gilada finance investments ltd Management discussions

MACROECONOMIC OVERVIEW

Financial year 2022-2023 began on a mixed note. On the positive side, after wreaking havoc for almost two years, the impact of the COVID-19 pandemic on lives and livelihoods started receding. This was aided by a mass immunization programme and the advent of a less virulent variant called omicron. However, the flip side was the impact of inflationary trends, supply chain disruptions emanating from China, and the start of the Russia-Ukraine conflict impacting commodity prices.

In FY2023, the Indian economy faced multiple challenges. The countrys retail inflation indicator, consumer price inflation (CPI) inched above the RBIs tolerance range in January 2022. It remained above the target range for almost twelve months before retracting within the upper tolerance of 6% in November 2022. Rising international crude prices coupled with domestic weather conditions like excessive heat and unseasonal rains kept food prices high, fueling retail inflation. The Government cut excise and customs duties and restricted exports to cool off inflation. The RBI, like other central banks, raised the monetary policy rates and reduced excess systemic liquidity. Major areas of concern for the economy were elevated commodity prices leading to a depreciation of the Indian rupee, higher retail inflation (both core and food inflation) leading to the RBI raising interest rates and rationalizing systemic liquidity, and a rising current account deficit (CAD).

However, despite these critical challenges, India emerged as the fastest growing major economy in the world. The second advance estimate of national income released by the central statistics office (CSO) on 28 February, 2023 expects real GDP growth in FY2023 to be 7.0%.

The calendar year 2023 began on a promising note with improved supply conditions, resilient economic activity, and some degree of stability in financial markets. In just a few weeks of March 2023 the sentiment changed as fresh headwinds emerged from the banking sector turmoil in some advanced economies. Bank failures in the USA and Switzerland with their contagion risks came to the forefront. However, the banking and non-banking financial services sector in India remained healthy and evolved in an orderly manner.

On balance, we believe that the Indian economy has weathered the external shocks reasonably well. The proof of it is that the country has emerged as the fastest growing major economy in the world.

INDUSTRY OVERVIEW

NBFCs have become important constituents of Indias financial sector and have been recording higher credit growth than scheduled commercial banks (SCBs) over the past few years. NBFCs continue to leverage their superior understanding of regional dynamics and customised products and services to expedite financial inclusion in India. Lower transaction costs, innovative products, quick decision making, customer orientation and prompt service standards have typically differentiated NBFCs from banks. Considering the reach and expanse of NBFCs, these are well-suited to bridge the financing gap in a large country like India.

In recent years as the impact of the second COVID-19 wave waned and the third wave turned out to be shortlived, the NBFC sector regained momentum, cushioned by proactive policy measures announced by the RBI and the Government. The economic survey has observed that credit extended by NBFCs is picking up momentum, with the aggregate outstanding amount at H 31.5 trillion as on September 2022. NBFCs continued to deploy the largest quantum of credit to the industrial sector, followed by retail, services, and agriculture. Loans to the services sector (share in outstanding credit being 14.7%) and personal loans (share of 29.5%) registered a double digit growth.

Given the increasing importance of NBFCs, the RBI, in the last few years, has increased its regulatory oversight over the sector. Multiple guidelines such as (i) vigil over asset-liability management practices, (ii) maintaining liquidity ratios, (iii) increased reporting requirements, and

(iv)scale-based regulation, have led to NBFCs adopting practices in line with banks. The regulatory vigil is based on four key cornerstones of: (i) responsible financial innovation, (ii) accountable conduct, (iii) responsible governance, and (iv)centrality of the customer.

The recently adopted changes to the finance bill withdrawing exemptions on long term capital gains to investors in debt mutual funds is estimated to have minimal impact on the NBFC sector given limited exposure of mutual funds in long term papers of NBFCs.

The steady momentum of NBFCs is heavily backed by robust demand for personal loans, which they need for their growth and working capital. According to ICRA Analysis, NBFCs are expected to witness 8-10% growth in AUM in FY 2022- 23 compared to 5-7% growth in FY 2021-22. Despite yield pressure, the sector is also expected to improve its asset quality metrics.

According to the Reserve Bank of India (RBI) data, outstanding bank credit to NBFCs has significantly increased from Rs. 3.68 Lac crore in 2017 to Rs. 13.20 Lac crore as of December 2022. NBFCs are expected to play a crucial role in financing Indias transition from the worlds fifth-largest to the third-largest economy by the end of this decade. The Government is also focusing on developing NBFCs with high emphasis on driving quality corporate governance across these entities. Following sluggish years amid liquidity stress, NBFCs have bounced back strongly with higher capital levels, reasonable stability in delinquency accounts, better asset quality and larger balance sheets. Stronger risk assessment frameworks, Government support such as debt moratorium and liquidity enhancement measures and broader economic revival have helped them tide through these challenges and pursue innovative strategies to meet evolving opportunities.

THECOMPANY

The Company is a prominent NBFC in the retail finance industry in India. The regulatory framework for NBFCs to introduce scalebased regulation came into effect from October 01,2022. Under the new framework, NBFCs are placed in one of the four layers viz., Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and a possible Top Layer (TL) based on their size, activity, and perceived risks. The new framework tightens regulatory oversight of the sector with stringent norms for the Upper layers. The Company has been classified as Base Layer under Scale Based Regulatory Framework for NBFCs as per the list issued by RBI. The Company is on schedule in implementing the applicable guidelines and regulatory framework. The Company continues to concentrate on lending to MSMEs and in particular the secured loan segment where the collection efficiency is better. It also aims at improving the business volumes of Vehicle loans, Commodity loans, loans against landed properties.

Key Highlights for FY 2022-23

• Assets under management (AUM): increased Rs.15.49 Crore to 19.31 Crores

• Total income: increased from Rs.3.76 Crores to 5.81 Crores.

•Net interest income (NII): increased from Rs.3.54 Crores to 3.51 Crores.

• Operating expenses to NII stood at 95.38%.

• Impairment on financial investment: NIL.

• Profit before tax (PBT): increased fromRs.1.61 Crores to 2.05 Crores.

• Profit after tax (PAT): increased from Rs.1.32 Crores to 1.52 Crores.

• Gross NPA stood as 2.96 % and Net NPA stood as 2.42 %

• Capital adequacy ratio as of 31 March 2023is 76.61%, which is well above the RBI norm of 15%. Tier I capital adequacy is67.40%.

RISK MANAGEMENT

As a NBFC, GFIL is exposed to credit, liquidity, operational, market and interest rate risk. It continues to invest in talent, processes, and emerging technologies to build advanced risk management capabilities. The Companys sustained efforts to strengthen its risk framework have resulted in stable risk metrics.

The Company promotes a strong risk culture that is embedded across the organisation. At the highest level, the Board of Directors has established a Risk Management Committee (RMC), which assists the Board in maintaining oversight and review of the risk management principles and policies, strategies, risk appetite, processes, and controls. This is enabled by a robust governance system and review mechanisms which include quarterly risk management review.

With the impact of the pandemic waning during FY2023, the risks revolving around inflationary trends, elevated interest rates and tighter systemic liquidity emerged as challenges which needed to be addressed. GFILs risk framework has ensured that, despite these risks, its net interest income, NPAs and liquidity management were not impacted.

Moreover, the Company has a robust asset-liability management framework and maintains enough liquidity buffer to meet its repayment obligation and emerging credit demand. By virtue of effective focus on capital and liquidity management, reduction in operating expenses, focus on debt management, servicing capability and strengthening of underwriting norms combined with a very sharp view on risk metrics, the Company ought to continue to show higher level of efficiencies in all parameters.

SWOT Analysis

Strengths

• A unique relationship-based business model with extensive experience and expertise in credit appraisal and collection process.

• Well-defined and scalable organizational structure based on product, territory and process knowledge

• Technology platform integrated across process as well as for onboarding customers

• Consistent financial track record with rapid growth in AUMs

• Robust financial management with balanced ALMs and lower NPAs

• Experienced senior management team

• Strong relationships with public, private banks, institutions and investors Weakness:

• Business and growth are directly linked with the GDP growth of the country.

• The Companys customers, MSMEs, are more vulnerable to the negative effects of economic downturns

Opportunities:

• Increasing Government regulations and tightening of norms to restrict competition and deter the entry of unorganized players, thus benefiting the leaders in the industry

• Increasing geographical reach and a higher customer base create opportunities to penetrate further into the hinterland

• Increasing disposable income, change in consumption pattern and shift in mindset to spend bringing in higher demand for consumer loans

• Government initiatives to increase spending in the MSME segment to increase start-up businesses and thus demand MSME loans

• Indias financial inclusion is still at a nascent stage, providing an opportunity for NBFCs to fill the gap and reach the unbanked and under banked population

• NBFCs have opportunity to provide financing solutions to MSMEs, which have traditionally struggled to access credit from banks

• Growth in the commercial vehicle, passenger vehicle and tractors market, presents opportunities for financing.

• Meeting working capital needs of the customers in the commercial vehicle eco-system

• Higher budgetary allocation by the Government to boost the infrastructure sector, involving the construction of roads, new airports, ports, etc., creates a huge demand for commercial vehicles

Threats:

• Competition from captive finance companies, small banks, FinTechs and new entrants

• Inadequate availability of bank finance and an upsurge in borrowing costs

• External risks associated with liquidity stress, political uncertainties, fiscal slippage concerns, etc.

• Increasing competition from global and local competitors in terms of product development and technology innovations, leaving very thin margins of error

• Regulatory and compliance-related changes in the sector affecting NBFCs

SEGMENT-WISE PERFORMANCE

There is no separate reportable segment as per IND AS 108 on "Operating Segments" in respect of theCompany.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has a well-defined organizational structure, documented policy guidelines, and a defined authority matrix that ensures efficiency of operations, compliance with internal policies and applicable laws and regulations, as well as protection of resources. The Company believes that a strong internal control system and processes play a critical role in the day-to-day operations of the Company. To this end, the Company has put in place an effective internal control system to synchronize its business processes, operations, financial reporting, fraud control, and compliance with extant regulatory guidelines and compliance parameters. Strict internal control and systems are devised as a depiction of the principles of the highest standards of governance. The Company ensures that a standard and effective internal control framework operates throughout the organization, providing assurance about safekeeping of the assets and execution of transactions as per the authorization in compliance with the internal control policies of the Company. The internal control system is supplemented by extensive internal audits, regular reviews by the management and standard policies and guidelines, which ensure reliability of financial and all other records. The Management periodically reviews the framework, efficacy, and operating effectiveness of the Internal Financial Controls of the Company, broadly in accordance with the criteria established under the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Tredway Commission ("COSO"). The Internal Audit reports are periodically reviewed by the Audit Committee. The Company has, in material respect, an adequate internal financial control over financial reporting and such controls are operating effectively. Internal Audits are carried out to review the adequacy of the internal control systems, compliance with policies and procedures. Internal Audit areas are planned based on inherent risk assessment, risk score and other factors such as probability, impact, significance and strength of the control environment. Its adequacy is assessed, and the operating effectiveness was also tested.

FINANCIAL PERFORMANCE

During the financial year under review, your company has made substantial disbursements and was able to report positive returns. Detailed financial performance has been given in Directors Report.

HUMAN RESOURCES

The Company values its human resources and believes that the success of an organization is directly linked to the competencies, capabilities, contributions, and experience of its employees. The Companys core philosophy is centered around promoting a safe, healthy, and happy workplace while fostering a conducive work environment among its employees. The HR department promotes a culture of integrity, honesty and a constant learning attitude, while also maintaining cordial relationships, equal opportunities and policies to prevent harassment. The Company constantly works towards promoting a respectful and secure workplace and aims to provide its employees with careers, not just jobs, and creating an environment of trust, confidence and transparency.

The HR policies of the Company are designed to empower its workforce with knowledge and build their capabilities to grow and prosper in a healthy work environment. Through a performance-driven culture, the Company motivates its employees to deliver excellence. As we scale up our business and strive to build a future-ready organization, talent attraction and retention, employee development and well-being, equal opportunities and harmonious relationships are key areas of focus. Our HR processes are guided by well-defined competencies and Company values.

CAUTIONARY STATEMENT

The statements made in this report describe the Companys objectives and projections that may beforward looking statement within the meaning of applicable laws and regulations. The actual result mightdiffer materially from those expressed or implied depending on the economic conditions, governmentpolicies and other incidental factors which are beyond the control of the Company. The Company is not underany obligation to publicly amend, modify or revise any forward-looking statements on the basis of anysubsequent developments, information or events.

BY AND ON BEHALF OF THE BOARD OF DIRECTORS FOR GILADA FINANCE AND INVESTMENTS LIMITED

RAJGOPAL GILADA	SAMPATKuMAR GILADA
MANAGING DIRECTOR	DIRECTOR
DIN: 00307829	DIN: 02144736
DATE: 10.08.2023 PLACE: BANGALORE