shriram transport finance company ltd Management discussions

ECONOMY OVERVIEW Global Economy

Manoeuvrings through challenges in 2022, the global economy has positioned itself with better prospects in 2023 and onwards. Post Covid-19 pandemic, the global economy is gradually recovering from a series of disruptions with supply-chain disruptions easing and energy and food markets stabilising after the Russia-Ukraine crisis. Additionally, most central banks have tightened monetary policy extensively and synchronously, which is expected to result in inflation, the most pressing issue in 2022, moving back towards its target range. According to the International Monetary Funds latest forecast, global growth is expected to reach 2.8% in 2023 and will rise to 3.0% in 2024.

Outlook

The global economy is currently bracing itself for slower growth, primarily due to the disruptive impact of the Russia- Ukraine conflict and the tightening of monetary policy. These factors have led to significant supply-side disruptions, creating challenges for economies around the world. However, amidst this uncertain outlook, certain economies are expected to exhibit resilience and drive global growth.

Indian Economy

The Indian economy demonstrated an exceptional performance during FY 2022-23, positioning itself as one of the fastest-growing economies. The nations GDP growth rate stood at 7%, driven by private sector consumption and increased Government focus on infrastructure development. Despite global macroeconomic challenges and tighter domestic monetary policies aimed at addressing inflationary pressures, the growth momentum remained steady, showcasing the underlying strength of Indias economy in recovering and revitalising growth drivers.

The Union Budget FY 2023-24 aimed at enhancing the nations positioning with increased capital expenditure to Rs. 10 Lac crore, marking an increment of 33% in capital outlay as compared to FY 2022-23. The governments focus on capital expenditure, strong manufacturing capacity utilisation, double-digit credit growth, and moderation in commodity prices are likely to enhance manufacturing and investment activities. This move is highly optimistic for key industries like manufacturing, infrastructure and healthcare coupled with the Governments introduction of various measures to support economic growth including the National Infrastructure Pipeline (NIP) and the Production- Linked Incentive (PLI) schemes.

Aggregate demand conditions were resilient in Q4 of FY 2022-23, even as private consumption showed some signs of slowdown. A favourable rabi crop is expected to boost rural demand, while the resilience of contact-intensive services is anticipated to support urban demand. Rural demand indicators such as consumer non-durables, tractor and two-wheeler sales registered healthy growth. Whereas Urban demand indicators like passenger vehicle sales and credit card spending registered robust growth in February, while consumer durables contracted in January.

Enterprises in the services and infrastructure sectors exhibit rising optimism about the overall business situation with higher selling prices anticipated to drive profit margin improvement. Investment activity exhibited buoyancy on the back of the Governments thrust on infrastructure spending, high-capacity utilisation, and revival in corporate investment in certain key sectors. Non-food bank credit rose by 15.4% (y-o-y) as of March 2023, and the total flow of resources to the commercial sector has increased by Rs. 26.0 Lac crore during FY 2022-23 as against Rs. 19.0 Lac crore a year ago. The Consumer Confidence survey for March 2023 indicates expectations of improved employment conditions, with marginal declines in sentiments regarding general economic conditions and household income. According to RBIs surveys, both businesses and consumers hold optimistic outlooks for the future. However, the slowdown in global trade and output, coupled with geopolitical tensions, global financial conditions, and market volatility, pose risks to the overall economic outlook.

Amidst this volatility, the banking and non-banking financial service sectors in India remain healthy and financial markets have evolved in an orderly manner. The prolonged geopolitical tension between Russia and Ukraine adversely affected global trade and crude oil prices, leading to a tighter inflationary grip. RBIs Monetary Policy Committee increased the policy repo rate under the liquidity adjustment facility (LAF) by 225 basis points from 4.0% to 6.25% between May and December 2022. Headline CPI inflation has gradually declined from its peak of 7.8% in April 2022 to 5.7% in March 2023 and is projected to ease further. The Reserve Bank of India (RBI) projected a headline inflation rate of 6.8% for FY 2022-23, which falls outside its target range. However, this level of inflation is not expected to affect private consumption or discourage investments significantly. Inflation is likely to exceed the central banks upper target limit of 6% until early Current Year 2023, but it may gradually decrease once higher interest rates are implemented.

Outlook

As observed in FY 2022-23, the fundamentals of the countrys economy remained resilient despite the challenges felt by the global economy. India is further expected to witness a growth of 6.0% in FY 2023-24. RBI projects CPI inflation for Q1 - FY 2023-24 at 5.0% and for Q2 -FY 2023-24 at 5.4% on the assumption of a normal monsoon. Whereas on the inflationary front, it is anticipated that the rates would remain moderate somewhere between 5-6%, due to the Governments adherence to calibrated monetary policies. The Governments continued focus on infrastructure development, coupled with rising private investment, is providing the necessary momentum for the countrys economy to flourish, backed by robust GST collections and forex reserves. The total gross collection for FY 2022-23 stands at Rs. 18.10 Lac crore with revenue increased by 22% that FY 2021-22. Way forward the GST collections would grow in the coming years and will be utilised in the economic development. The forex reserve stood at USD 595.976 Billion in the first week of May 2023 marking second consecutive weekly rise in reserves. However, a high degree of synchronisation between Indias growth cycle with advanced countries urges to remain cautious about plausible hindrances. This could have a significant impact on Indias deepening trade and financial connections with advanced economies.

(Source: MOSPI, NSO, https://www.outlookindia.com/business/growth- premium-news-244264

https://www.deccanherald.com/business/business-news/indias-gdp-to-grow-at-6-in-2023-24-sp-1204173.html

https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR88MINUTESOFMPC507ABE3E36B346B6A843FCDCCD9F6207.PDF)

INDIAN FINANCIAL SERVICES SECTOR OVERVIEW

The Indian financial services sector is a vital component of the countrys economy, comprising a diverse range of players such as commercial banks, insurance companies, non-banking financial companies, pension funds, mutual funds and other smaller financial entities. The sector has been evolving over the years, coupled with changes and reforms by the Government and regulatory bodies to strengthen the industry, enhancing its growth prospects.

One of the key growth drivers for the sector has been the increasing focus on financial inclusion and providing better access to finance for the underbanked and underserved sections of the society. This has led to the emergence of digital banking, microfinance, and fintech collaborations that are disrupting traditional banking models.

Despite the uncertain global environment since early 2020, the Indian financial sector has remained stable and resilient. Furthermore, the Non-Banking Financial (NBFC) sector has played a crucial role in bridging the credit gap and supporting the growth of various sectors such as micro, small and medium enterprises (MSMEs), agriculture and affordable housing, among others.

INDUSTRY OVERVIEW AND FINANCING

The financial institutions have a vital role in promoting stability and implementing regulatory measures to support households and businesses, especially amid economic crises. At present, the geopolitical conflicts have slowed down countries post-pandemic recoveries, hastening the normalisation of monetary and fiscal policies.

In India, NBFCs have emerged as the principal institutions providing credit financing to the unorganised and underserved sectors. NBFCs have revolutionised the lending system in India by providing financial inclusion for those who lack easy access to credit. They offer a range of services, including MSME financing, home finance, microfinance, gold loans and other retail segments. On the back of digitalisation and technology, NBFCs are further offering quick and convenient customer financing experience, especially for low-income and untapped segments of the creditworthy population. These companies have unlocked industrial opportunities by leveraging a hybrid model of physical and digital delivery.

Despite facing competition from banks in traditional segments, NBFCs have raised Rs. 700 Billion in equity over the past 3.5 years, improving their gearing levels. With more robust balance sheets, lower leverage and steadily improving funding access, NBFCs are well-positioned to capitalise on credit demand. This could lead to an increase in Assets Under Management (AUM) by 13-14% in FY 2023-24, with a strategic focus on non-traditional segments such as unsecured loans, used vehicles and the MSME sector.

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.

(Source: CRISIL NBFC Report 2021, https://economictimes.indiatimes. com/industry/banking/finance/non-bank-lenders-surpassed-banks-in- microlending-segment-in-september-2022-report/articleshow/97703891.cms?from=mdr

https://assets.kp mg.com/content/dam/kpmg/in/pdf/2022/11/role-of-nbfcs-and-hfcs-in-driving-sustainable-gdp-growth-in-india.pdf

https://www.icraresearch.in/research/ViewResearchReport/4225)

Commercial Vehicle (CV)

The Indian commercial vehicle (CV) industry has recovered post the COVID-19 pandemic. In F.Y. 2022-23, commercial vehicles witnessed the second-highest domestic sales growth in India. As per SIAM, the sales of overall Commercial Vehicles increased from 7,16,566 units in FY 2021-22 to 9,62,468 units in FY 2022-23, representing 34% substantial growth rate. Furthermore, the sales of Medium and Heavy Commercial Vehicles (MHCVs) increased from 2,40,577 units in FY 2021-22 to 3,59,003 units in FY 2022-23 indicating a growth of ~50%. Additionally, Light Commercial Vehicles increased from 4,75,989 units in FY 2021-22 to 6,03,465 units in FY-2022-23 indicating a growth of 27%. MHCVs market share poised to grow further, driven by increased activity in the construction and infrastructure sectors, while truck utilization reached an all-time high of 90%. LCVs growth levels have been increased due to rural consumption and e-commerce. In F.Y. 2022-23, the CV industry in India is expected to witness positive volume growth of 22-24%, driven by positive demand drivers from multiple industries and growing freight movements.

Several Original Equipment Manufacturers (OEMs) are testing the introduction of E-variants in the commercial vehicle category. Higher E-LCV adoption is expected to be seen in Tier-1 cities due to the factors such as higher last-mile delivery demand and the urge to reduce pollution. However, we feel there would be gradual but continuous upgradation of vehicle technology with alternative fuels and hybrid variants increasing the cost of acquisition of vehicles which will bring in efficiency and reduced cost of logistics. (source: KPMG)

NBFCs are collaborating with various dealers, vendors in the ecosystem to provide finance beyond asset purchases, such as fuel and tyre credit, repairs and annual maintenance of vehicles and leveraging third-party providers for insurance and security needs. The growth momentum of CV industry in India remains intact owing to Government push on infrastructure development and improvements in economic activities.

(Source: KPMG Report November 2022)

Passenger Vehicle

The Indian Passenger Vehicle (PV) industry is a significant segment of the countrys automobile industry, accounting for approximately 18% of domestic sales volume. PVs are classified into three categories: Passenger cars, Vans, and Utility Vehicles (UVs). In FY 2022-23, domestic sales of PVs exhibited significant growth, primarily due to the improvement in sentiments and the ease in the supply of semi-conductors. This growth reflects a strong recovery after the pandemic-induced disruption, which adversely affected sales in FY 2021-22.

According to data from the auto industry body SIAM, India witnessed significant growth in passenger vehicle sales during the FY 2022-23. This growth was attributed to the alleviation of chip shortages and a surge in demand for sport utility vehicles (SUVs). Domestic wholesales of passenger vehicles reached 3.89 Million units for the fiscal year ending on March 31, 2023, compared to 3.07 Million units in the previous year. Sales of Passenger Cars increased from 1.47 Million units to 1.74 Million units, indicating a growth rate of 19%. Utility Vehicles experienced a substantial growth from 1.49 Million units to 2.0 Million units, representing a growth rate of 34%. Vans also witnessed growth, with sales increasing from 1.13 Lac units to 1.39 Lac units, reflecting a growth rate of 23%.

In the same period, car sales for fleet operations, including those to app-based cab aggregators such as Ola and Uber, experienced an almost two-fold increase. These sales are expected to significantly surpass the overall industry growth, approaching pre-pandemic levels this year. The industry estimates that fleet operators purchased approximately 137,000 vehicles in the last financial year, marking a growth of 95% compared to FY 2021-22. Additionally, the new model launches, ease in supplies of chips and semi-conductors, and increased competitiveness in the economy are expected to support volume growth.

The positive growth is expected to be led by factors such as product mix, ease in supply chain issues, discounts and offers, and the increasing shift towards bigger-sized and feature-rich vehicles in the utility vehicle sub-segment. In the future, the demand for PVs is expected to improve further due to investments from the PLI scheme, new vehicle launches, better traction of ICE models, and a strong order book. Moreover, Indias enhanced manufacturing capabilities is also expected to support the passenger vehicle industrys demand in the long term.

(Source: Automobiles Passenger Vehicle Outlook, CareEdge

https://economictimes.indiatimes.com/industry/auto/auto-news/car-sales-on-fleet-street-accelerate-95-in-fy23/articleshow/100085686.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst)

The Indian passenger vehicle financing opportunity is expected to grow at a compound annual growth rate (CAGR) of around 20% to reach USD 50 Billion in annual disbursements during FY 2021-22 - FY 2025-26, driven by strong underlying demand, rising premiumisation, and improving finance penetration in the used/preowned vehicles segment. The PV financing opportunity is supported by a massive under-penetrated market, with only around 40% of mid-income and above households in India owning a passenger vehicle, compared to an average ownership of 1.2-2x per household (all income households) in other economies.

(Source: Vehicle Financing, HDFC Securities)

Two-wheeler (2W)

In the Indian automobile industry, the two-wheeler segment dominates with a share of approximately 79% in total domestic sales volume. This segment is divided into three categories, namely Motorcycles, Scooters, and Mopeds. The domestic 2-Wheeler industry posted a year on year double digit growth in FY 2022-23 after three consecutive year of decline, reaching 15.86 Million units from 13.57 Million units in the previous year.

Furthermore, Electric Two-wheelers (E2W) are also experiencing steady demand. The E2W segment has started to exert an influence on its ICE counterparts. Currently, 5% of 2-wheeler sales come from electric vehicles (EVs), with EVs accounting for 15% of sales in the scooter segment specifically. The incumbent 2W OEMs have strong execution capabilities, coupled with a focus on the EV product pipeline, leading to an increase in the order book.

According to a CRISIL study, if there are no major challenges on the supply side, the electric 2-wheeler industry in India is projected to achieve sales of 1.2 Million units in 2023-24. The demand will be driven by factors such as a gradual pick-up in the rural economy on the back of winter crop harvesting, timely arrival of monsoon, and higher MSPs. The premium segment, faster growth in Scooters and ramp-up in export are also anticipated to contribute to the demand.

(Source: Automobiles Two- Wheelers Outlook, CareEdge)

Tractor and Farm Equipment

The Indian tractor industry witnesses a robust demand in the FY 2022-23. The incremental traction is majorly backed by the good agricultural conditions as well as the prices for the farmers. The total foodgrain production in the country is estimated at record 3,235.54 Lac tonnes which is higher by 79.38 LMT as compared to FY 2021-22. This was owing to the handsome monsoon received during the time with 6% greater rainfall than average as per India Meteorological Department. In continuation of the same, the current reservoir position stood at 48,347.510 m in May 2023.

Backed by these robust driving factors, the Government is further strategising to boost the production in FY 2023-24. This provides a fertile ground for the tractor industry to expand its growth and maximise outcome. During the FY 2022-23, according to Tractor & Mechanisation Association (TMA) the tractor industry achieved a ground breaking sales record of 945,311 units with a growth of 12%. A report by the Allied Market research predicts that the industry is poised to grow with 7.9% CAGR between 2021-2023 to reach the valuation of USD 12,700.8 Million.

In recent years, there has been a discernible and noteworthy progression within the realm of agriculture mechanisation. A substantial segment of farmers in the nation has already undergone a transition, forsaking animate sources in favour of adopting mechanical equipment to streamline and optimise their farming operations. This notable shift can be primarily attributed to a confluence of contributing factors, encompassing the enhanced accessibility of credit, the provision of government incentives, the consequential amplification of agricultural productivity, the burgeoning prevalence of contract farming, and the steadfast ascent of rural incomes.

Significantly, the Indian agricultural equipment market has achieved a substantial magnitude, reaching a noteworthy valuation of Rs. 1,023.2 Billion in the year 2022. According to projections furnished by the IMARC Group, this market is poised for further expansion, with estimations anticipating a momentous augmentation to Rs. 1,852.6 Billion by the year 2028. Such anticipated growth is projected to be characterised by a CAGR of 10.5% throughout the period spanning from 2023 to 2028.

The COVID-19 pandemic had a limited impact on the tractor segment due to sustained rural demand and the agriculture sectors resilience. This led to the NBFCs financing 54% of the tractor segment in 2022. Moreover, the agriculture and rural sector has seen the rise of several agricultural technologies to assist lenders in understanding crop patterns and local geography for accurate credit assessment. These technologies can also be leveraged for holistic tractor and agriculture-based financing. As a result, rural financing has extended beyond asset financing, including tractor and farm equipment, to encompass a broad spectrum of agriculture technology-enabled financing

(Source: KPMG Report November 2022

Construction Equipment

According to ICRA, the Mining and Construction Equipment (MCE) industry is expected to witness a growth in volumes from FY 2022-23, with an expected 10-12% YoY increase in sales volumes. This growth is expected to be supported by infrastructure spending by the government, as well as the robust order book across end-user industries. In FY 2021-22, the overall NBFC Construction Equipment (NBFC-CE) AUM is estimated to have grown by 2.1%. However, ICRA expects NBFC-CE AUM growth to revive to about 7-9% in FY 2022-23 due to an increase in volumes and loans, although competition from banks could pose a downside risk.

(Source: ICRA Research)

Micro, Small and Medium Enterprises (MSME)

The MSME sector in India plays a crucial role in providing employment opportunities and contributing significantly to the countrys GDP. The outbreak of the Covid-19 pandemic accelerated the adoption of digital technologies, resulting in increased efficiency and revenue for small business owners. However, the MSME sector is currently facing a credit gap from formal financial institutions, with only 15% of the total addressable market being served by them. This situation presents a promising opportunity for NBFCs to offer customised products and digital solutions to help the sector grow.

Regarded as the cornerstone of the Governments Make in India campaign, the Indian Governments numerous supportive measures aimed at creating a favorable environment for MSMEs will continue to propel a positive growth outlook. It is expected to lay strong emphasis on providing MSMEs with access to easy and secure funding to overcome credit-starvation and the hazards of credit fraud. The numerous Government initiatives supporting this positive outlook include tax exemptions, access to funding and expansion of financing, marketing and technology. Some other notable policies in this direction are the Pradhan Mantri MUDRA Yojana (PMMY), Special Credit Linked Capital Subsidy Scheme (SCLCSS), SAMBHAV and National MSME Policy.

NBFCs have played a significant role in boosting credit flow to MSMEs, especially in underbanked areas of the country. These companies have adopted innovative tools, unconventional risk modelling and personalised offerings to cater to the specific requirements of small businesses. Additionally, NBFCs have leveraged technology for data analytics and streamlined their processes for faster disbursement of credit.

Compared to banks, they have been more agile and introduced personalised products based on the risk profiles and demands of different segments of the sector. Furthermore, NBFCs have partnered with fintech players, banks and alternative lenders to extend credit and bundled products for businesses.

(Source: https://assets.kpmg.co m/content/dam/kp mg/in/pdf/2022/11/role-of-nbfcs-and-hfcs-in-driving-sustainable-gdp-growth-in-india.pdf )s

Gold Loan

Gold loans have become a popular option for borrowers to manage their working capital needs, especially in rural areas where unorganised players hold 65% of the total pledged chunk in the country. In terms of organised players such as banks and NBFCs are increasing their penetration into this sector, banks comprise a larger share in the organised gold loan sector due to lower interest rates and larger ticket sizes.

NBFCs are focussed on customer convenience, quick disbursement, and flexibility. In FY 2020-21, NBFCs retained a 23% stake in the Indian gold finance sector, with the total NBFC gold loan AUM increasing by an astounding 44% to surpass Rs. 4.7 trillion, fuelled by a 30% YoY uptick in gold prices in the same period.

The gold loan market is expected to maintain its outstanding performance due to the increasing digitisation of financial services, a wider physical branch network, minimal documentation, faster turnaround times, and increased demand following the COVID-19 pandemic. The sector is transforming, shifting from unorganised to organised and from organised to digital means. The growth in the online gold loan space is projected to drive the gold loan book by 11-12% in FY 2022-23. Specialised gold loan NBFCs are expected to play a significant role in driving AUM growth due to their focussed approach and new technology initiatives that enable customers to transact online with ease. The gold industry contributes 1.3% to Indian GDP and the popularity of gold loans is expected to continue to grow in the future as a secure and flexible medium to meet short-term cash emergencies.

Housing Finance

The housing finance industry in India is witnessing significant growth, with financial institutions contributing to a loan book growth of 24.1% between FY 2018-19 and FY 2022-23. This growth is expected to continue, with the housing loan segment projected to contribute about 13% to Indias GDP by FY 2024-25, while rising at a CAGR of 20.58% between FY 2021-22 and FY 2030-31, driven by affordable housing, declining property prices, attractive tax incentives, and an increase in household income. Furthermore, a reduction in housing market inventory was seen due to widespread vaccination coverage, rising consumer spending on contact- based services, and the return of migrant workers to construction sites. In FY 2022-23, the loan book outstanding stood at approximately Rs. 9.1 Lac crore.

The housing finance industry is undergoing significant structural changes with a focus on credit quality and collection efficiency. It is anticipated that the assets under management of HFCs will exhibit a growth of 10%-12% during the FY 2022-23, primarily owing to the growth of home loans. The NBFCs have a loan outstanding of Rs. 8.9 trillion with an addressable loan market of Rs. 21 trillion.

In FY 2021-22, there was a cumulative shortage of 9.5 Cr housing units with an aggregated loan demand of Rs. 35 trillion. The credit growth outlook for affordable HFCs is looking robust with 9-11% growth in FY 2022-23, backed by various Government initiatives for the housing sector like PMAY, tax incentives, RERA, GST, and special financing windows. Additionally, significant regulatory measures implemented by the RBI and NHBs focus on fuelling the affordable housing sector with easy flow of credit to help bridge the demand-supply gap in the sector.

(Source: KPMG Report November 2022)

COMPANY OVERVIEW

The Company is a prominent NBFC in the retail finance industry in India. The name of the Company was changed to Shriram Finance Limited to reflect its diversified financial product portfolio consequent upon merger of Shriram City Union Finance Limited (SCUF) and Remaining undertaking of Shriram Capital Limited (SCL) with the Company. The Company is a leader in organised financing of pre-owned commercial vehicles and two-wheelers. It has vertically integrated business model and finances passenger vehicles, Construction Equipment, Farm Equipment, MSMEs Gold, Personal loan and Working Capital Loans, among others.

The merger is expected to bring significant synergies, primarily from the cross-selling of loan and insurance products. Additionally, the combined entity will benefit from lower cost of funds and operational expenses, including improved employee productivity resulting in lower customer acquisition costs. The technological framework of the merged entity will facilitate seamless data mining and the use of advanced artificial intelligence and machine learning techniques to provide best-in-class service to customers. Throughout this process, our time-tested philosophy of customer centricity will continue to guide each step of our journey.

With over 7.32 Million customers, the Company focuses on offering prompt borrowing solution to customers and delivering value to stakeholders. The Company has a broad reach with 2,922 branches across India and recorded an AUM of Rs. 185,682.86 crore as on March 31, 2023.

Post amalgamation of SCUF with the Company, Shriram Housing Finance Limited which was a subsidiary of SCUF, became the Companys subsidiary. It is a housing finance company registered with the National Housing Bank (NHB). The primary operation of the Company is providing loans for the purchase or construction of residential space and loans against property.

The regulatory framework for NBFCs to introduce scale- based 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 Upper Layer under Scale Based Regulatory Framework for NBFCs as per the list issued by RBI in its Press Release 2022-2023/975 dated September 30, 2022. The Company has in place SBR Framework Implementation Roadmap and policies required thereunder. The Company is on schedule in implementing the applicable guidelines and regulatory framework.

Key Highlights for FY 2022-23

• The MSME loan and two-wheeler loan segments drove growth in FY 2022-23

• Achieved strong financial growth through higher NIM of 8.37%

• Longer tenure resources were raised through fresh long- term borrowings

• Credit fundamentals were reinstated through strong credit ratings received from multiple credit rating agencies

• Collection efficiency and asset quality were improved through a state-of-the-art coverage network and distribution systems

• Strong focus on technology platforms to leverage opportunities emanating from digital-based lending trends

Super App initiative

The Company leads the transformation journey of lending, investments, and insurance by leveraging the emerging technologies. The Company has developed the Super App with the primary objective to consolidate the entire Shriram ecosystem within a single mobile application and deliver cutting edge products and experiences to the consumers. This strategic move aims to streamline customer acquisition by providing a more accessible platform for reaching out to new customers. Additionally, the Super App will facilitate upselling and cross-selling opportunities, enabling enhanced revenue generation paving the way for digital transactions in a unified platform. To further expand its offerings, the App will establish partnerships with various entities such as BPCL/ HPCL/IOCL(OMCs), vehicle dealers, tyre manufacturers and lubricant shops integrating them into its ecosystem. The App is completely owned by the Company and features a centralised KYC (Know Your Customer) system specifically designed for the Companys operations.

SWOT Analysis

Strengths

• Pioneer in the pre-owned commercial vehicle financing sector

• Strong distribution network in India with a pan-India presence of 2,922 branches

• Serving the under-served retail markets

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

• Strong brand pedigree and successful track record

Well-defined and scalable organisational 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 and foreign banks, institutions and investors

• Serving over 7.32 Million customers across India

Weakness:

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

• The Companys customers, MSMEs, SRTOs (Small Road Transport Operators) are more vulnerable to the negative effects of economic downturns.

Opportunities:

• 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

• Partnerships with private financiers for enhancing reach without significant investments

• Penetration into rural markets for financing cargo light commercial vehicles

• Onboarding customers on the technology platform

• 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

• Cross-selling ofinsurance products, invoice discounting, etc also create opportunities

• Leveraging the strong parentage of being one of the largest financial conglomerates in India

• Brand equity to garner higher acceptability among the underprivileged sections of society

• Increasing Government regulations and tightening of norms to restrict competition and deter the entry of unorganised 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 underbanked population

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

• With the Governments focus on affordable housing, NBFCs have opportunity to extend housing finance to the underserved segments of the population

• Market for second hand truck financing is under penetrated with 55-60% of the market with private financiers / money lenders who charge high interest rates

• Stringent traffic regulations in major cities limiting movement of higher tonnage vehicles, stricter emission norms and legislative pressure on banning trucks > 15 years to trigger replacement demand

• Freight capacity expected to grow at 1.25x GDP growth going forward, company to benefit from exponential growth for cargo LCVs with increased penetration into rural areas

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

• Growing commoditisation of financial products remains the toughest challenge for the Company

Financial Performance

In view of coming into effect of the Scheme of Arrangement and Amalgamation, the following figures for the year ended March 31, 2023 are not comparable with the figures for the previous year ended March 31, 2022.

(Rs. in crores unless otherwise stated)

Particulars	FY 2022-23	FY2021-22	% change
Total Income	29,802.89	19,274.23	54.63%
Net Interest Income	16,963.00	9,316.00	82.08%
Assets Under Management	1,85,682.86	1,27,040.86	46.16%
Securitisation/Direct assignment done during the year	19,136.45	14,147.25	35.27%
Net worth	43,202.07	25,904.55	66.77%
Profit after tax	5,979.34	2,707.93	120.81%
Earnings per Share	159.69	101.74	56.96%
Capital Adequacy Ratio	22.61%	22.97%	-1.57%
Return on total assets	2.89%	1.88%	53.72%
Debt equity ratio	3.65	4.42	-17.42%
Net Interest margin	8.37%	6.62%	26.44%
Interest coverage ratio	2.35	1.95	20.51%
Net profit margin	20.06%	14.05%	42.78%
Return on Net Worth	14.84%	11.14%	33.21%
Gross Stage 3 Assets Ratio	6.21%	7.07%	-12.16%
Net Stage 3 Assets Ratio	3.19%	3.67%	-13.08%
Return on equity	14.84%	11.14%	33.21%

During the FY 2022-23, the Stage 3 Assets was 6.21% as compared to 7.07% in FY 2021-22. The Stage 3 Assets net of Stage 3 Provision was 3.19%in FY 2022-23 as compared to 3.67% in FY 2021-22 due to more provision made on stage 3 assets during the year. There are significant changes in the key financial ratios of the Company for FY 2022-23 as compared to FY 2021-22 on account of the Scheme of Arrangement and Amalgamation coming into effect from the Appointed Date i.e., April 01, 2022. Refer note 52 of the Standalone financial statements.

HUMAN RESOURCES

The Company values its human resources and believes that the success of an organisation 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, which adds value to its brand while responding successfully to business challenges. As we scale up our business and strive to build a future-ready organisation, 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.

The Companys field employees used mobile applications to educate customers on financial products. The Company is also ensuring employee health and well-being even after the pandemic and exploring a phased combination of work- from-place and WFH for cost optimisation and increased efficiency.

As of March 31, 2023, the total number of employees was 64052, with a net addition of 10,599 employees during FY 2022-23.

RISK MANAGEMENT

The Company prioritises risk management to protect the interest of customers, colleagues, shareholders, and the Company while ensuring sustainable growth. Our risk management framework aligns with industry standards, and a strong control framework forms the foundation for effective risk management. The Risk Management Committee identifies major risk classes, including Credit, Market, legal and regulatory, operational, liquidity, interest rate, cyber security, information technology, strategic, and economic risks.

We address increasingly complex risks through our risk management system, which conducts risk analysis and implements preventive measures. Our risk-focussed culture is supported by standards, guidelines, processes, procedures, and controls. Policies are reviewed and approved by the Board and its Committees encompassing independent identification, assessment, and management of risk across business verticals.

Our philosophy is to ensure a sustainable and ethical business environment, reflected in our risk management practices.

Key Risks and Mitigation

Risk Type and Definition	Mitigation
Credit Risk The risk of potential loss arising from the failure of borrowers and/or counterparties to meet their contractual obligations. The Company is exposed to credit risk from the lending activities	With over four decades of experience, the Company manages credit risk through strict credit norms and robust procedures. This is achieved through various measures including a robust credit appraisal process for all business segments, underwriting borrowed capital while considering the inherent cash flows of customers, and taking effective inputs from credit bureaus information reports. Regular stress testing and scenario analysis of the entire credit portfolio are also undertaken to implement corrective actions.
	In addition, the Company uses defined credit ratings from established credit rating agencies as mandated by its process, to make portfolio investment decisions with systematic tracking of the portfolio. Appropriate risk exposures are taken through rigorous analysis of counterparty fundamentals, industry, and sectoral risks. To ensure portfolio risk concentration, prudent allocation strategies are implemented across different asset classes, industry sectors, geographical regions, single liability, and joint liability groups.
Market Risk Market risk is the potential risk of financial loss arising from adverse movements in market factors, such as interest rates, credit spreads, foreign exchange rates, commodity prices, and others, that impact earnings and capital	The Companys market risk is managed through a framework of policies and processes that are regularly reviewed to comply with market practices and regulatory guidelines. The Asset Liability Management Committee (ALCO) monitors market movements, government policies, and regulatory changes affecting the NBFC industry, adjusting strategies prudently and promptly. We proactively monitor market risks and de-risk the loan book portfolio through a well-organised Market Risk Management System. We also perform periodic stress testing across asset classes to simulate the impact of sudden market shocks.
Operational Risk The risk of loss resulting from inadequate or failed internal process, people, systems, organisation, regulatory and internal compliance or from external events	The Companys operational risk framework aids departments in achieving their objectives by identifying, assessing, measuring, controlling, and mitigating risks. Pillars for mitigating operational risks include state-of-the-art corporate governance practices, a code of conduct, corporate ethos, and organisation-wide risk management approaches. To ensure a standard and homogeneous workforce, the Company provides skill development programs and seminars. The Company has standard operating procedures and structures to improve governance on transactions, portfolio assessment, and regulatory compliance. Risk-oriented audit procedures occur at systematic intervals to reduce enterprise risk exposure. Regular stress testing and audits of the Disaster Recovery (DR) plan and Business Continuity Plan (BCP) assess the Companys preparedness against contingencies. Efficient contingency plans are in place for data security and recovery against potential ‘force majeure contingencies.
MSME Finance Risk MSME financing risk refers to the potential for financial losses or adverse outcomes associated with providing financial services to Micro, Small, and Medium Enterprises. This risk arises from factors such as creditworthiness, market conditions, operational challenges, regulatory compliance, interest rate fluctuations, technological advancements, and external shocks.	In order to mitigate risks, the Company employed a range of strategies. They conduct thorough credit assessments, evaluating factors like financial statements, cash flows, collateral valuations, and credit history. Risk diversification is practiced by spreading the loan portfolio across different industries, geographies, and borrower profiles. Technological integration enables efficient risk management through data analytics and Al-driven decision-making. These strategies are implemented to ensure responsible lending practices, minimise concentration risk, and enhance the overall stability and sustainability of the Company in MSME financing.
Interest Rate Risk The risk arising from a financial loss, owing to unfavourable interest rates for both lending and treasury operations. It has a significant influence upon a companys net-interest income and profitability	The Company has established comprehensive policies and procedures to ensure compliance with regulatory guidelines regarding assets and liabilities exposure. It conducts rate-sensitive asset-liability maturity analysis to evaluate the correlation between the maturity profiles of its loan book and changes in interest rates. The Company determines interest spreads by categorising assets and liabilities into various time periods based on their contracted maturities or anticipated re-pricing dates. The difference between the maturity of assets and liabilities, or their potential for repricing at any given time, indicates the level of exposure to the risk of potential changes in margins on newly issued or re-priced assets and liabilities.
Liquidity Risk The risk that arises from the Companys inability to meet its financial obligations as and when the need arises/within predetermined timelines.	The Companys liquidity risk is managed through a comprehensive framework of policies and processes approved by the Asset Liability Management Committee (ALCO). We have implemented a range of policies, procedures, and controls to manage liquidity risk, in alignment with our Asset Liability Management (ALM) policies and procedures. We use a maturity ladder and cumulative surplus/deficit of funds calculation technique to standardise the determination of liquidity risk on any specific maturity date. Additionally, we have a contingency plan in place for liquidity management during times of crisis.
	We proactively monitor capital adequacy and asset exposure levels to assess potential funding requirements and maintain a diversified source of funding including borrowings from banks, financial institutions, capital markets, and public fixed deposits to facilitate flexibility in meeting funding requirements. Regular training programs on cash management and asset-liability management are conducted to ensure the Companys long-term financial stability.
Cash Management Risk The cash management risk associated with the collection of loan instalments refers to the potential challenges and risks faced by a financial institution when it comes to receiving timely and complete payments from borrowers.	The Company has maintained its focus on onboarding customers onto its technology platform, emphasising the use of digitisation. It has established a robust cash management service network and actively engages with customers through digital collections via the MyShriram Mobile Application. Various modes, including BBPS (Wallets), have been enabled to facilitate customer payments for their loan accounts. Additionally, the Company has obtained NACH mandates from select customers, implementing stringent checks and internal controls across all branches. Regional branch collections are closely monitored and reconciled on a daily basis.
	In the near future, the Company plans to launch a Super-App that will consolidate all its existing and new lending products under a single umbrella. This initiative aims to provide customers with easy access to the entire Shriram ecosystem, enhancing their experience through a seamless interface. By leveraging this platform, the Company intends to gather valuable insights and analytics, paving the way for continued innovation in the future.
Climate Risk Climate change has emerged as a significant and comprehensive global concern, affecting various aspects of human existence. The financial sector, including non-banking financial companies (NBFCs), is not exempt from this concern. Given the evident and disruptive impact of climate-related events, there is a growing effort to incorporate sustainability practices into the business operations.	We have implemented a robust ESG framework to address climate-related risks. We prioritise sustainability through strong governance and oversight at the highest level. We have made significant progress in reducing energy consumption, emissions, and implementing tree plantation initiatives. Moving forward, we will continue to adopt technological solutions and operational measures to further reduce energy usage. Our commitment to mitigating climate risks is unwavering as we strive to contribute to a greener future.
Information Technology Risk The risk arising as a result of IT infrastructural failure or data loss/threats causing operational setback and financial losses.	The Company has implemented a cutting-edge technology infrastructure and platform for processing its business information systems. To manage the IT risks that may arise from such a setup, the Company has put in place an efficient IT risk management mechanism with adequate measures, checks, and controls. The Company conducts regular security drills and employee awareness programs to ensure the security of its IT infrastructure and network architecture, both from internal and external threats. To achieve better Recovery Point Objective (RPO) and Recovery Time Objective (RTO), the Company has deployed a Security Operations Centre (SoC) that operates 24x7, conducts systematic disaster recovery drills, and performs rigorous security tests and evaluations before launching any application. The Company also conducts periodic vulnerability assessment and penetration testing, using internal resources and under the guidance of external experts. In case of any functional section becoming non- functional, the Company has a contingency plan in place to ensure the continuity of crucial business functions to its customers.
Cyber Security Risk The risk arising out of cyber-attacks and hacking, owing to increased usage of internet and digital means.	The Company has implemented a robust cybersecurity framework to effectively manage and mitigate cyber threats. Our critical assets are protected 24x7 by a dedicated Security Operations Centre (SoC), and we have made significant investments in state- of-the-art security systems and hired skilled professionals to ensure the highest level of preparedness against cyber threats.
	To ensure information security across the organisation, we have established a comprehensive security framework, policies, and procedures aligned with industry best practices. Our employees receive all-inclusive training and workshops to raise awareness of potential cyber threats such as malware, phishing, ransomware, and spoofing.
	Furthermore, we have obtained ISO 27001 certification for our Information Security Management System, which covers all IT processes. We have also installed Email Threat Prevention (ETP) services to quarantine potential email threats before they reach our employees.
	To ensure the effectiveness of our cybersecurity measures, we conduct regular penetration testing to assess vulnerabilities in our IT infrastructure and network. Additionally, we scrutinise fraud protection measures to authenticate risk-based transactions.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has a well-defined organisational 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 synchronise 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 organisation, providing assurance about safekeeping of the assets and execution of transactions as per the authorisation 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 Organisations of the Treadway 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. The Company has framed risk-based internal audit policy as part of its oversight function. The objective of risk-based internal audit review is to identify the key activities and controls in the business processes, review effectiveness of business processes and controls, assess the operating effectiveness of internal controls and provide recommendations for business process and internal control improvement.

FUTURE STRATEGY

The Board has established a comprehensive set of medium- term and long-term strategies to drive the achievement of its corporate goals over the next 3-5 years, navigate the dynamic business landscape and continue to deliver value to the stakeholder. These strategies encompass various key areas and initiatives, which are outlined below:

• Periodic business plan reviews and effective liquidity management

• Synergising business operations and expanding the product range across branches

• Implementation of SuperApp, a comprehensive digital platform consolidating the entire Shriram ecosystem

• Utilising data analytics for loan disbursement and recovery processes

• Strengthening the leadership position through continuous improvement and innovation

• Enhancing loan portfolio quality through rigorous risk assessment and management

• Maintaining customer loyalty and satisfaction through winning relationships.

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 national and global effect of economic conditions, political conditions, volatility in interest rates, changes in regulations and policies impacting Companys businesses and other related factors. The information contained herein is as referred. The Company does not undertake any obligation to update these statements. The Company has obtained the data and information referred here from sources believed to be reliable or from its internal estimates, the accuracy or completeness of which cannot be guaranteed.