ujjivan financial services ltd Management discussions

Ujjivan Financial Services Limited (hereinafter referred to as "the Company"), an RBI-registered NBFC-Core Investment Company is the promoter of Ujjivan Small Finance Bank Limited (hereinafter referred to as "USFB" or "the Bank"). The Company on a standalone basis has no operation of its own and derives its value primarily from its investments in USFB where it holds 73.67% of the Banks equity share.

Further, the Company is in the process of amalgamation with its subsidiary Bank in accordance with applicable laws and guidelines. Both the entities in the Ujjivan Group, have already received no-objection letters from RBI and NSE & BSE. Post which both companies have applied with NCLT Bengaluru Bench and is awaiting their directions.

Key highlights pertaining to the consolidated financials (as per Ind-AS) are given below:

( in Crores)

Particulars	FY 2022-23	FY 2021-22	y-o-y growth
Total Income	4,679	3,092	51%
Total Operational Expenses	3,148	3,396	(7%)
Profit/(Loss) Before Tax	1,531	(304)	NM
Profit/(Loss) After Tax	1,140	(230)	NM

This report is being presented from the perspective of our subsidiary ‘Ujjivan Small Finance Bank, referred to as Bank. It highlights a synopsis of the banking industry, business and financials of the Bank which predominately dominates the consolidated financials and business of the Company; on a standalone basis, the Company is a non-operating Company.

MACROECONOMIC INDICATORS

Beginning FY 2022-23, the global setback accentuated due to covid induced pandemic had subsided. Across the globe, economies targeted to recover and aimed to propel stalled growth northwards, emerging out of the global contraction. However, this euphoria was short-lived as Eurozone entered into a crisis due to the Russia-Ukraine conflict, resulting in inflated commodity prices which shocked all major developed economies in the universe. Due to this double whammy, policymakers the world over encountered a predicament, with the latest one being liquidity concerns. To counter these issues central banks across economies are synchronously adhering to rate hikes led by Federal Reserve. These rate hikes in US markets incentivised the US dollar to appreciate against most currencies across the globe. Further leading slow to global growth, owing to higher interest rates marred by the effects of inflation. On the contrary, the Indian economy was much more resilient due to its strong fiscal policies and robust banking system. This developing economy staged a full recovery in FY 2022-23 well beyond many and ascended the growth path. During the year Indian economy witnessed a robust GDP growth estimated to be 6.9% for the full year with real GDP growing 7.7% year-on-year during the first three quarters of FY 2022-23. This handsome growth was corroborated by strong government capex expenditure and buoyant private consumption. Inflation remained high, averaging around 6.7% in FY 2022-23 but the current-account deficit narrowed in Q3 on the back of strong growth in service exports and easing global commodity prices.

RBI started tightening its monetary policy at the commencement of FY 2022-23, limiting the damages caused by outflows of foreign capital, rising inflation and weakening currency. During the year RBI, hiked policy rates by 250 bps to 6.5%. Despite that, the banking sector in India has responded in equal measure to the demand for credit. On a year-on-year (y-o-y) basis, non-food bank credit registered a growth of 15.4% in March 2023 as compared with 9.7% a year ago. Credit to agriculture and allied activities rose by 15.4% (y-o-y) in March 2023 vs 9.9% a year ago. However, credit to industry registered a growth of 5.7 % (y-o-y) in March 2023 declining from 7.5 % in March 2022. Size-wise, credit to large industries rose by 3.0 % as compared with 2.0% a year ago. Credit growth of medium industries was 19.6% as against 54.4% a year ago. Credit to micro and small industries registered a growth of 12.3% in March 2023 (23.0 % a year ago). Within the industry, credit growth to basic metal and metal products, chemical and chemical products and petroleum, coal products and nuclear fuels accelerated in March 2023 as compared with the corresponding month of the previous year while that to food processing, infrastructure and textiles decelerated. Credit growth to the services sector accelerated to 19.8 % (y-o-y) in March 2023 from 8.7 % a year ago, this can be attributed to the improved credit offtake to Non-Banking Financial Companies (NBFCs) and trade. Personal loans registered a growth of 20.6 % (y-o-y) in March 2023 as compared with 12.6 % a year ago, primarily driven by housing loans.

Not only was the credit demand strong, but Banks had also intensified their focus on deposits. A sharp increase in deposit rates is currently seen in the industry-leading to a higher inflow of fresh deposits. Owing to the rising interest rate scenario fresh deposit rates for PSBs, PVBs and SCBs rose m-o-m by 18 bps, 17 bps and 23 bps, respectively in the quarter ended March 2023 surpassing pre-pandemic levels. PSBs have been comparatively more aggressive when compared with PVBs as not only has the increase been higher, but PSBs absolute rates also continue to be higher than PVBs. As the interest rates are expected to remain elevated in the near term, concern over NIM compression remains.

As mentioned earlier, Indias GDP recorded growth of 6.9% in FY 2022-23. It shows the economic activities in the country have remained strong. The total GST collection for FY 2022-23 stands at 18.10 Lakhs Crores and the average gross monthly collection for the full year is 1.51 Lakhs Crores. The gross revenues in FY 2022-23 were 22% higher than that last year. PMI manufacturing remained robust at 56.4 in March, recording expansion for the 21st consecutive month due to favourable domestic demand. Service sector activity exhibited buoyancy. These services remained in the expansion zone in March, driven by favourable demand conditions and new business gains. Aggregate demand conditions were resilient in Q4 of FY 2022-23, even as private consumption showed some signs of a slowdown. Urban demand indicators like passenger vehicle sales and credit card spending registered robust growth in February 2023, while consumer durables contracted in January 2023. Rural demand indicators such as consumer non-durables, tractor and two-wheeler sales, registered healthy growth. 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. The steady growth in contact-intensive services should be positive for urban demand. The governments focus on capital expenditure, capacity utilisation above the long-period average and moderating commodity prices are anticipated to bolster manufacturing and investment activity.

The RBI continued to closely monitor the global economic situation in light of increased inflation levels, turmoil in the banking systems of certain advanced economies, tense geopolitical relations, and the challenges posed by tight financial conditions. As per data released by the National Statistical Office (NSO), private consumption and public investment were the major drivers of growth for the Indian economy. Furthermore, the CPI headline inflation persisted above 6%, surpassing the tolerance limit set by the RBI, making it a crucial factor to be closely observed in the upcoming year. Global financial market volatility has surged, which can affect imported inflation risks. Based on RBI surveys, it is expected that the upcoming financial year will see a decline in production costs, along with crude prices being maintained below USD 85 per barrel and a normal monsoon, all of which are likely to help curb inflation. The average daily absorption under the LAF moderated to 1.4 Lakhs Crores during February-March from an average of 1.6 Lakhs Crores in December-January. During FY 2022-23, the money supply expanded by 9.0%, and Indias foreign exchange reserves stood at USD 578.4 Billion as of March 31, 2023.

To further strengthen the Indian Banking system, RBI introduced various initiatives to enhance its robustness and credibility, viz. developing an Onshore Non-deliverable Derivative Market. This measure will further deepen the forex market in India and provide improved flexibility to residents in meeting their hedging requirements; enhancing the Efficiency of Regulatory Processes, to streamline and simplify processes for entities to make applications seeking license/authorisation or regulatory approvals from the RBI under various statutes/ regulations from a web-based centralised portal named as PRAVAAH; and expand the scope of uPI by permitting operation of pre-sanctioned credit lines at banks through the UPI. In addition, this initiative will foster innovation and facilitate the development of a centralised web portal, enabling the public to search for and claim their unclaimed deposits easily.

OUR STRATEGY

The Bank envisions building a technologically-driven and customer-focused leading mass-market bank. The Indian economy is currently experiencing a significant rise from the bottom of the pyramid, with numerous families transitioning into the middle class. These emerging middle-class families are evolving and creating a demand for financial solutions. The Bank aims to capitalise on this opportunity by targeting this segment, which is not deeply penetrated by its larger peers. Also, in the process, the Bank aims to help the Indian socio-economic environment move towards growth and upliftment.

Over the past years, the Bank has strengthened its position, especially by capitalising on positive initiatives implemented after the pandemic. As a result, the Bank has established a robust platform that is well-prepared to seize upcoming opportunities.

DiVERSiFiED BOUQUET OF PRODUCTS

The Bank offers a comprehensive suite of products and services and a personalised customer experience. Over the years, the bank has built a strong base of customers across asset and liability verticals. The Bank is focused on creating need-based products for each of its segments. The Bank intends to enhance its services to MSME customers by introducing products tailored for the semiformal and formal segments while also transitioning towards relationship banking. This strategic shift involves a focus on providing shorter term products such as supplychain finance, working capital funding, bill discounting, and other non-fund-based facilities. In housing, the Bank is increasingly moving towards customised offerings targeted at local requirements in various regions. During the fiscal year, the Bank launched a state-level collateral policy catering to diversity in the real-estate market and legal regulations in different states.

The Bank also introduced a micro-LAP (Loan Against Property) product designed for small borrowers requiring funding. This product aims to assist small borrowers and their families with a solid repayment history and the capacity to manage higher-ticket loans. By enhancing its fintech alliances, the Bank will further broaden its channels, enabling enhanced customer reach and providing them with superior services. For institutional segments, new products, such as bank guarantee have been launched and the working capital product is being worked upon.

The Bank is working towards expanding its bulk deposit avenues and looking to enhance exposure limits from various mutual funds, insurance companies, and various co-operative banks. On the liability front, its emphasis will be on implementing digital solutions for institution businesses, such as Public Funds Management System (PFMS). Strengthening fintech alliances will further expand the Banks channels to reach its customers. POS and QR-led acquisition shall be a key area of focus as the Bank expands its reach among small and medium retailers. The Bank is continuously enhancing its offerings towards the aspiring middle-class segment, by offering more value-add products to strengthen the Banks position as a mass-market bank. Government and

FOCUS ON DIGITAL BANKiNG AND ANALYTiCS

The Bank has established a dedicated digital banking team to improve customer experience, optimise technology investments, and minimise operational costs. This initiatives key components include digital innovation, API banking, fintech collaborations and partnerships, robotic process automation, artificial intelligence, digital lending, payments, digital marketing, and data analytics and insights. The aim is to leverage these factors to enhance overall efficiency and effectiveness within the Banks digital ecosystem.

The Bank is actively implementing an end-to-end digitisation process to enhance contactless disbursements and repayments. Leveraging data analytics, the Bank will gain actionable insights to facilitate wellinformed decision-making. By harnessing its full-stack API banking platform, the Bank intends to collaborate with the fintech ecosystem to offer its customers innovative products and solutions. Additionally, digital channels will play a pivotal role in acquiring new customers and delivering services efficiently. The Bank leverages technology to provide a better customer experience to the mass-market and aims to expand its digital reach within the country.

In line with this objective, the Bank has introduced a novel mobile app called Hello Ujjivan. The primary focus of this app is to cater to the needs of semi-literate or less tech- savvy customers, who encounter encountering obstacles like language barriers and difficulty comprehending banking terminology. These challenges often hinder their use of mobile banking services. Being the first of its kind, the app combines various advantages, such as a userfriendly interface, support for vernacular languages, visual communication through pictures, and voice interactions. This unique amalgamation offers customers an experience that fosters deeper digital penetration. In fiscal year 2024, the Bank plans to enhance the app by expanding its range of services, including the addition of loan application functionality.

INCREASED CUSTOMER PENETRATION THROUGH A MULTI-CHANNEL APPROACH

The Bank leverages a strategic blend of physical and digital channels and partnerships to extend its reach and provide added value to customers. The Bank consistently enhances its customer outreach through technologyenabled channels such as Video Banking, Phone Banking, is currently available, with plans for further expansion throughout the year. The Bank operates two in-house phone banking facilities that operate round the clock with a team of over 150 phone bankers.

These facilities offer comprehensive support in nine languages, serving customers and generating/converting business leads. Among over one Million registered customers, 89% access the services in Indian languages. Presently, more than 200 services are available through Phone Banking, with ongoing efforts to further enhance the offerings. Notable features of the Banks Phone Banking include a reduced IVR wait time, quicker access to phone bankers, Straight-Through- Process for certain service requests, and the ability to book term deposits over the phone. The Bank is actively working on transforming this channel into a significant sales platform that would lead to further improvement in field-staff productivity. Furthermore, various initiatives are being implemented to enhance the overall customer experience.

The Bank is committed to offer customers a branch-like experience at their convenience by providing seamless banking services through branchless solutions. In fiscal year 2024, the Bank will introduce Video Banking services to cater to tech-savvy customers who prefer branchless banking. This service aims to enhance trust and confidence in the Bank by enabling face-to-face interactions through video calls. The Video Banking offerings will feature robust multi-layer authentication for security and will be accessible in multiple languages throughout To promote its products and services, the Bank extensively utilises the digital platform employing dedicated programmes that leverage analytics and customise messages to cater to specific target audiences. In addition, the Bank prioritises expanding its customer reach through neighbourhood transaction points, ensuring seamless service for customers who reside at a distance from the branches.

STRENGTHENING LiABiLiTY FRANCHiSE, AND iNCREASiNG OUR RETAiL BASE

The Banks primary emphasis has been establishing a strong and sticky foundation of retail deposits to support its asset expansion. The Bank has observed promising and robust growth in its retail deposit base, including cASA (current Account and Savings Account) deposits and customer acquisition. Anticipating the increase in interest rates, the Bank proactively implemented rate hikes earlier than its competitors. This strategic decision not only bolstered deposit momentum but also contributed to substantial growth in retail deposits for the Bank. Towards the second half of FY 2022-23, the Bank aimed at reducing interest rate premiums over larger peers and successfully reduced the same to a large extent. Consequently, the Bank managed to keep the cost of funds within control despite multiple REPO hikes.

The Bank has established a robust foundation among traditional customer segments such as senior citizens, women, enterprises, and TASc (Trusts, Associations, Societies, and clubs). Additionally, by prioritising digital products and employing a multi-channel approach, the Bank is actively expanding its customer base among newage segments, including young professionals, established investors, and tech-savvy entrepreneurs. With a strong emphasis on customer service, the Bank strives to uphold high standards to enhance customer satisfaction and foster long-term retention. To achieve this goal, the Bank consistently invests in technology and provides comprehensive training to its staff, ensuring that the quality of service remains at the forefront of the industry.

The Banks primary focus will be on enhancing the sourcing mix of customer segments and product offerings. The Bank aims to fulfil a significant portion of its funding needs through current Account Savings Account (cASA) deposits, recurring deposits, and fixed deposits while simultaneously establishing a reliable and enduring deposit base and attracting new customers. The Bank will encourage account utilisation by capitalising on its dedicated customer service and user-friendly digital channels to achieve this.

RESPONSIBLE BANKING FOR THE UNSERVED/ UNDERSERVED SEGMENTS

With a strong commitment to promoting financial inclusion for unserved and underserved segments, the Banks focus is on fostering financial discipline among its customers. The bank will continue to educate and train them about the risks associated with excessive debt and multiple borrowings, and the advantages of saving in a bank and obtaining insurance products. Through the Banks partnership with the Parinaam Foundation, it will offer financial literacy programmes to enhance financial awareness. Furthermore, the Bank is developing an AI platform to assist customers in fulfilling service requests and conducting basic transactions in their preferred language and channel. The Bank aims to encourage its customers to embrace digital channels, providing them with a cost-effective, convenient, secure, and seamless transaction experience.

DIVERSIFY REVENUE STREAMS, CONTROL COSTS

The Banks primary focus is expanding its portfolio of financial solutions to augment its revenue streams, encompassing fee- and non-fund-based revenues. Leveraging its extensive banking outlet network, digital channels, diverse product and service portfolio, and large customer base, The Bank aims to enhance its fee and commission-based business. The Banks treasury team adeptly trades and manages funds, capitalising on market opportunities. Additionally, the introduction of new products for institutional clients will contribute to fee income growth. The RBIs relief measures have categorised lending by SFBs to MFIs and various other segments as priority sector lending, enabling the Bank to exceed the mandated targets for priority sector advances. Furthermore, the trading of priority sector lending certificates will continue to serve as a significant source of fee income.

GROWING CUSTOMER BASE

As on March 31, 2023, the Bank had 77 Lakh customers which is a growth of around 20% over 65 Lakhs a year ago. This growth was driven by both asset and liability customer growth. On the asset side, the Bank acquired around one Million customers during the year primarily driven by MicroBanking and Housing. On the liability side, the Banks retail branch banking has been adding around 70,000 - 75,000 customers every quarter.

Key business and financial performance highlights of the material listed subsidiary Ujjivan Small Finance Bank Limited (USFB) (in I-GAAP):

• Gross advances at 24,085 Crores as on March 31, 2023 as against 18,162 Crores as on March 31, 2022; growth of 33% Y-o-Y

• Disbursement during FY 2022-23 was 20,037 Crores as against 14,113 Crores during FY 2021-22; growth of 42%

• Total deposit of 25,538 as on March 31, 2023 as against 18,292 as on March 31, 2022; grew by 40%

• cASA increased by 35% from 4,993 Crores in March

2022 to 6,744 Crores in March 2023

• 76.9 Lakhs customers in March 2023 as against 64.8 Lakhs customers in March 2022

• 42.5 Lakhs borrowers in March 2023 as against 37.9 Lakhs borrowers in March 2022

• cRAR of 25.8% in March 2023 as against 19.0% in March 2022

• Number of branches increased to 629 in March 2023 as against 575 in March 2022. Number of ATMs increased from 492 to 517 during FY 2022-23

• Total income increased to 4,754 Crores in March 2023 from 3,173 Crores in March 2022; an increase of 50%

• Net interest income grew to 2,698 Crores in March 2023 from 1,774 Crores in March 2022; an increase of 52%

• Profit after Tax (PAT) for FY 2022-23 is 1,100 Crores as against (415) Crores in FY 2021-22

• Return on Asset (ROA) for FY 2022-23 is 3.9% as against (1.9%) in FY 2021-22

• Return on Equity (ROE) for FY 2022-23 is 31.4% as against (13.8%) in FY 2021-22

• GNPA at 2.6% in March 2023 as against 7.1% in March 2022

• NNPA at 0.04% in March 2023 as against 0.6% in March 2022

• Cost to income ratio decreased to 54.8% in FY 202223 from 70.1% in FY 2021-22

• Cost of fund increased to 6.5% in March 2023 from 6.3% in March 2022, due to rise in interest rates

• 18th IBA Technology conference, Expo & Awards - Payment and small finance bank category:-

o Best IT Risk Management o Special Prize - Best AI&ML Adoption Bank o Special Prize - Best Fintech Collaboration

• India Fraud Risk Management Summit & Awards 2023: Best Transaction Fraud Monitoring & Decisioning

• IBSi Global FinTech Innovation Awards 2022: Best Risk Management Implementation Category: Best Project Implementation Most Impactful project

• 13th Aegis Graham Bell Awards: Winners in "Innovation in Consumer Tech" category for HELLO UJJIVAN application

USFB - Key Ratios as on March 31, 2023

Particulars	FY 2022-23
Average Yield - across segment	18.4%
Cost of Funds (CoF)	6.5%
Net Interest Margin (NIM)	9.5%
Return on Assets (ROA)	3.9%
Return on Equity (RoE)	31.4%
Cost to income	54.8%
Capital Adequacy (CRAR)	25.8%
NNPA	0.04%
LCR	180%

HUMAN Resources

Human resources have consistently served as one of the fundamental pillars of the Bank in the pursuit of its mission and vision. The FY 2022-23 once again demonstrated the significant advantages an organisation can reap by adopting an Employee First approach. The Banks unwavering trust in its employees was evident as it consistently surpassed its own quarterly goals, resulting in the most profitable year in the Banks history. This success was further validated when the Bank was recognised as the Best SFB by its employees in a survey conducted by the Great Place to Work Institute for the FY 2022-23. The bank also achieved a notable position in the Top 50 Great Place to Work in both the General Category and BFSI industry.

In FY 2022-23, the Bank dedicated its efforts to enhancing holistic people development and strengthening organisational capabilities, aiming to provide a comprehensive growth experience for its employees. With a focus on progress, the organisation introduced a new grade structure that offers career

growth opportunities based on consistent performance. Additionally, the implementation of a succession policy at the senior management level ensured smooth transitions and effective leadership within the Bank. Skill enhancement was another important area and a total of 17,870 employees were taken through various kinds of training and skill enhancement programmes. Flagship programmes for Branch managers in Branch Banking and Rural Banking and re-skilling programmes for people in Affordable housing, MSE departments, and Credit departments were carried out. On the behavioural training, Customer centricity was a programme that was initiated for branch level employees to improve their skills in providing a better customer experience. Additionally, improving the supervisory capabilities of the organisation has always been a critical task for the Bank.

To address this, the Bank reintroduced firsttime supervisory skills training, accompanied by impact assessment programmes conducted before and after the training sessions. In order to instill risk ownership among branch supervisors, programmes on First Line of Defense from risk were conducted for branch-level employees. The credit underwriting, vigilance, and audit teams also underwent annual re-skilling and certification programmes to ensure their proficiency and expertise. In the current year, significant attention was given to technical training for the IT, Digital Banking, and Human Resources teams. To enhance the technical skills of these departments, online training platforms such as Techacademy and SHRM partners were introduced.

A blended of the E-learning platform within the Bank. A total of 35 e-learning courses were launched, including essential courses on the Code of Conduct, POSH (Prevention of Sexual Harassment), KYC (Know Your customer), AML (Anti-Money Laundering), and Information Security. A well-rounded wellness programme for employees and their families was also an essential area for the Bank. The Bank introduced Emotional Wellness programmes for employees and their families. The re-introduction of free annual health check-ups for all employees and a discounted one for the staff families was done, and 300+ branches participated in the same.

The Bank also ensured better employee insurance benefits and enhanced maternity benefits by 50%, introduced robotic and advanced benefits for cancer treatment, and increased the accidental medical expense limit by 67% for all employees. Apart from this, several online health awareness programmes on matters like road safety, cardiovascular disease, yoga awareness and benefits, and cervical cancer were done. A campaign on road safety awareness was carried out throughout the year, looking at road accidents contributing to a large number of accidents among employees. The Bank strongly upholds the principle of recognising hard work and dedication. In recognition of the employees contributions to the Banks turnaround in FY 2021-22, the Small Finance Bank Board and management made the decision to reward them. This announcement of a special annual pay-out (RLSP) generated significant excitement among the employees. Furthermore, in alignment with the core management value of wealth creation for employees, the bank issued a performancebased Employee Stock Ownership Plan (ESOP) in the third quarter.

The Bank placed significant emphasis on a crucial aspect of people management, which is Listening and Transparent Communication. To facilitate this, an AI-chatbot named Amber was introduced to collect real-time employee feedback and suggestions. The feedback is closely monitored at the Head of HR level, and appropriate corrective actions are taken. Forums like Chair pe Charcha - meetings with the leadership team in the corporate office, Lunch with the Captain, an opportunity for employees to share lunch with the MD and CEO and have a discourse with him, townhalls throughout the year, and the flagship

INTERNAL CONTROLS AND RISK MANAGEMENT AT UJJIVAN FINANCIAL SERVICES LIMITED

Internal control systems and adequacy

The Company has implemented policies and procedures to ensure the smooth and efficient operation of its business. This includes adhering to the Companys policies, safeguarding its assets, maintaining accurate and complete accounting records, and preparing reliable financial information in a timely manner. Additionally, management conducts regular reviews of controls and takes necessary actions in response to potential changes.

Risk Management

The Company operates as a non-operating holding company with the primary objective of making investments in group companies in the form of securities and providing guarantees. It is also engaged in financial activities, including investment in bank deposits, money market instruments, government securities, and other activities permitted by relevant statutory authorities for core investment companies.

As the Bank is a separate listed entity, the company maintains a distant oversight of the Banks risk management practices. It expects the Banks risk management committee to adopt the best risk practices, regularly review the risk management framework, and ensure compliance with risk parameters and regulations. The Company itself has a dedicated Risk Management Committee of the Board, which has formulated a comprehensive risk management policy outlining the committees functions, implementation, and the role of the board.