MARKET SCENARIO
Indian economy was resilient in the face of this global turmoil and on
the path to recovering to pre pandemic levels. Projected to be one of the fastest growing
economies at 6.5%-7.0%1 in FY23, India has revived on the back of private consumption and
capital formation. The first eight months of FY23 saw an increase of 63.4%2 in Central
Governments Capital Expenditure, coupled with increase in private Capex resulted in
strengthening corporates balance sheets thereby increasing credit financing. Buoyant
consumption, release of pent-up demand saw accelerated growth in not only personal loans
but also in the housing market. Housing bank credit growth witnessed an uptick as housing
inventories continue to decline. Consequently, improved financial health of corporates
have resulted in increased credit demand in both the Banking sector and NBFCs. The NBFC
landscape continues to evolve rapidly adapting to economic challenges, regulatory changes,
and weathering industry volatility. NBFCs play a very important role in the financial
sector as evident in the increase in industry AUM3 from INR 3.6 lakh crore in March 2008
to INR 27 lakh crore in March 2022. Improving macro-economic fundamentals will continue to
drive the NBFC space given the visible improvement in asset quality and balance sheet
strength post pandemic. While competition from Banks continue in the traditional segments
of home loans and new vehicle finance, there is substantial growth in NBFCs in other
non-traditional segments like MSMEs, Personal Loans etc. Digital thrust, use of
technology, partnerships, and recovery in asset quality have all led to stronger
fundamentals. FY24 expects to see NBFCs AUM grow at 13%-14%4. Retailisation and
diversification of portfolio strategies will help retail focused NBFCs grow at 12-14%
according to ICRA reports. Additionally, improved collections, controlled slippages,
stable operating costs, and moderation of credit costs will help drive sector
profitability. Note: (1, 2) The Economic Survey 2022-2023 (3, 4) Crisil Assocham Report on
NBFCs
CHALLENGES AND OPPORTUNITIES
The global economy has seen continued shocks and substantial slowdown
since 2020. Covid-19 had a significant impact, followed by the Russia-Ukraine conflict
which caused a steep rise in inflation and commodity prices. Since then, the different
world economies are striving to fight inflationary pressures, causing them to continuously
hike rates, resulting in a slowdown in growth. IMF too lowered its growth forecast for
2022 and 2023. In January 2023, the World Economic Outlook Update projects that global
growth will fall to 2.9 percent in 2023 but rise to 3.1 percent in 2024.
The residential market has been on a strong recovery path over the past
18 months as the economy emerged from the pandemics shadow. The residential sector
witnessed a robust demand revival with the year expected to register a decadal high
in-home sale. The market registered strong sales backed by robust consumer demand and
quality launches by developers. As per ICRA- new launches are expected to be at a six-year
high of 400 Mn sft in FY2023, showing improvement from the previous two years which were
impacted by the Covid-19 pandemic.
The housing finance market is valued as ~ 25 lakhs as of Mar 22 and is
expected to expand at a compound annual growth rate (CAGR) of 20.58% during the FY 2022
– FY 2027 period. Increasing urbanization, affordable mortgage rates, rising
disposable income, demand from first-time home buyers are some of the key factors
propelling the growth of the housing finance market. It is estimated that Indias
urban population is expected to grow to 814 million by 2050 as compared to 410 million in
2014. Furthermore, it is estimated that 25 million units of affordable housing will be
required by 2030.
According to a report by BCG, in FY 2023, the market share of NBFCs
remained stable across most product segments – 34% in housing loan, 20% in personal
loans, 19% in MSME loans, 47% in auto loans, 2% in gold loans.
NBFCs/HFCs are strongly positioned to meet the evolving needs of the
customers with last-mile reach, domain expertise, and lower turn-around-time (TAT),
enabled by improved risk management capabilities, adequate growth capital, and
‘next-gen tech infrastructure.
Furthermore, HFCs and NBFCs have also been facing increased regulatory
oversight and push towards convergence with banks through various measures, such as
scale-based regulation, realignment in asset quality classification, and Prompt Corrective
Action norms. These will aid in better governance practices and structural strengthening
of the sector, resulting in further harmonisation of the regulatory landscape across banks
and NBFCs.
BUSINESS OVERVIEW/OPERATIONAL PERFORMANCE
During the FY2023, income has increased to Rs. 6,650 Crores as compared
to Rs. 6,105 Crores in the previous year, on account of Increase in retail revenue due to
increased operations partially off-setted by lower revenue in wholesale due to book run
down and non-accrual of interest / reversal on NPAs.
Lending Operations
The Companys AUMreduced by 3% YoY to Rs. 50,427 Crores as of
March 2023 versus Rs. 51,808 Crores as of March 2022. As of March 2023, the Company had a
diversified exposure across both retail and wholesale financing through its presence in
the following sub-segments: a. Retail Lending
A multi-product retail lending platform that is ‘digital at the
core
Significant increase in size and scale, post the DHFL acquisition
Retail loan book of Rs. 29,374 Crores, accounted for 64% of overall
loan book as of March 2023
b. Wholesale Lending:
Loans for residential and commercial real-estate developers as well as
corporates in select sectors
Real Estate Developer financing loan book stood at Rs. 14,080 Crores
Corporate lending book stood at Rs. 616 Crores
DHFL wholesale book stood at Rs. 653 Crores
Market Borrowings
During the year, the average borrowing cost improved reflecting the
progress made on our strategic priorities during the year, including strengthening of the
balance sheet and granularization of the wholesale loan book.
Capital Adequacy Ratio
As of March 31, 2023, Companys Capital adequacy ratio was 27% and
Tier I ratio was also 27%. Corresponding figures as on March 31, 2022 were 22.03% and
21.12% respectively. These are well above the minimum regulatory requirement prescribed by
the regulators.
ALM
The Asset Liability Management (ALM) was within the stipulated norms.
The Company maintains surplus funds to manage liquidity requirements for the near term.
RISK AND CONCERNS
An independent risk management function formalizes the risk measurement
& management process at the Company. The risk management philosophy is embedded into
all activities of the entity, including comprehensive internal control and assurance
processes to manage key risks. The risk management function mainly deals with credit,
operational and liquidity & interest rate risk.
The Risk Management function plays a critical role in development and
update of the credit policy which forms the basis of underwriting the loans. The Risk
management function also analyses the liquidity & interest rate risk at portfolio
level.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has adequate internal controls and processes in place with
respect to its financial statements, which provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements. These
controls and processes are driven through various policies and procedures. The processes
and controls are reviewed periodically. The Company has a mechanism of testing the
controls at regular intervals for their design and operating effectiveness to ascertain
the reliability and authenticity of financial information.
DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL
PERFORMANCE
Financial performance for fiscal 2023 is summarised in the following
table:
(Rs in crores)
Net interest income and other income |
3,197 |
2,772 |
Operating expenses |
1,868 |
848 |
Net loss on fair value changes &
derecognition of financial |
4,038 |
440 |
instruments |
|
|
Provisions and contingencies |
(159) |
627 |
Exceptional item |
10,257 |
143 |
Profit before tax |
(12,806) |
714 |
Profit after tax |
(7,425) |
526 |
Other Comprehensive Income / (Loss) |
65 |
10 |
Total Comprehensive Income |
(7,359) |
536 |
Net interest income and other income: YoY increase driven by increase
in retail operations, gradual decline in cost of borrowings and higher fee-income in
retail lending. Operating Expenses:Op ex increased primarily on account of increase in
retail operations.
Credit costs:Credit costs increased primarily due to provisions &
fair valuation losses in Wholesale business. We continue to remain vigilant across our
portfolio and maintain conservative provisioning to take care of contingencies arising in
the future.
Exceptional Item: One time impact related to impairment of good will
pertaining to wholesale business.
PAT: YoY decline majorly on account of exceptional items of Goodwill
Write-Off, Higher Provisioning & FV losses in Wholesale, Increase in Operating
Expenses due increased retail operations partially offsetted by Reversal of Tax Liability,
higher net income due to increased retail operations
STRATEGY OF BUSINESS:
Transformation Agenda:
The transformation journey of our financial services business, over the
last 2-3 years, could be categorised under three phases. With the acquisition and
integration of DHFL, which was a major step in this transformation journey, we have now
completed Phase I and II of this journey and have embarked on Phased III.
Phase I – Consolidation:
In Phase I, we build a resilient business model in the wake of
liquidity tightening, COVID-19 and other macro-economic headwinds. During this phase, the
business focused on: (i) improving capital adequacy and deleveraging; (ii) making the
wholesale book more granular; (iii) increasing provisions; and (iv) strengthening
liabilities side.
Phase II -Trans ition + quantum growth:
In Phase II, between June 2021 and March 2022, the business
transitioned from a wholesale-driven to a diversified business, post DHFL acquisition.
There were three components to this phase:
(i) Organic build-out of the retail lending business: In 2020, we
embarked on the journey of building a technology led retail lending business, which is
‘digital at its core and ‘phygital (i.e., physical, as well as
digital) at the customers end. In November 2020, we launched our multi-product
retail-lending platform and pivoted the business towards affordable and mass-affluent
categories, in tier 2 / 3 cities, while making the book more granular.
(ii) Significant loan book growth and scale through the DHFL
acquisition: In September 2021, we completed the acquisition of DHFL, which led to
significant increase in retail loans (~4x increase in book post-merger) and loan book
diversification – as the share of retail loans increased to 41% (post-merger) versus
16% as of March 2021. The acquisition also created a platform with pan-India presence,
with 301 branches across 24 states / union territories, and access to a customer pool of
~1 million (life-to-date).
(iii) Increased loan book granularity: Improved the granularity of the
wholesale book, by reducing single-borrower exposures.
Phase III – Sustainable growth and profitability:
With the DHFL acquisition and integration now complete, we are now
embarking on ‘Phase 3 of our transformation journey and have put in place the
appropriate levers for improved performance in future.
In Phase III, the focus will be delivering sustainable growth and
profitability. Our approach to building and managing the financial services business will
be focused on creating a balance between the three principal vectors of the business
– growth, risk, and profitability.
Scale-up the RetailAUM
INR 29,374 Cr. in FY 23 versus INR 21,040 Cr. in FY 22
Leverage DHFLs platform to cross-sell
Cross Sell Disbursements of INR 2,483 Cr. over last one year.
Significantly increase retail loans share to two-third
Constantly moving towards the guidance of two-third retail loans share,
Wholesale : Retail mix stood at 50 : 50 in Q4 FY23.
Demerger and Simplification of Corporate Structure
Completed the demerger and simplified the Corporate Structure; Created
two separate listed Entities for Financial Services (Piramal Enterprises Ltd.) and
Pharmaceuticals (Piramal Pharma Ltd.)
One Year ofDHFL Acquisition:
During FY23 PEL completed one year of DHFLs acquisition and
integration into Piramal Capital Housing Finance Limited (PCHFL). Piramal Capital &
Housing Finance Limited (PCHFL) merged into DHFL with effect from September 30, 2021
pursuant to the reverse merger as per the resolution plan. Consequently, the name of the
Company was changed from ‘Dewan Housing Finance Corporation Limited to
‘Piramal Capital & Housing Finance Limited with effect from November 3,
2021.
Consideration paid for the DHFL acquisition:
The total consideration paid by the Piramal Group of ~Rs. 34,250 Crores
at the completion of the acquisition, includes an upfront cash component of ~Rs. 14,717
Crores and issuance of debt instruments of ~Rs. 19,532 Crores (10-year NCDs at 6.75% p.a.
on a half-yearly basis).
A value-accretive acquisition:
The acquisition was carried out at a very attractive purchase price of
<0.4x of DHFLs assets. PEL being well capitalised, this acquisition was achieved
without infusing or raising any additional equity. The yields of the acquired retail book
were >11% whereas the cost of borrowings was ~7%, making the deal accretive from the
onset. Off-balance sheet, fee-earning securitised pool of assets worth 18,747 Crores (as
of March 2022) was acquired in addition to the loan book. The deal factored in any
foreseen asset quality risks and so far, has been in line with expectations, providing
significant upside from the recoveries of the POCI book. The cumulative recoveries from
the POCI book stood at XX Crores as on March 2023.
(A)Retail Lending:
We are building a well-diversified loan book across the product
categories and customer segment, catering to the unserved financing needs of the
‘Bharat market. As of March 2023, the Retail loan AUM increased by 40% to Rs.
29,374 Crores from Rs. 21,040 Crores as of March 2022.
Retail loans accounted for 64% of PCHFLs loan book as of March
2023 as compared to 42% as of March 2022.
‘Twin Engine Strategy for Retail Lending:
We adopted a twin-engine approach to build our multi-product retail
business, in line with the stated strategy to diversify our loan book and make it more
granular to reduce the concentration risk.
(i) Engine #1 -‘Phygital secured lending:
‘Phygital lending encompasses traditional branch-led secured
affordable housing and MSME lending business, catering to the budget customers of
‘Bharat, while being digital at the core. It is characterised by high-touch
intensity model with a higher proportion of self-employed customers. Furthermore, it
constitutes the major (~90%) part of the overall retail AUM. Secured lending will continue
to build the AUM as these are long duration loans.
The business leverages the widespread network of branches in tier II
and tier III cities across India to bridge the lending gap in the under-served
‘Bharat market, while serving self-employed, cash salaried, small business
owners, and salaried customers. We have a pan-India distribution network, with extensive
presence in the ‘Bharat market. Further, we have made significant progress on
re-activation of DHFL branches.
(ii) Engine #2: Digital lending-originated through digital assets and
partnerships
Our second engine of growth in the retail lending business is digital
embedded finance. This includes small ticket and short-duration loans (such as personal
loans, purchase finance, merchant buy-now-pay-later, etc.), originating through digital
channels and partnerships, which act as a customer acquisition engine, adding over 90% of
new customers. We aim to be preferred lending partners for the consumer-tech ecosystem,
offering personalised financing solutions to customers.
We continue to diversify across product categories, business models,
and partners. As of March 2023, we had launched 20 diverse programs with fintech NBFCs,
transaction platforms, ed-techs, MSME platforms, and gold collateral companies. The
categories in focus include consumer fintech, pre-owned cars, education, healthcare
services, merchant commerce, digital personal loans, and gold loans.
Investing in capability-building initiatives:
In order to build a sustainable business supported by a superior
technology architecture and the right talent, we are committed to invest across technology
/ analytics, talent, and branch network.
In the past few months, we have managed to bring our entire business on
cloud, assembled a future-ready tech stack, with a combination of off-the-shelf and
internally engineered technology.
The business is using modular, next-gen capabilities to re-imagine the
entire customer journey. Also, we have on-boarded a healthy mix of experienced, diverse,
and tech-native management professionals to drive execution of the retail lending
business, going forward. In addition, the Company plans to significantly expand its branch
network over the next 5 years.
(A)Wholesale Lending:
Increasing the granularity of the wholesale financing loan book
Significant consolidation has taken place in the NBFC sector,
especially in the wholesale lending / developer financing business. We are among one of
the few NBFCs that have continued to remain strong even after this prolonged crisis
environment. Hence, there exists a significant gap in a large addressable market, having
only a few credit providers.
Our new approach, as part of ‘wholesale lending 2.0, will be
more calibrated, with focus on smaller loans; granular book, and cash-flow backed lending.
It will be based on superior risk management. We will create focused, analytics-driven
underwriting vertical. Also, there would be pro-active asset monitoring with early warning
signals. Furthermore, high-yields loans will be done under fund structures, going forward.
(B) Asset Quality:
The GNPA ratio stood at 3.5% as of March 2023 versus 2.3% as of March
2022, and the net NPA ratio stood at 1.9%as of March 202 3 versus 1.2% as of March 2022.
Total Provisions were Rs. 2,980 Crores as on March 2023 (equivalent to
6% of AUM) as compared to Rs. 2,755 Crores as on March 2022 (equivalent to 5.3% of AUM).
(C)Liabilities side:
Focus on lowering the cost of borrowings, driven by diversification of
loan book growth and funding sources.
We continue to diversify the borrowing mix towards stable, long-term
funding sources, which has significantly strengthened our ALM profile.
With a significant share of our borrowings as ‘fixed rate
liabilities and a bulk of assets at floating rate, as of March 2023, the Company is
well positioned to navigate the rising interest rate environment.
(D)Capital:
Further optimise capital utilisation through loan book growth and
inorganic initiatives.
As of March 31, 2023, Companys Capital adequacy ratio was 27% and
Tier I ratio was 27%. Corresponding figures as on March 31, 2022were 22.03% and 21.12%
respectively. The year-on-year change in capital adequacy reflects the impact of DHFL
acquisition, which was a major step towards efficiently optimising and deploying capital.
FUTURE OUTLOOK
Larger HFCs / NBFCs with liquidity support have continued to drive the
sectors overall credit growth. Between FY2019 and FY2023, large HFCs / NBFCs have
outpaced the overall sector, in terms of credit growth each year. HFCs / NBFCs with strong
parentage will continue to have better access to funding and are well-positioned to
navigate the changing regulatory environment.
Furthermore, the sector will witness further consolidation, as NBFCs
with a strong capital base, low leverage, and high on-balance sheet liquidity, will
continue to gain market share.
Key strategic priorities for the Company:
Transforming into a well-diversified business, with the aim to achieve
a loan book mix of ~2/3rdretail and ~1/3 rdwholesale in 5 years
Focus on lowering cost of borrowings, driven by diversification of loan
book growth and funding sources
Further optimise capital utilisation through loan book growth and
inorganic initiatives
Maintaining adequate provision to manage future contingencies
Improve profitability through growth, lower borrowing costs, change in
retail product mix and capital optimisation
MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/ INDUSTRIAL RELATIONS FRONT,
INCLUDING NUMBER OF PEOPLE EMPLOYED
The Company has been in the growth phases and the focus was on building
a world class team. We have hired 2,850 employees in a span of one year. We have hired a
young and talented workforce from within the industry. Our average age of employees is 33
years. We have built a platform for imparting functional training that enables job
readiness for our hires. The focus in future will also be attracting and retaining the
best talent and building processes that nurture talent.
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