total headcount was reduced from 16,194 as on March 31, 2012 to 8,932 as on March 31, 2014. With resumption of hiring, the headcount increased to 9,698 as on March 31, 2015, 11,991 as on March 31, 2016, 14,755 as on March 31, 2017 and 16,021 as on March 31, 2018. To implement its growth strategy, though the Company plans to increase its headcount and open branches in certain areas, it will continue to focus on efficiencies to maintain and improve operating leverage.

Other factors that the Company continues to focus to optimise its cost structure include enhancing the productivity of employees, introducing technology for expedient reporting and re-engineering the internal processes. The results of cost optimisation are evident in the reduction in cost-to-income ratio from 74.5% in FY14 to 50.4% in FY18. The Company plans to bring down the cost-to-income ratio to 40% in the medium term.

The Companys debt to equity ratio was 2.5 as on March 31, 2018, as compared to 2.9 as on March 31, 2017. With growth in its portfolio, and increase in the availability of financing, the Company aims to maximise its operating and financial leverage.

Deepening Financial Inclusion through RDSP

The Company acts as a Business Correspondent to IndusInd Bank.

Under this arrangement, the Company earmarked 240 branches as on March 31, 2018 where it also plans to offer liability products such as Savings account and Recurring Deposit account to its members. RDSP will be rolled out as a service point corresponding to these branches. The Company has identified 150 merchants as RDSP points in Karnataka and Odisha, where it has piloted this model and found encouraging results even for the store owner who saw increased footfalls and enabled greater customer accessibility.

Update on RDSP Pilot: The Company converted Kirana Stores as cash transaction points by enabling them with smart phones/ Tab. These Kirana store owners are IndusInd Banks sub-agent and provide services such as accepting loan repayment, cash deposits, cash withdrawal, and utility payment. The cross-sell products facilitated by the Company will also be available for its members through RDSP and this will also create cross-sell opportunities (e.g. Solar, Mobile, Sewing machines, etc.) to non-members. The Company believes that this will further enhance its outreach.

Information Technology as an Enabler

BFIL continued its leadership in Digital transformation for enabling a world-class organisation. In todays constantly evolving market landscape and cashless economy that the country is embracing, building world-class technology driven operations is the key to sustainable growth and customer value. The Company is leveraging new-age mobile and data driven technologies to effectively and efficiently manage processes, taking the operations to the next level of world-class delivery of products and services to the remotest parts of the country.

Technology for RDSP (Retail Distribution Service Points):

The Company endeavours to make transaction with borrowers cashless. Clients will pay the instalment in the nearest Kirana store with Aadhaar number and Biometric authentication on any day as per their convenience. To facilitate these services, the Company deployed Mobile applications using Android technology. Technologies based on Java using Web services for data transfer with Banking system, the Company and the Client are established through secured channels between the participating entities.

e-KYC and Cashless Disbursal:

With the emphasis on going paperless, the Company adopted Aadhaar based biometric identification (e-KYC) of clients. This enabled instant credit bureau verification, reduced turnaround time for loan disbursements and improved data quality, thus reducing the instance of fake clients. BFIL is a registered KUA with NPCI.

In FY18, the Company disbursed 95% of the loans directly to Clients Bank account.

‘Bharat Sanjeevani Software:

An end-to-end IT ecosystem has been developed by Bharat Financial Inclusion Limited for animal healthcare Service program ‘Pashu Dhan Sanjeevani. The service delivery process will be enabled and monitored through the ‘Bharat Sanjeevani software- a Mobile App with automated call routing especially developed for doctors, veterinary field officers and artificial insemination technicians comprising the entire value chain. The Company has initiated a pilot in 2 districts in Madhya Pradesh and expects to expand with the support of the local Government. A 24x7 call centre has been set up which acts as the central command centre for providing the services. This enables Veterinary services including emergency treatment, on-demand artificial insemination, vaccination and deworming to be provided at the door-step of farmers. The service will help farmers immensely as they used to face difficulty in bringing cattle to the treatment centers. A team of doctors and veterinary assistants will provide tele-consultation or schedule a visit based on the severity of the cattles health condition. The Company plans to extend similar pilot programmes in Odisha and Jharkhand.

HR Biometric Attendance:

The Company introduced attendance tracking of all employees from the Branch using biometric device. This reduced the manual efforts involved in collating the attendance registers from all the branches spread across the country, validation/verification and man-hours spent for processing the payroll. This approach is authenticated and error-free and has aided the HR team immensely in manpower planning.

HR Compliance:

The Company has automated the entire HR related compliance such as PF, ESI and Gratuity for all its employees to be filed on-time across Government agencies, at varied frequencies - monthly, quarterly and yearly. Distinct rules and methodologies across 18 states and districts specific compliance made the existing process much more complex. The Company developed a system that provides automatic alerts to the respective team, generates forms as per requirement, ready templates for uploading to the respective department website. Stage-gated workflow based approval mechanism is in place and the system provides a dashboard with updated status to the leadership team.

GPS-enabled Route Optimisation and Cashless Fuel Reimbursement:

The Company has developed a location-based field force task automation and geo-intelligence, GPS based platform. This helped the Company in effective field force management: manage their work, organise their travel/movement, optimise their geographies. Sangam Manger route mapping, optimisation and automated fuel reimbursements for the Companys employees across length and breadth of the operational areas were introduced. This has facilitated in time and motion, task-on-device, territory and route planning, location Intelligence using mobile technologies and cloud for a seamless anywhere-anytime experience.

IV. Risks And Management Strategies

Risk is an integral part of the Companys business, and sound risk management is critical to the success of the organisation.

As a financial intermediary, the Company is exposed to risks that are particular to its lending and the environment within which it operates. The Company has identified and implemented comprehensive policies and procedures to assess, monitor and manage risk throughout the Company. The risk management process is continuously improved and adapted to the changing risk scenario and the agility of the risk management process is monitored and reviewed for its appropriateness in the changing risk landscape. The process of continuous evaluation of risks includes taking stock of the risk landscape on an event-driven basis.

The Company has an elaborate process for risk management. This rests on the three pillars of Business Risk Assessment, Operational Controls Assessment and Policy Compliance Processes. Major risks identified by the businesses and functions are systematically addressed through mitigating actions on a continuing basis. These are discussed with both the Management and the Risk Management Committee. Some of the risks relate to competitive intensity and the changing legal and regulatory environment. The

Risk Management Committee of the Board reviews the risk management policies in relation to various risks and regulatory compliance issues.

The Company identifies the following as key risks:

Political Risk

The Company recognises political risk as one of the major risks facing the industry and believes that political risk can be mitigated through responsible lending and fair pricing by way of:

• Low cost lender – The Company charges one of the lowest interest rates among NBFC-MFIs to its borrowers.

• Voluntary Cap on RoA from core lending – The Company has voluntarily capped its returns from core lending at 3%.

• Robust Customer

Grievance Redressal (CGR) Mechanism with Independent Ombudsman

• Calibrated Growth – The Companys growth strategy aims to meet requirements of its members and also address concerns of various stakeholders.

Concentration Risk

The Company aims to avoid unbalanced concentration in both its loan portfolio and borrowings. To mitigate the concentration risk, the Company has well defined Geographic and Borrower dependence norms.

Geographic Concentration Norms – In order to mitigate the risk of external intervention, concentration in any particular state, district or branch, as well as to manage non-payment risk, the Company has implemented the following limits:

Disbursement Related Caps: The disbursement limits stipulate each state to entail less than 15% of the total disbursements for the Company (except states of Bihar and Odisha which have a 17.5% limit); each district to entail less than 3% of the total disbursements for the Company (except districts in states of Bihar and Odisha which have a 4% limit); each branch to entail less than 1% of the total disbursements for the Company (except branches in states of Bihar and Odisha which have a 1.25% limit); no disbursements to be made by branches that have an NPA of more than 1% (2% in certain cases) or collection efficiency of less than 95%; Caps are subject to tolerance limits.

Portfolio Outstanding Related Caps:

• Net-worth related caps:

Each state to ensure that its Gross Loan Portfolio will not exceed 75% of the Companys net worth (100% for Odisha); each district to maintain that its Gross Loan Portfolio will not exceed 5% of the Companys net worth (up to 5% of the operating districts may go up to 10% of the Companys net worth); each Branch to maintain that its Gross Loan Portfolio will not exceed 1% of the Companys net worth (up to 5% of the operating branches may go up to 2% of the Companys net worth).

• Portfolio Mix:

Each state to ensure that its Gross Loan Portfolio will not exceed 15% of the Companys total portfolio (except states of Bihar and Odisha which have a 17.5% limit).

Caps are subject to tolerance of 10%.

Borrowing Dependence Norms – In order to reduce dependence on a single lender, the Company has adopted a cap on borrowing from any single credit granter at 15% (25% for IndusInd Bank). The share of borrowing from top 3 banks reduced significantly from 61% in

March 2013 to 26% in March 2018.

Operational Risk

The core business of the Company is to provide collateral-free loans in rural areas, and consequently, requires enhanced operational risk management. To mitigate the operational risk, the Company adopts the following strategy.

• Integrated cash management system – The Companys loan disbursements are predominantly cashless, however, collections from borrowers are predominantly in cash. Inconvenient access to bank accounts for transactions, and relatively lower penetration of mobile-enabled payment systems in rural India where the Company lends, drive the need for transactions in cash. Hence Cash management is an important element of the business.

To reduce the potential risks of theft, fraud and mismanagement, the Company has been implementing an integrated cash management system since July 2009 which is operational in approximately 1,419 of its branches as on March 31, 2018. The system utilises an Internet banking software platform that interfaces with various banks to provide the Company with real-time cash information for these branches and the loan activity therein.

The Company believes this integrated system augments its management information systems and facilitates its bank reconciliations, audits and cash flow management. The system also reduces errors.

• Product and Process Design – The Company adopts a standardised approach to product design and operational procedures at the branches and centers to enable predictability of transactions as a risk mitigant.

• ISO Certified InternalAudit – The Company has adequate controls and processes in place with respect to its operations. The Internal Audit department acts as the third line of defence by monitoring adherence to controls and processes and provides inputs for strengthening risk management. The Internal Audit function has been certified with ISO 9001:2015.

Liquidity Risk

The Company places significant importance on liquidity management and has a bias for liquidity mainly to address operational requirements and corporate commitments. Along with funding strategy and asset liability management, the Company has well-defined liquidity metrics such as cash burn, optimal liquidity and liquidity cap tests to ensure sufficient liquidity in line with business requirements and aid risk mitigation.

V. Internal Control Systems And Their Adequacy

The Company has well-established and strong internal controls with well-designed systems, policies and procedures to maintain financial discipline. The Companys Internal Control Systems are commensurate with the nature of its business and the size and complexity of its operations. Based on the guidelines received on various issues of control from the Reserve Bank of India and the Government of India, the Companys Board of Directors and the Audit Committee of the Board are part of the Internal Control System for better compliance at all levels.

Internal Audit Department of the Company is an independent function that ensures, checks and evaluates operational risks, internal controls, internal financial controls, and adherence to policies and procedures by conducting inspection of branches/ offices. These are routinely tested and cover all Branches, Regional Offices and the Head Office. Significant audit observations and follow-up actions thereon are reported to the Audit Committee.

The Audit Committee of the Board oversees the Internal Audit function of the Company. The Audit Committee reviews the adequacy and effectiveness of the Companys Internal Control System, including Internal Financial Controls and monitors the implementation of audit recommendations including those related to strengthening of the Companys risk management policies and systems. The Audit Committee monitors compliance with inspection and audit reports of the Reserve Bank of India, other regulators and statutory auditors.

VI. FY18 - Update

Operational and Financial Highlights

During FY18, the Company reported a profit after tax of 455.5 crore as compared to a profit of 289.7 crore in FY17.

Revenue increased by 21.7% during FY18. The Company obtained incremental drawdowns (excluding managed) of 9,977.2 crore in FY18, an increase of 44.6% compared to FY17. Disbursements were higher in FY18 and the Company registered a growth of 37.6% in the loan portfolio during FY18 from 9,149.6 crore as on March 31, 2017 to 12,594.4 crore as on March 31, 2018. Gross Loan Portfolio in states other than Andhra Pradesh and Telangana increased at a CAGR of 45.6% from 1,320.0 crore as on March 31, 2012 to 12,594.4 crore as on March 31, 2018. Further, average loan recovery rates was at 98.7% for FY18 for all loans and 99.8% for loans disbursed since January 1, 2017.

Operational Performance

Operational Highlights	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18
No. of branches	1,255	1,268	1,324	1,399	1,567
No. of districts	294	314	323	322	342
No. of employees	8,932	9,698	11,991	14,755	16,021
No. of members (in Lakh)	57.8	64.0	69.7	67.0	72.7
Disbursements for the year ( in crore)	4,787.6	6,890.8	12,087.8	14,666.9	18,472.0
Gross loan portfolio ( in crore)*	3,112.8	4,184.5	7,688.0	9,149.6	12,594.4
*Includes securitised, assigned and managed loan portfolio
Financial Highlights	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18
Incremental borrowings* ( in crore)	3,703	5,561	8,309	8,022	12,401
Total revenue ( in crore)	544.8	803.1	1,320.7	1,727.9	2,102.0
Profit after tax ( in crore)	69.9	187.7	303.0	289.7	455.5
Total assets ( in crore)	2,497.2	4,698.7	7,153.7	10,417.6	11,530.7
Return on average asset^	2.3%	4.3%	4.2%	0.8%~	2.8%~
Return on average equity	16.7%	21.6%	25.1%	3.9%~	14.3%~

*Amount of sanctions received from banks and financial institutions

^ Assets include securitised, assigned and managed loan portfolio ~ Return exclude MAT Credit

Financial Performance

(Comparison of FY18 With FY17)

	FY18		FY17
Particulars	in Crore	Percent to Revenue	in Crore	Percent to Revenue	Increase / Decrease
Income from operations	1,917.2	91.2%	1,553.1	89.9%	23.4%
Other income	184.8	8.8%	174.8	10.1%	5.7%
Gross revenue	2,102.0	100.0%	1,727.9	100.0%	21.7%
Employee benefit expenses	526.4	25.0%	406.2	23.5%	29.6%
Finance costs	710.4	33.8%	622.5	36.0%	14.1%
Other expenses	162.1	7.7%	134.3	7.8%	20.7%
Depreciation and amortisation	13.2	0.6%	12.8	0.7%	3.7%
Provisions and write-offs	235.0	11.2%	359.4	20.8%	(34.6)%
Total expenditure	1,647.2	78.4%	1,535.1	88.8%	7.3%
Profit before tax	454.8	21.6%	192.8	11.2%	135.8%
Tax expense	(0.7)	0.0%	(96.9)	(5.6)%	(99.3)%
Profit after tax	455.5	21.7%	289.7	16.8%	57.2%

Income from Operations

Income from operations increased by 23.4%, from 1,553.1 crore in FY17 to 1,917.2 crore in FY18. This growth is primarily due to an increase in average (quarterly) Gross Loan Portfolio by 24.6% from 8,577.0 crore in FY17 to 10,687.7 crore in FY18. The opening and closing Gross Loan Portfolio for FY18 were 9,149.6 crore (as on March 31, 2017) and 12,594.4 crore (as on March 31, 2018) respectively.

Other Income

Other income increased by 5.7%, from 174.8 crore in FY17 to 184.8 crore in FY18. The increase in other income was primarily due to an increase in the Companys other fee income. Other fee income relates to fees for acting as business correspondent with regards to managed loans and fee received from strategic alliance partners for financing their products, such as mobile phones, solar lamps, sewing machine, bicycle, mixer grinder and pressure cookers.

Financial Expenses

The Companys financial expenses represent 43.1% of the total expenses for FY18. Financial expenses increased by 14.1% from 622.5 crore in FY17 to 710.4 crore in FY18 due to an increase in average (quarterly) borrowings by 20.3% from 6,009.5 crore in FY17 to 7,231.1 crore in FY18.

Employee Benefit Expenses

Employee benefit expenses consist of salaries and other employee benefits. Employee benefit expenses increased by 29.6% from 406.2 crore in FY17 to 526.4 crore in FY18, due to annual increments and increase in the number of employees from 14,755 at the end of FY17 to 16,021 at the end of FY18.

Other Expenses

Other expenses represented 9.8% of the total expenses for FY18 and increased by 20.7% from 134.3 crore in FY17 to 162.1 crore in FY18. This increase was primarily due to an increase in travelling and conveyance expenses.

Depreciation and Amortisation

Depreciation and amortisation increased by 3.7%, from 12.8 crore in FY17 to 13.2 crore in FY18. This increase was primarily on account of net additions of 13.5 crore during FY18.

Provisions and Write-offs

Provisions and write-offs represented 14.3% of the total expenses for FY18 and L. decreased by 124.3 crore, from 359.4 crore in FY17 to 235.0 crore in FY18 primarily due to reversal of provision of 207.7 crore in FY18 as a result of a write-offs of loan portfolios which werefullyprovided for in prior periods.

FUND RAISING

In FY18, the Company received sanctions for 12,401 crore as compared to 8,022 crore during FY17. The Company raised funds of 9,977.2 crore in FY18, as compared to 6,900.2 crore in FY17. Funds raised in FY18 include 1,018.5 crore and 3,161.90 crore through securitisation and assignment of portfolio loans respectively.

The Companys debt funding sources are broad based and, as on March 31, 2018, its total outstanding borrowings and funds from securitisation/assignment of loans from public sector banks, domestic private banks, foreign banks and financial and other institutions were 33.5%, 43.1%, 9.8% and 13.6%, respectively, of its total borrowed funds and funds from securitisation/assignment of loans. As on March 31, 2017, its total outstanding borrowings and funds from securitisation/assignment of loans from public sector banks, domestic private banks, foreign banks and financial institutions and other institutions were 40.7%, 32.3%, 9.9% and 17.1% respectively of its total borrowed funds and funds from securitisation/assignment of loans. The Companys weighted average cost of borrowings including processing fees (on B/S daily average) reduced to 9.8% in FY18 from 10.9% in FY17.

The Company meets the requirements of PSL guidelines and PS On July 07, regularly accesses bank financing that qualifies as 2016, the RBI revised PSL norms for all the scheduled commercial banks (excluding regional rural banks). The scope of PSL has been expanded to include new segments for lending such as medium enterprises, social infrastructure and renewable energy. PSL norms have been detailed earlier in this section. The PSL guidelines also specify that, going forward, the monitoring on compliance for banks on Priority Sector targets will be done on a more frequent basis, that is, quarterly (instead of yearly) and banks will have to publish the information of their Priority Sector advances on both quarterly as well as annual basis. With the quarterly compliance on PSL reporting for banks, the seasonality in funding is reduced and ensures credit flow to the MFI sector on a regular basis through the year.

VII. Human Resources Management

The Company is embarking on a new growth journey, with new aspirations and milestones. In this journey, the Company values the contribution of its frontline managers who are driving the Companys vision by demonstrating sincerity & passion. The Company continued to show signs of positivity and growth, providing the Management an appetite for enhancing potential and driving growth and development of its people. Engaging with excellence was the way in FY18, with focus on HR process automations with a vision to build efficient and error-free function.

As part of HR Automation, the Company has taken a significant stride in implementing the Aadhaar based e-joining process to on-board its employees. This process improvement has made the Companys on-boarding process more authentic and helped it to move away from tedious paper work involved during the on boarding process which could potentially result in manual errors at the time of capturing employee details which is the core of Human Resource Management.

To channelise the employee movements, the Company has adopted Bio-metric attendance recording system at the branch offices to track attendance in real-time. This has facilitated HR in effective manpower planning and initiate disciplinary actions on-time without human intervention.

Self-manager services are extended to field-staff and the leadership team at the field level are enabled with automated dashboards for better man-management through HRIS (Human Resources Information System) – SPARK.

The managers are equipped with the HRMS App (Adrenalin app) with which they can action the employees requests like absence regularization, leave approvals, PMS approvals etc. on the go. Processes related to payroll were automated which helped the Company to enhance efficiencies in payroll management. The Company continues to monitor field HR reports through DAMS Disciplinary Actions Management System and HR Connect.

The Company has launched employee recognition program called SMILE (Succeed, Motivate, Improve, Learn & Engage) to recognise exceptional performances at the workplace with awards like SPOT and Employee of the month.

Continuing the thrust on developing and grooming of internal leadership among middle-level managers, a new program is developed and delivered called ‘SHIKHAR Building future leaders, a 4-day program for Area Managers, which focused on developing competencies required to take up the next level roles and responsibilities.

The Company continues to pay special attention to new joinees at the field level to ensure that the entry level employees of the organization are WELCOMED in the organization in the right way and in the right spirit through a program called ‘WELCOME – One Day Induction. As part of building process capabilities for field staff, the Company provided 12,77,244 man-hours of technical training in seven vernacular languages.

The Company has been recognised by Great Places to Work Institute India as one of Indias 15 Best Workplaces in BFSI -2018.

To support its growing business, the Company hired Business Leaders from the banking industry to head various regional offices. The Company also started hiring talent from various Rural Management Colleges and trained them to create a talent pool for future leadership positions. The Company has provided internal growth opportunities to consistent performing employees.

The Company reinforced retention of Mid & Senior level employees through issuance of ESOPs. As on March 31, 2018, the overall employee strength of the Company was 16,021. The Company has given equal and fair career growth opportunities within the organisation, as a result of which 1,630 were promoted to the next level. The human resource distribution shows that the number of field employees in branch offices were 13,841 (86%) and the number of Head Office & Regional Office staff were 2,180 (14%).

Voluntary attrition rate during FY18 was 25.55%.