northlink fiscal capital services ltd Management discussions

INDUSTRY STRUCTURE AND DEVELOPMENTS:

GLOBAL ECONOMY OVERVIEW

The financial year 2023 continued to face the snowballing effects from continued headwinds, most notably the COVID-19 pandemic and its newer variants, geopolitical turmoil with the Russia-Ukraine war entering its second Year, energy crises in Europe, among others. This raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike.

The baseline forecast for global output growth estimated at 3.4 percent in 2022 likely to fall to 2.8 percent in 2023, before rising to 3.0 percent in 2024. For advanced economies, growth is projected to decline by half in 2023 to 1.3 percent, before rising to 1.4 percent in 2024. About 90 percent of advanced economies are expected to see a decline in growth in 2023. For emerging market and developing economies, economic prospects are on average stronger than advanced economies, but these prospects vary more widely across regions. On an average, growth is expected to be 3.9 percent in 2023 and is likely to rise to 4.2 percent in 2024.

India and China are expected to contribute more than half of global growth in CY 202223, according to the International Monetary Fund.

Source: World Economic Outlook, IMF

Performance of major economies United States: Reported GDP growth of 2.1% as compared to 5.9% in 2021 China: GDP growth was 3% in 2022 as compared to 8.1% in 2021 United Kingdom: GDP grew by 4.1% in 2022 as compared to 7.6% in 2021 Japan: GDP grew 1.7% in 2022 as compared to 1.6% in 2021 Germany: GDP grew 1.8% as compared to 2.6% in 20

OUTLOOK

The global economy is expected to grow by 2.8% in 2023, influenced by the ongoing Russia-Ukraine conflict. Concurrently, global inflation is projected to fall marginally to 7%. Despite these challenges, there are positive elements within the global economic landscape. The largest economies like China, USA, the European Union, India, Japan, United Kingdom and South Korea are not in a recession. Approximately 70% of the global economy demonstrates resilience, with no major financial distress observed in large emerging economies. The energy shock in Europe did not result in a recession, and significant developments, including Chinas progressive departure from its strict zero-covid policy and the resolution of the European energy crisis, fostered optimism for an improved global trade performance. Despite high inflation, the US economy demonstrated robust consumer demand in 2022. Driven by these positive factors, global inflation is likely to be still relatively high at 4.9% in 2024. Interestingly, even as the global economy is projected to grow less than 3% for the next five years, India and China are projected to account for half the global growth.

(Source: IMF)

INDIAN ECONOMIC OVERVIEW

Overview: Even as the global conflict remained geographically distant from India, the ripples comprised of increased oil import bills, inflation, cautious approach of governments and a sluggish equity market. The Indian economy grew by 7.2% for FY 22-23. India emerged as the second fastest growing G20 economy in FY 22-23. India had retained its position as the fifth-largest global economy and was seen along with China as a principal driver of global economy.

Growth of the Indian economy	FY20	FY 21	FY 22	FY23
Real GDP growth (%)	3.7	(6.6)	8.7	7.2

Growth of the Indian economy quarter by quarter FY 22-23

	Q1FY23	Q2FY23	Q3FY23	Q4FY23
Real GDP growth(%)	13.1	6.3	4.4	6.8

(Source: Budget FY24; Economy Projections, RBI projections)

Inflation

The financial sector plays a fundamental role in its economys growth and sustainable development. However, some macroeconomic variables can impact the performance of this sector, one of them being inflation. Inflation occurs when there is a general increase in the price of goods and services, which lead to a fall in the purchasing value of money.

Higher inflation also implies less long-run financial activity in economies with high inflation, leading to intermediaries lending less and allocating capital less effectively, equity markets falling short of liquidity. For 2023, inflation stood at 7.44% against the 6.71% for the year 2022.

According to a recent report by the IMF, inflation is expected to remain elevated, driven by the Russia-Ukraine crisis-induced commodity price increases and broadening price pressures. The disruptions caused by the war have forced the Reserve Bank of India to reassess its accommodative policy stance. In its latest monetary policy review, the central bank said it would priorities keeping inflation in check over incentivizing growth, and raised its inflation forecast for the year to 5.7 % from 4.5 %, assuming crude oil prices at $100 per barrel.

(Source: The Economics Times, April 2022)

INDUSTRY OVERVIEW NBFC Sector Analysis

Over the past few years, Non-Banking Financial Companies (NBFCs) have played a prominent role in the Indian financial system. They provide financial inclusion to the underserved section of the society that does not have easy access to credit. NBFCs have revolutionized the Indian lending system and have efficiently leveraged digitization to drive efficiency and provide customers with a quick and convenient financing experience.

The plethora of services include vehicle financing, MSME financing, home financing, microfinance and other retail segments The Government has consistently worked on the governance measures to strengthen the systemic importance of the NBFCs and NBFC Sector has further seen the growth of approx. 25% YoY basis. As of January 31, 2022 there were approximately 9,443 NBFCs registered with Reserve Bank of India (RBI) as of 31^st March 2023.

The pandemic impacted the NBFCs operations, leading to decline in disbursements across the sectors. However, the support and focus of the Government through various liquidity measures such as repo rate, targeted long-term repo operations, special liquidity scheme and partial credit guarantee scheme, kept the sector afloat. The growth was mainly led by growth in the housing, auto, gold and other retail segments which stood resilient even in the previous fiscal year.

Pursuant to RBI circular RBI/2021-22/125 DOR/STR/REC.68/21.04.048/2021-22 dated November 12, 2021, on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances - Clarifications, the Company has revised its process of NPA classification to flagging of the borrower accounts as overdue as part of the day-end processes for the due date.

EVOLVING REGULATORY LANDSCAPE

Over the past few years, financial services as a sector has come under increased scrutiny and therefore, greater regulatory supervision. This is especially true for NBFCs, as over the years, the sector has undergone considerable evolution in terms of size, complexity and interconnectedness within the financial sector. With a view to bridge the regulatory gaps between the Banks and NBFCs, NBFCs are now increasingly being subject to regulations and guidelines at par with banks. Some of the key regulations and guidelines aimed at bringing this regulatory convergence between the Banks and NBFCs are:

• Scale Based Regulations where NBFCs would be classified into layers on the basis of their size, activity and perceived risk. Effective October 2022, the said regulations would put in place enhanced regulatory standards pertaining to Capital, Prudential and Governance requirements. NBFCs which warrant enhanced regulatory requirements based on a set of parameters and scoring methodology will feature in the upper layer, while the middle layer will comprise of deposit-taking NBFCs irrespective of asset size, non-deposit-taking NBFCs with assets worth Rs 1,000 crore or more, as well as Housing Finance Companies.

The lowest layer will comprise NBFCs currently classified as non-systemically important non-deposit taking NBFCs (NBFC-ND). The threshold for NBFCs falling in the layer will be raised to Rs. 1,000 crore.

The middle layer will consist of systemically important non-deposit taking NBFCs (NBFC-ND-SI) and deposit taking NBFCs (NBFC-DJ. In addition, a few other types of NBFCs, such as housing finance companies (HFCs), infrastructure finance companies, infrastructure debt funds, standalone primary dealers (SPDs) and core investment companies (CICs) will also feature in this layer on the basis of their activity. These NBFCs shall be subject to regulatory structure as applicable for NBFC-ND-SI and NBFC-D at present.

The upper layer will consist of only those NBFCs which are specifically identified as systemically significant among NBFCs, based on a set of parameters, viz., size, interconnectedness, complexity and supervisory inputs. In addition to the regulations applicable to the previous layer, a set of additional regulations will apply to these NBFCs.

• Prompt Corrective Action (PCA) framework prescribed for NBFCs as a tool for effective market discipline, to enable Supervisory intervention at appropriate time which require NBFCs to initiate and implement remedial measures in a timely manner, so as to restore its financial health. With the NBFC sector witnessing a high growth trajectory over the past decade and substantial inter-connectedness within the financial ecosystem, this framework is expected to further strengthen the supervisory tools available to the regulator to manage N BFCs.

• RBI circular dated November 12, 2021, pertaining to asset classification of NBFCs, whereby certain aspects such as classification of an account as Special Mention Account (SMA) and Non-Performing Asset [NPA) were clarified / harmonized. This has again been brought to ensure uniformity in the implementation of Income Recognition, Asset Classification and Provisioning norms across all lending institutions.

• RBI has tightened the norms around appointment of Auditors with issue of ‘Guidelines on appointment of Statutory Auditors with a view to strengthen governance relating to appointment of auditors and to improve the overall quality and standards of financial reporting of RBI regulated entities. It sets out the criteria for audit firms regarding the number of audits they can take at a time and how they should conduct it, while requiring joint audits for entities with asset size of more than Rs. 15,000 crore.

• Extending Risk Based Internal Audit framework to NBFCs to enhance the quality and effectiveness of their internal audit systems and processes. It requires internal audit function to broadly assess and contribute to the overall improvement of the Organizations governance, Risk Management and control processes using a systematic and disciplined approach.

• Amendment in Listing Obligations and Disclosure Requirements by SEB1 enhancing Disclosure norms and Compliance requirements for debt listed entities. Multiple provisions which were hitherto applicable only to equity listed entities were made applicable to High Value Debt Listed Entities ("HVDL"). HVDLs are entities with listed NCDs having outstanding value of Rs. 500 crore and above. Further, certain provisions which were already applicable to debt listed entities have also been amended resulting in additional compliances. The amendments encompassed areas such as board composition including independent directors, related party transactions, corporate governance requirements, disclosure of information, financial results and submissions to stock exchanges among others.

• Introduction of guidelines on declaration of dividends by NBFCs with the intent to infuse greater transparency and uniformity in practice. It requires NBFCs to comply with the minimum prudential requirements including capital adequacy and net NPA levels to be eligible to declare dividend within the prescribed Dividend Payout ratio.

While the parity in regulations is expected to improve the overall health and shore up the governance standards for the NBFCs in the medium to long term, the sector may face some headwinds in the immediate to short term. However, the impact may not be significant for larger, well capitalized NBFCs such as TCFSL which are well placed to navigate the evolving regulatory landscape.

OPPORTUNITIES & THREATS, PERFORMANCE AND OUTLOOK

The Company is expecting good opportunities in the upcoming financial year. Interest Income is the main source of the revenue of the company, so Board has taken a balanced approach for granting loan to the different sectors of the economy. Board has always adopted a cautious approach with respect to granting a loan to the existing consumers as well as also takes a pro-active approach to explore the new opportunities and market for its business with limited level of risk. After stabilization for existing business, the company will foray into other related areas to have good growth in future.

However, threats are perceived from its existing and prospective competitors in the same field also the changes in the external environmental may also present threats to the industry i.e. Inflationary pressures, slowdown in policy making and reduction in household savings in financial products, Competition from local and multinational players, Execution risk, Regulatory changes, Attraction and retention of human capital are the major setbacks for NBFCs. The company bears the normal risk in terms of inherent business risk in the kind of business the company is into.

The biggest challenge before NBFCs is that they are facing competition from banks and financial institutions, due to their ability to raise low cost funds which enables them to provide funds at much cheaper rate. More stringent capital adequacy norms have been stipulated by RBI for NBFCs which is making difficult for them to give cheaper finance.

• SEGMENT WISE / PRODUCT WISE PERFORMANCE

The Company being a NBFC mainly engaged in loan and other financing activities during the year under review, hence there was no requirement of segment-wise reporting.

• INTERNAL CONTROL AND THEIRADEQUACV

Internal Control measures and systems are established to ensure the correctness of the transactions and safeguarding of the assets of the Company. The Management ensures adherence to all internal control policies and procedures as well as compliance with regulatory guidelines. The audit committee of the Board of Directors reviews the adequacy of internal controls. This has improved the management of the affairs of the Company and strengthened transparency and accountability

• Risk and Concerns:

The NBFC industry in general faces the risk of re-entry and new entry of players and existence of several unorganized regional players increasing the competition which mainly affects the asset quality.

This is further characterized by captive NBFCs floated by other business houses. The ever existing systemic and delinquency risks and fluctuations in interest rates make the companies more vulnerable. Due to stiff competitions in the finance field where the companys activities are centered in, the overall margins are always under pressure, but maintainable with the constant effort and good services rendered by the company. Deployment of funds in sensitive and volatile sectors increases the risk exposure while concentration risk increases dependency.

The companys business may be impacted by introduction of new policies or changes in existing policies. The companys management team keeps a close eye on policy regulations and formulates company plans appropriately.

• FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The Company has achieved total revenue Rs. 50.14 Lakh and earned profit after tax of Rs. 5.83 lakh.

• MATERIAL DEVELOPMENT IN HUMAN RESOURCES AND INDUSTRIAL RELATION FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

Your company continues to lay great stress on its most valuable resource people. Continuous training, both on the job and in an academic setting, is a critical input to ensure that employees at all levels are fully equipped to deliver a wide variety products and services to the customers of the company. The company had employed 6 persons during thefinancial year 2022-23. Industrial Relations throughout the year continued to remain very cordial and satisfactory.

• KEY FINANCIALS RATIO

Sr. Ratio No.	31.03.2023 (In %)	31.03.2022	Variation	Explanations
1. Current Ratio	13.68	14.25	-4.00%	Most of the Current Liabilities Paid off.
2. Debt Equity Ratio	1.86	6.54	71.55%	Most of the debt repaid.
3. Net Profit Margin	11.63	3.12	272.55%	Net Profit increased due to higher revenue
4. Operating Profit Margin	0.00	0.00	100.00%	N.A. due to no ?
5. Inventory Turnover Ratio	0.00	0.00	100.00%	No turnover of commodity during 22-23
6. Debtor Turnover Ratio	0000	0.00	100.00%	No turnover of commodity during 22-23
7. Interest Coverage Ratio	0.00	0.00	100.00%	No interest paid during 2022-23
8. Return on Net Worth	0.11	0003	236.36%	Net Profit increased 1

• DETAILS PERTAINING TO NET-WORTH OF THE COMPANY:

Sr. No. Particulars	31.03.2022 (In Rs. Lacs)	31.03.2021 (In Rs. Lacs)
1. Net worth	595.49	Rs. 595.00

• DISCLOSURE OF ACCOUNTING TREATMENT:

The Company has followed the same Accounting Standard as prescribed in preparation of Financial Statements.

• CAUTIONARYSTATEMENT

Statements in the Management Discussion and Analysis Report describing our company objectives, expectations or predictions may be forward looking within the meaning of applicable regulations and other legislations. Actual results may differ materially from those expressed in the statement. Important factors that could influence company operations include global and domestic financial market conditions affecting the interest rates, availability of resources for the financial sector, market for lending, changes in regulatory directions issued by the Government, tax laws, economic situation and other relevant factor.