MANAGEMENT DISCUSSION AND ANALYSIS
INDIAN ECONOMIC SCENARIO
The past few years have established a solid foundation for continued growth of the
Indian economy in the future. During the last few years, the Government proactively
undertook structural reforms to enable the country graduate to the next level of growth.
One of the biggest successes of this Government has been controlling inflation at an
average rate of 4.3% for four years. Early in its tenure, the Government deregulated
petrol and diesel prices thereby eliminating subsidy which at one time had exceeded Rs. 1
trillion a year. Further shifting to direct benefit transfer saved precious resources
otherwise prone to leakage. These and other such initiatives such as restrained MSP
increase reduced fiscal deficit which has helped control inflation. The Real Estate
Regulation Act helped secure homebuyers interest and stop massive rerouting of resources
by developers. Large-scale digitisation efforts based on a vast mobile base and a vast
Aadhaar base, about a billion each, coupled with India-stack and proliferation of
electronic platforms have significantly formalised the economy. Significant FDI norms have
rapidly scaled up foreign investment in India.
FY18 has been another year of reforms. Undoubtedly, the single biggest reform of FY
2017-18 has been the implementation of GST which required a constitutional amendment and
multiple legislations, and clearly the most important tax reform in the post-independent
era. The Government subsumed multiple taxes into one single tax through GST. Though the
initiative faced initial hiccups and uncertainties post its launch, it has brought in more
transparency and efficiency into the system. Driven by concerns regarding its impact on
business, majority of corporates and industries across the country took a cautious
approach, which in turn brought down manufacturing and economic activity during the
Q2FY18. However, since then, GST has had a positive impact on the countrys economy,
leading to mass scale formalisation and the entry of a large number of that resulted in a
50% upsurge in number of tax payers to 34 lakh businesses.
TheimplementationofGSTwillfurtherlead to an increase in financial transparency of
MSMEs, who more or less have been operating anonymously. This would enable financial
services companies to better evaluate credit profile of MSMEs.
Besides, it would also facilitate MSMEs, who previously have been understating income,
to procure credit for expansion. With this, it is estimated that the share of lending
revenues from MSMEs will increase by nearly 400 basis points to 24% in FY22 up from 20% in
FY17.
The Insolvency and Bankruptcy Code (IBC) another such landmark reform which India
sorely lacked. Further, during the year, the Government also proposed a funding of Rs.
2.11 lakh crore as a part of a recapitalisation plan to support stressed public banks.
This will enable distressed banks to revive their lending activities.
Though in the short run, these initiatives have caused a temporary slowdown, with
GDPgrowthdecliningto6.6%inFY2017-18 compared to 7.1% in FY 2016-17, the outlook remains
positive. The good news is that the Indian economy is showing signs of acceleration with
growth in corporate sales, depleting finished goods inventories and restart of investment
in fixed assets by corporations indicating revitalisation of CAPEX cycle.
The positive impact of the Governments reformative initiatives was affirmed by Moodys
Investors Services, when it upgraded the countrys credit rating from a stable ‘Baa2
to positive ‘Baa3. The upgrade, which came after a gap of 14 years, indicates the
confidence the players have in the Indian economy. This was further reinforced by a 30
position jump to the 100th spot in the World Banks Ease of Doing Business
rankings and a rating as the eighth most attractive FDI destinations by A. T. Kearney.
All international eyes are on India as it is now the worlds sixth largest economy,
displacing France and joining the leading five the United States, China, Japan, needs.
Germany and United Kingdom, as per the estimate from the International Monetary Fund
(IMF). Institutions like the IMF and World Bank are bullish on the Indian economy as it is
likely to become the 5th largest economy very soon. The IMF projects it to grow
at 7.4% in FY19 and 7.8% in FY20, while the World Bank expects growth to touch 7.3% in
FY19 and accelerate to 7.5% in FY20.
OPPORTUNITY LANDSCAPE
The MSME segment offers a huge untapped opportunity owing to the significant million
MSMEs in India, 40 million have current accounts and of these, only 4.5 million are
borrowers. This indicates a vast business potential.
Use of data analytics and information from credit bureaus will be important to make
quick decisions on lending to self-employed and those working in the informal sector.
ratios. Its total
BUSINESS OVERVIEW
Capital First Limited (Capital First) is one of Indias leading financial institutions.
Formed on the theme of financing Indias 50 million MSMEs and its emerging middle class
consumers by leveraging a differentiated model and new technologies, Capital First came
into existence in FY13 as a result of a management buyout of the existing listed NBFC
supported, by equity backing from leading global private equity.
The Company primarily focusses on financing salaried and self-employed consumers, a
rapidly growing segment, driven by rising affluence, aspirations and favourable
demographics. It also has a large and growing presence in the MSME segment, where it
caters to their multiple financing
The Companys successful new models of financing MSMEs and Indian consumers in the
unbanked and under-penetrated segments, using new technologies and deep analytics, enabled
it to register strong growth over the years. The Company rapidly expanded its business
operations to more than 225 locations, cumulatively financed over 6.0 mn customers,
disbursed over Rs. 58,000 Crore (US$ 8.92 billion) and built a loan portfolio of Rs.
26,997 Crore (US$ 4.15 billion) as on March 31, 2018. While remaining focussed on growth,
the Company consistently maintained high asset quality and continued to build the
institution on the strong pillars of ethics, values and corporate governance.
During FY 2017-18, the Company registered a strong performance in all key parameters
including business growth with strong focus on the retail segments, robust asset quality
and improved profitability
Assets Under Management (AUM) increased by 36% from Rs. 19,824 Crore (US$ 3.05 billion)
as on March 31, 2017 to Rs. 26,997 Crore (US$ 4.15 billion) as on March 31, 2018.
Continued focus on the retail sector resulted in the Retail AUM increasing to Rs. 25,243
Crore (US$ 3.73 billion) as compared to Rs. 18,353 Crore (US$ 2.82 billion) as on
March 31, 2017, accounting for 94% of the overall AUM. As on March 31, 2018, its Gross and
Net NPA stood at 1.62% and 1.00%, respectively. The Net Profit of the Company grew by 37%
from Rs. 239 Crore (US$ 37 million) in FY17 to Rs. 327 Crore (US$ 50 million) in FY18.
MSME FUNDING
The recent years have seen the countrys financial services sector being impacted by
the NPA crisis, largely driven by mid-sized corporates and large corporates. Besides, from
a funding perspective, the revenue pool of mid and large corporates is likely to remain
subdued over the next few years, driven by the recent stress in lending books in India. In
this scenario, it is more likely that the credit growth in the coming years will be driven
by the smaller SME segments that have been relatively stable in terms of asset quality.
One big challenge in lending to this segment has been the lack of reliable audited
financial records. However, with the increasing availability of surrogate digital data
(i.e., tax payments, etc.), introduction of GST, which will drive greater transparency and
increasing digital point of sale payments, credit offtake has the potential to
continuously grow in the future.
Capital First was late to the game as we started retail operations only in FY10 and
many other large established banks and lenders were operating in India since decades or
centuries. Yet a focussed and dedicated approach to the segment coupled with strong
technology competencies has enabled it to cater to diverse financing requirements of these
segments. Strong customer connect, product innovation, faster processing and service
quality position it as a specialised player for the segment.
The Companys brand is now recognised in the market as a live and vibrant organisation
which has had significant success in the market.
Additionally, Capital First also provides affordable housing finance to various
categories of customers, largely self-employed, through its wholly-owned subsidiary
Capital First Home Finance Limited (CFHFL). CFHFL has obtained a Housing Finance Company
license from National Housing Bank and operates on a pan-India basis. The subsidiary has
displayed strong performance and its assets under management has surged to Rs. 2,078 Crore
(US$ 320 million) as on March 31, 2018.
IMPACT OF GOODS AND SERVICES TAX
The Company has not observed any significant of the portfolio, especially for the loans
to MSMEs on account of GST implementation. The asset quality has been steady and the
business growth has been improving continuously.
PORTFOLIO PERFORMANCE
Capital First has structured its entire operations with inherent checks and balances
for effective risk management. Its sales, credit, operations and collection teams operate
independently and have separate reporting lines to ensure there is no conflict of
interest.
The Company has a well-devised and rigorous credit underwriting process to maintain
asset quality. The process begins with shortlisting of loan accounts meeting the necessary
lending norms defined in the credit policy by the business origination team. These
accounts are then transferred to the credit underwriting team, where the credentials of
borrowers are independently assessed. Post this, the loan booking and operations recheck
details and finallydisburse the loan. On disbursal of the loan, an independent portfolio
monitoring team takes charge to oversee the portfolio and independent collections team
make follow-ups to ensure recovery. The entire process prevents fraudulent practices and
ensures each account goes through multiple rounds of checking, to maintain the credit
health of each account.
The Company takes corrective actions as and when necessary, to constantly improvise and
fine tune the lending criteria and services to make it more effective.
For example in the Companys mortgages business, every application passes through
multiple level of scrutiny including cash flow evaluation and checks from credit bureau
and references. Post this, only 38% of the applications get disbursed. Most of the
rejections happen, primarily on account of lack of financial health visibility or
insufficient cash flow service debt.
ASSET QUALITY
Asset quality is one area where Capital First truly has a competitive edge. As
on March 31, 2018, the Companys Gross NPA and Net NPA stood at 1.62% and 1.00%,
respectively, on a 90 DPD basis. Despite having passed through difficult phases (decline
in GDP, rupee and liquidity crisis, demonetisation, GST) that saw many players in the
financial services sector witness an increase in NPAs, the Company, on the contrary has
been able to improve its asset quality and profitability.
The Company reported NPA at 180 DPD till FY15, 150 DPD till FY16, at 120 DPD till FY17,
and at 90 DPD since FY18 as per RBI norms. The reported NPA of the respective year are not
comparable. Hence, in order to enable easy comparability of NPA as a common scale, the NPA
chart above has been compiled at 90 DPD basis for the last 9 quarters.
CAPITAL
The Companys balance sheet strength is evident in its consistently growing capital.
The total capital (T1+T2) available with the Company has grown at a CAGR of 21% in the
past five years to reach Rs. 3,993 Crore. As of March 31, 2018, the Companys overall
capital adequacy ratio stood at 15.88% with Tier-I capital adequacy at 12.32%.
RESOURCES AND LIABILITIES
During the year, Capital First has successfullydiversified its borrowing portfolio with
financial more than 290 institutions including banks, mutual funds, superannuation funds,
provident funds, gratuity funds and insurance companies. The Company has raised more funds
from the debt capital market in FY18. The debt capital market now contributes to 54% of
the overall borrowing portfolio as of March 31, ws and 2018 as compared to 48% as
of March 31, 2017.
ASSET LIABILITY MANAGEMENT
The Company follows a conservative and prudent policy for matching funding of assets,
which translates into a robust Asset-Liability stability. Its strategy of borrowing on
longer tenor than the actuarial maturity of its assets enables it to achieve healthy cash
ensure the total inflow in each maturity bucket is higher than the total outflows.
This enables the Company to maintain adequate liquidity at all times. The Companys
strong ALM strategy is one of the key pillars strengthening its structural
foundation.
CONSOLIDATED FINANCIAL MANAGEMENT
FY18 turned out to be another year of strong performances across all parameters in
spite of overall macro and policy changes. The year saw the Companys total income
increase by 48% from Rs. 1,640 Crore (US$ 252 million) in FY17 to Rs. 2,430 Crore (US$ 374
million) in FY18. Profit before tax 38% from Rs. 357 Crore (US$ 55 million) in FY17 to Rs.
494 Crore (US$ 76 million) in FY18. Profit 37% from Rs. 239 Crore (US$ 37 million)
in FY17 to Rs. 327 Crore (US$ 50 million) in FY18. Over the last 5 years, the Profit
After Tax of the Company has consistently outpaced the growth of assets every year,
signifying increased profitability.
With enhanced business operations, the Return on Equity of the Company has continuously
improved over the quarters, from 2.28% in Q1FY14 to 14.82% in Q4FY18, increasing the
shareholders value.
SHAREHOLDERS FUNDS
As on March 31, 2018, the total number of shares of the Company stood at 9,89,65,244by
with a Book Value of Rs. 264.49 (US$ 4.07) per share. The Companys strong business
model and growth have attracted investmentsafter tax from several marquee FIIs and DIIs.
These include Warburg Pincus, Government of Singapore &
Government Pension Fund Global, Jupiter Asset Management, Ashburton Limited, Birla
Asset Management, HDFC Mutual Fund, HDFC Standard Life Insurance Company.
OPPORTUNITIES & OUTLOOK
The present economic scenario augurs well for the financial services industry. The
demonetisation led to financialisation of savings and the implementation of GST is
bringing in more efficiency and transparency while augmenting formalisation. Adoption of
digital technologies and biometric identification are easing the customer onboarding
process and enabling reaching out to wider audiences. This is boosting financialby
inclusion and enabling financiers to tap underserved markets. These changes will also
assist financial services companies to get more insightfulcompanies, data relating to MSME
customers, who largely operate informally, making it difficult to analyse their
creditworthiness.
As on date, nearly 90% of the market is still untapped.
The Company already has a strong portfolio catering to MSMEs and the retail
sector. With a more focussed approach and the ability to ride the wave of various positive
external factors audit– in the observationsform of regulatory changes andare
prevailing demographics and business demands, the Company is of sustaining its growth
momentum. The Company will focus on continuous innovation in the product side to remain
relevant to changing customer needs and also leverage technology to target right customer
segments and geographies. The Company will continue to emphasise on the necessary checks
and internal controls to ensure that the growth is sustainable with strong asset
quality.
INTERNAL CONTROL SYSTEMS
Capital First has internal control systems that are adequate and commensurate with the
size and nature of its operations. These systems ensure effectiveness and efficiency of
operations, assets safeguard adequacy, reliability of financial controls and compliance
with applicable laws and regulations. The system ensures authorisation, recording and
reporting of all assets and transactions to safeguard from unauthorised use or disposition
of assets that may lead to losses. The Company has further strengthened its system
controls by implementing robust Loan Management Systems.
The Company has an Internal Audit Department, which reports to the Audit Committee of
the Board of Directors. This department undertakes comprehensive audits of the Companys
functional areas and operations to examine the adequacy of and compliance with policies,
plans and statutory requirements.
Significant reported to the Audit Committee and follow-up actions are taken
accordingly. The Audit Committee also reviews the adequacy and effectiveness of the
Companys internal control environment and monitors the implementation of audit
recommendations.
RISKS AND CONCERNS
Capital First continues to invest in technology and digital processes as the Company
acknowledges that these are vital elements for mitigating various risks posed by the
environment.
Credit Risk Management: Capital First has established detailed procedures and
policies for underwriting across various product categories. The Company underwrites loans
on the basis of assessed cash flows of customers or other such credit evaluation tools as
it deems necessary, including inputs from credit bureau information reports as
required. While it does lay emphasis on detailed credit underwriting processes, it
also considers various other factors like the underlying collateral and the LTV
ratios approved for the customer. These policies are regularly monitored against desired
outcomes for the organisation and revised as necessary.
Interest rate volatility: Fluctuations in interest rates could adversely affect
borrowing costs, interest income and net interest margins of companies in the financial
sector. Being well funded with a strong capital base, Capital First is in a position to
tide over such spells. Further, the Company ensures that it maintains an
appropriate proportion of asset and liabilities at floating rate to avoid interest rate
mismatches across buckets.
Competition: The financial services space in India is quite competitive. The
Company is of the belief that from the countrys point of view India needs an ever-growing
number of players to address the large markets in the country. There is scope for
sustained business growth despite competition. Further, being a Company that is well
capitalised accompanied with high governance standards, robust internal controls
and advanced IT & Risk management systems, the Company is comfortable and confident on
this count.
Changes in policies towards NBFC: There is a growing trend towards more stringent
regulation in the NBFC sector. The Company is of the view that these changes are
structurally beneficial for the financial services industry. Anticipating such regulations
and implementing good governance norms before they are mandated has been a constant
practice at Capital First. Accordingly, the Company feels confident on this count as well.
For example, the Company smoothly transitioned from the 180 DPD NPA regime to the 90
DPD NPA regime, and transited from standing asset provisioning of 25 bps to 40 bps.
Operational Risk Management: Towards minimising operational risks, the Company has
put in place a mechanism with system based ‘maker-checker processes for critical
controls. Further, it has laid down detailed process manuals with Service Level Agreements
(SLA) for data and document processing and handling.
INFORMATION TECHNOLOGY
Capital First recognises the significance of robust IT infrastructure in the current
era, where it is crucial to offer customers faster and more efficient services. Towards
this end, the Company makes a sizeable investment each year to ensure adoption of best technologies
that can streamline operations, brings in efficiency and enable to provide better customer
service to make the Company more competitive in the market. The Company further
understands the relevance of information security and accordingly it has invested in
globally accepted platforms and solutions for Enterprise Security solutions. The Companys
operations are ISO 27001:2013 and compliant.
HUMAN CAPITAL
Capital First recognises that people play a critical role in achieving its goals. We
therefore understand that it is imperative that we have employees who are highly capable,
are engaged and have the motivation to convert vision into a reality.
We strive that employees at Capital First get an opportunity to succeed and we make
efforts to facilitate their work life as much as possible. We continued to drive rigour in
our performance management, rewards and recognition practices which shows in the great
results and consequently there is higher levels of motivation among employees.
Engagement of our employees is of prime importance. We are successful owing to a
culture of transparency, empowerment, quick decision-making, non-hierarchical, where every
employees opinion counts. This has been supplemented by initiatives around health - e.g.
employees were encouraged to run marathons. We received a wonderful response.
Over 900 employees, most of them first timers, ran a race of at least 10 km or more in
the last 6 months! We put together a Goodwill Challenge where employees of each branch got
together to volunteer for a social cause. Our Chairman personally champions these causes
in his personal capacity and encourages all our employees to support the causes which
the Company supports under its CSR programme by their personal involvement.
The Regional HR Team introduced this year helped build higher engagement among
employees through their availability to quickly sort out employee grievances, educate our
employees on HR policies and practices and help drive key initiatives around talent
management.
We take compliance to all laws and regulations very seriously.
CAUTIONARY STATEMENT
Statements made in this Management Discussion and Analysis Report may contain certain
forward-looking statements based on various assumptions on the Companys present and
future business strategies and the environment in which it operates. Actual results may
differ substantially or materially from those expressed or implied due to risk and
uncertainties. These risks and uncertainties include the effect of economic and political
conditions in India and abroad, volatility in interest rates and in the securities market,
new regulations and Government policies that may impact the Companys businesses as well
as the ability to implement its strategies. The information contained herein is as of the
date referenced and the Company does not undertake any obligation to update these
statements. The Company has obtained all market data and other information from sources
believed to be reliable or its internal estimates, although its accuracy or completeness
cannot be guaranteed.
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