Global economic growth during the year 2014 remained subpar and uneven. While thedeveloped economies led by the US and UK continued to strengthen, the growth in mostemerging markets slowed further during the year. Among the key emerging economies, Chinafurther slowed down due to weak global growth and policy induced slowdown to move theeconomy to more manageable levels and due to slowdown in investment, particularly in realestate. The year also saw a sharp decline of over 3fty percent in crude prices. The sharpdecline in commodity prices in general and crude prices in particular had a strongnegative impact on the exporting countries while positively in fluencing the importingnations.
|Other Advanced Economies *||2.2||2.8||2.8||3.1|
|Emerging and Developing Economies||5.0||4.6||4.3||4.7|
* [Excludes the G7 (Canada, France, Germany, Italy, Japan, United Kingdom, UnitedStates) and euro area countries] Source: International Monetary Fund 2015
The Indian economy during 2014-15, helped by a stable macroeconomic environment andseveral policy measures undertaken by the new government, witnessed a mild recovery. Thestability in these indicators was critical to revive the investment climate, which wasimpacted by the high volatility during 2012 and 2014. The Central Statistics Office (CSO)(Advanced Estimates) projects GDP growth at 7.4% for 2014-15 against 5.1% in 2013 and 6.9%for 2014. Segment wise, agriculture is estimated to have grown by 1.1%, industry at 5.9%and services at 10.6% during 2014-15.
Within industry, manufacturing grew by 6.8% against 5.3%, underscoring the gradualrecovery in the sector, with basic goods growing by 6.9% against 2.1% during the last yearwhile capital goods expanded by 6.2% against a contraction of 3.6% the year earlier.Consumer durables manufacturing declined by 12.5% during the year, compared with 2013-14,signifying the lack of purchasing power in the economy. Services sector expanded by 10.6%against 9.1% in the preceding year. The year saw continuation of muted activity in railwayand port traffic, domestic and international passenger traffic, international freighttraffic, tourist arrivals, motorcycle and tractor sales as well as bank credit and depositgrowth.
Indian GDP trend
|Agriculture, forestry & 3shing||3.7||1.1|
|Mining and quarrying||5.4||2.3|
|Electricity, gas and water supply||4.8||9.6|
|Trade, hotels, transport, communication and services related to broadcasting||11.1||8.4|
|Financial, real estate & professional services||7.9||13.7|
|Public administration, defence and Other Services||7.9||9.0|
|GDP at market prices*||6.9||7.4|
|Source: CSO *Advance Estimates|
India, helped by the stability in its macroeconomic environment, expected cyclicalrecovery and easing of the interest rate cycle attracted considerable foreign flows intothe country during the 3scal. This led to expansion of the forex reserves by US$ 55billion to US$ 340 billion. The sharp decline in commodity prices in general and crudeprices in particular led to reduction in imports and helped control Current AccountDeficit (CAD). Gold imports, which had dropped by staggering 47% in 2014, increased by19.5% during the 3scal to US$ 34.32 billion, primarily due to the decline in global pricesand the relaxation of a few of the supply related curbs placed by the Reserve Bank ofIndia (RBI).
(Source: Economic Survey 2014-15)
Inflation moderated sharply during 2015 partly supported by the drop in internationalcrude oil prices. Food inflation came down, aided by a limited increase in minimum supportprices for food grains, subdued rural wage growth and the governments offloading offood stocks. A sharp drop in crude oil prices helped contain fuel inflation, though hikesin excise duty limited the pass-through of global oil prices to domestic retail prices.
Easing inflationary pressure allowed RBI to reduce repo rates (rate at which RBI lendsto banks) twice by 25bps each to 7.5%. The gradual pass-on of this reduction to theborrowers will provide the much-needed support to growth by fuelling household spendingand reducing corporate interest outgo.
INDIAN FINANCIAL SECTOR - A SYNOPSIS
The Indian Financial Sector comprises banks and financial institutions. Tighterliquidity conditions, stringent prudential norms and regulatory changes have resulted infewer and stronger Non-Banking Financial Companies (NBFCs) in the country.
The year 2014-15 saw some significant changes in the banking and financial industry:
After a gap of more than 10 years, RBI awarded bank licences to two new entities.
The monetary framework has been changed to 6 reviews per year as compared to 8 earlier.
The RBI issued norms for payments banks and small banks and initiated a process toissue differentiated licences.
RBI received 41 applications for payments bank licence and 72 for small finance banklicences.
Banks were allowed to undertake Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio(SLR) exemption for the funds raised via infra bonds.
Under the Prime Minister led Pradhan Mantri Jan Dhan Yojana over 130 million bankaccounts were opened, helping take financial inclusion significantly forward
INDIAN NBFC SECTOR Credit Scenario
Indian rural economy has slowed down over the last two years. This has adverselyaffected the asset quality to some extent and weakened the growth for the NBFC sector.NBFCs though, stand to benefit from the reduction in the cost of funding, which in turnshould help to improve margins.
A strong monsoon and pro-growth rural focused policy measures should lead to a pick-upin the rural economy and augur well for the NBFC sector with rural presence.
The NBFC sector is an important part of the Indian financial sector. It has beenconsistently contributing to the sector through its scale of operations, technologicalprowess and innovation in form of newer financial products and services. Having a stronglink with the financial sector on both sides of the balance sheet, NBFCs along with otherfinancial entities are subjected to counterparty failures, decline in collateral value,interest rate movement, liquidity and solvency risks. NBFCs have shown dynamism indelivering innovation and in assisting financial inclusion. A wide reach into the remotestareas of the country has helped NBFCs resolve the credit shortage of smaller enterprisesand entrepreneurs, who are a productive part of Indias growth.
The RBI issued new regulations for the NBFC sector, taking cue from several importantrecommendations made by the Working Group (Chairperson: Smt. Usha Thorat) on Issues andConcerns in the NBFC Sector and the Committee on Comprehensive Financial Services forSmall Businesses and Low Income Households (Chairman: Dr. Nachiket Mor). As per the newnorms,3 NBFCs that accept public funds and interact with customers will be subject tostringent prudential regulations.
Net Owned Funds
NBFCs would be required to raise the minimum Net Owned Fund (NOF) limit to Rs.1 croreby March, 2016, and to double it to Rs. 2 crore by 2017, in a phased manner. Currently theminimum NOF requirement is at Rs. 25 lakh.3
CRAR-Tier 1 Capital
For deposit and non-deposit taking NBFCs, Capital to Risk (Weighted) Assets Ratio orCRAR, which includes Tier I capital of 7.5%, is 15% currently. This will be changed toTier I capital of 8.5% by end of March 2016 and 10% by March 31, 2017.
Provision on Standard Assets
NBFCs also have to maintain standard provisioning of 0.3% by end of March 2016; 0.35%by March 2017 and to 0.4% by end of March 2018.
Asset classification norms are being harmonised with those of banks. An asset isclassified as Non-Performing Asset (NPA) when it has remained overdue for a period of 6months or more for loans; and overdue for twelve months or more in case of lease rentaland hire purchase instalments, as compared to 90 days for banks. Lease Rental andHire-Purchase Assets shall become NPA if they become overdue for 9 months (currently 12months) for the financial year ending March 31, 2016 and will become NPAs by March 31,2018 in a phased manner in case they are overdue for 3 months. Assets other than LeaseRental and Hire-Purchase Assets shall become NPA if they become overdue for 5 months forthe financial year ending March 31, 2016; if overdue for 4 months for the financial yearending March 31, 2017; and if overdue for 3 months for the financial year ending March 31,2018 and thereafter.
Corporate Governance and Disclosure Norms
Directions pertaining to Corporate Governance have been encapsulated in a separate setof Guidelines viz. "Non-Banking Financial Companies - Corporate Governance (ReserveBank) Directions, 2015" effective 10th April, 2015.
These are applicable to all Deposit accepting NBFCs (NBFC-D) and NBFC-ND-SI (nondeposit accepting NBFC with asset size of Rs. 500 crore and above). All the provisionspertaining to Corporate Governance and Disclosure contained in the Revised RegulatoryFramework for NBFCs issued on November 10, 2014 have been incorporated in the Guidelines,albeit in a structured manner.
The salient features are given hereunder:
The constitution of the following committees has been made mandatory :
Audit Committee Nomination Committee Risk Management Committee
Audit partner rotation
The new framework prescribes rotation of the Partner of the Audit firm every threeyears.
Information Systems Audit
The Audit Committee is required to ensure that Information Systems Audit is conductedat least once in two years.
Fit and proper criteria for Directors
To put in place a policy for ascertaining the Fit and Proper criteria forDirectors in accordance with the Guidelines that have been prescribed.
There are also increased requirements for Directors to provide declaration orundertaking and quarterly filings (statement of change of Directors and Certificate fromManaging Director that fit and proper criteria in selection of Directors hasbeen followed) with the RBI; the annual statement to be certified by the Auditors.
Additional Disclosures in Financial Statements
The new framework has significantly increased the disclosure requirements in theFinancial Statements. Some of the important additional disclosures to be made in theFinancial Statements of NBFC-D and NBFC-ND-SI include the following:
Registration, licence, or authorisation obtained from other Financial Sector Regulators
Ratings assigned by credit rating agencies and migration of ratings during the year
Penalties, if any, levied by any Regulator
Information i.e. area, country of operation and joint venture partners with regard tojoint ventures and overseas subsidiaries
Asset liability pro file, extent of financing of parent company products, NPAs andmovement of NPAs, details of all off-balance sheet exposures, structured products issued,securitisation or assignment transactions.
GROWTH DRIVERS OF NBFC SECTOR
The NBFC sector witnessed strong activity in some sectors, indicating a revival.Predominant among them is the CV industry where freight activity has risen and lowerdiesel prices are helping improve operator profit s. States are getting a greater share ofrevenue from the Centre, and thus, will be able to channelize funds into sustainablesocial benefit schemes, and infrastructure improvement. This will boost the rural economy.
The following sectors drive growth in the NBFC sector, and their current performance in2014-15 and the long term outlook is listed below:
One of Indias major sectors, the automotive industry contributes 22% toIndias GDP. In 2014-15, Passenger Vehicles sales increased by 3.9% during the 3scal3but the overall Commercial Vehicles segment registered3 a de-growth3 of 2.84% during theyear. Medium & Heavy Commercial Vehicles grew by a strong 16.02% and Light CommercialVehicles sales declined by 11.57 %. (Source: Society of Indian AutomobileManufacturers). India is expected to become the third largest market for automobilesby 2020, signifying bright growth prospects.
India is the largest tractor market in the world. (Source: JD Power Asia Pacificreport).The sector performed sub-par in 2014-15 due to below-normal monsoon, lower farmoutput and low support prices of wheat and paddy. During the 3scal, Tractor sales saw adouble digit decline to 5.5 lakh units due to lower demand on account of sluggishness inthe economy. Karnataka was the only State to register a double digit increase in the salesof tractors on account of relatively better rainfall. Based on good monsoon predictions,improving irrigation infrastructure, the prospects for the tractor industry look positivein the long-term. Tractors also find use in other industries like infrastructure andconstruction, both of which are expected to witness a major upturn, on the back of recentpolicy initiatives. Given these factors, we believe that tractor financing will also growsignificantly.
Infrastructure and Real Estate
The sector continued a lacklustre performance with slow execution and several stalledprojects in 2014-15. Thus, demand for construction equipment remained tepid during theyear. However, the future looks bright due to benign interest rates, falling crudeand steel prices and infrastructure investment increasing in several States across India.The recent budget proposals have given a big push for infrastructure sector with Rs.70,000 crore increase in investment. The budget also stressed on the need to revive thePublic Private Partnership (PPP) mode of infrastructure development. The Government ofIndias revised norms on minimum built-up area, capital requirements and easing ofexit norms will attract Foreign Direct Investment (FDI) into construction.
The Government of Indias new vision is to ensure Housing for All by2022, especially with prioritised focus on affordable rural housing. This requires severalinitiatives to empower consumers and to promote mass housing construction technologies.Adequate development of the housing sector could help increase its share in the economyfrom 6% in 2013 to 10-12% by 2022.
Indian mutual fund industry has significant headroom to develop, with thecountrys savings rate being over 30-35% in the last few years. The Asset UnderManagement (AUM) stood at Rs 10,82,757 crore at the end of March 31, 2015. The number ofinvestors has grown significantly in the past 3scal and an upward trend in markets andimproving economic indicators are expected to result in a much more broad-basedparticipation in 2015-16.
Source: Association of Mutual Funds in India (AMFI)
Gold loan industry
For most of 2014, gold prices fell largely due to rising US dollar, tepid demand fromthe two largest importing nations viz India and China and due to limited demand of GoldExchange Traded Funds (ETFs). In case of lending against gold, RBI harmonised the LTVratio to 75% for banks as well as NBFCs. The Central Bank also mandated a high Tier ICapital Adequacy Ratio of 12% for the greater risk in gold lending.
Reducing international commodity prices prove to be a favourable external shock forcrude importers even as this adversely impacts crude exporters. Global growth is likely tosteadily shoot up through 2015 and 2016. The growth outlook in the Euro area is expectedto improve, bolstered by increase in demand from lower crude prices and a depreciatingeuro along with easing financial and credit conditions following accommodative monetarypolicies. Capital movements into US Treasuries on the back of a US rate hike anduncertainty regarding commodity and energy prices as well as geopolitical climate, are afew of the key risks and could disrupt global growth as market sentiments shift rapidly.
In India, the retail inflation has consistently fallen since September 2014. TheGovernments policies aimed at increasing infrastructure investment and subduedcommodity prices together with upbeat financial market conditions for India points atsustained recovery in 2015-16. Retail inflation is estimated to lie below 6% in 2015-16.CAD is estimated to remain around the acceptable levels of less than two percent onaccount of restrained input costs unless global commodity prices rise again, particularlythose of crude oil. Meanwhile, softened input costs shall put savings into government andcorporate pockets. As per RBI survey, Fiscal deficit is expected to moderate further at3.9% in 2015-16 because of lower subsidies, deregulated energy prices and excise levies ondiesel and coal.
ABOUT MAHINDRA FINANCE
Mahindra & Mahindra Financial Services Limited (Mahindra Finance) is aleading NBFC and is a part of the USD 16.5 billion Mahindra Group. The Company has awell-diversified business covering Auto and tractor finance, SME loans, ConstructionEquipments (CE), Personal Loan and gold loan across the country. It also offersFixed Deposits and is also in the business of Mutual Fund distribution. The Company has1,108 offices across the country and over 3.5 million customers (as on March 31, 2015) andis the first finance Company from India to become a part of Dow Jones SustainabilityIndex. MMFSL also recorded Total Assets Under Management of Rs. 36,878 crores as on 31stMarch, 2015.
SME FINANCIAL SOLUTIONS
With SME financial solutions, the Company assists in providing project finance, workingcapital, equipment finance, corporate loans and bill discounting services. The Companyadvises small and medium entrepreneurs to understand their financing needs and options,and avail the best possible solutions. Mahindra Finances biggest strength is easyaccessibility and personalised services which can help small scale dreams reach their truepotential, because we believe in the capability of these entrepreneurs.
India Ratings and Brickworks Ratings upgraded MMFSLs long term debt rating toAAA.
CARE Ratings also assigned AAA rating to Companys long term debt.CRISIL has reaffirmed AA+/Stable rating to the Companys long term debt.
The key operational highlights during the year are as below:
Opened more branches at the village level to remain close to customers, to understandtheir cash flows and approach the customer for recovery when he has the money. Thesebranches shall also seize new opportunities when the economic cycle and farm cycle improve
Increased number of offices to 1,108 as on 31st March 2015, up by 24% from 893 officesas on 31st March 2014
Increased employee base to 14,197 s on 31st March 2015 as against 12,816 as on 31stMarch 2014
Total Income increased to Rs. 5585 Crores in 2014-15 from Rs. 4953 Crores in 2013-14,with an increase of 13%
Assets Under Management (AUM) has risen to Rs. 36,878 Crores from Rs. 34,133 Crores in2013-14, with an increase of 8%
The customer base reached 3.63 million people, from 3.12 in 2013-14, an increase of 17%
The Company has always been following norms that are more prudent than those prescribedby RBI. The Company has put in place processes to meet RBIs new regulations.
The following table presents MMFSLs standalone abridged financials for thefinancial year 2014-15, including revenues, expenses and profits.
The Company has 1,108 offices across the country and over 3.5 million customers (as onMarch 31, 2015) and is the first finance Company from India to become a part of Dow JonesSustainability Index.
|Abridged profit and loss Statement||Rs. in Crores|
|Particulars||Year ended March 31, 2015||Year ended March 31, 2014|
|Revenue from operations||5,536.06||4,921.63|
|Employee benefits expense||459.08||297.33|
|Depreciation and amortization expense||41.52||24.30|
|Loan provisions and write offs||827.49||505.79|
|profit before tax||1,253.64||1,345.77|
|profit for the year||831.78||887.23|
|Key Indicators||FY 2014-15||FY 2013-14|
|RONW (Avg. Net Worth)||15.5%||18.6%|
|Tier I Capital||15.5%||15.5%|
|Tier II Capital||2.8%||2.5%|
|Book Value (Rs.) (excluding ESOPs)||100.2||90.2|
|NIM (Gross Spread)||9.5%||9.9%|
SCOT OF MAHINDRA FINANCE Strengths
Quality service: Mahindra Finance provides financial services through simpleprocesses and procedures in sanction and disbursement of credit as well as; timely,friendly and flexible terms of repayment aligned to the unique features of its clientele.Easy and fast appraisal and disbursements make the Company, the preferred choice for manyof its customers.
Round the corner: An established reach and network helps the Company to cater tothe remotest of villages. More than 90% of the unorganised sector has no link with banksand 60% of the rural consumers do not have bank accounts. The Company has significantbusiness presence in semi-urban and rural areas.
Customer Insight: Focus on customer is one of the key factors that have driven theCompany in all these years. A strong business model and a prudent insight about itscustomers gives the Company a competitive edge. Better risk management have made MahindraFinance achieve commendable growth as well.
Strong balance sheet: On the asset side, loans and advances make up nearly 92.6% ofthe total assets. This primarily includes auto loans. Most of these loans are retailloans, and therefore spread a large customer and geographic base.
Demographic pattern and rising rural prosperity: India has one of the youngestpopulations in the world, and this means that there will be a large number of peopleseeking employment and livelihood. The aspirations in rural India are rising, andopportunities for those wanting to be entrepreneurs are increasing.
Rural prosperity is also on the rise, fuelled by increased support prices and welfareschemes initiated by the government. Per capita Gross Domestic Product has grown faster inIndias rural areas than in its urban centres.
New opportunities: The rising income and prosperity levels in rural India will leadto many new opportunities like home finance and SME loans. New opportunities like homefinance, SME finance for the rural reach along with, and a foray into factoring and billpayment for the rural hard-to-reach customer will take the Company to new scales ofsuccess.
Regulatory concerns: Newer regulatory updates pose a constant challenge for smoothoperations of the Company. With constant updates governing the functional aspects offinancial institutions, there lies an unseen challenge in the coming years.
Geographical concentration: Too much focus on rural market and lesser on urbanmarkets might affect the Companys sustainability.
Cost of funds: Higher cost of funds might lead to reduced bottomline for theCompany. Also, a lesser interest spread, or higher cost of lending might lead to customersturning away to cheaper source of funds.
Higher delinquencies: Asset quality deterioration may not only wipe the profit sout of the Company but eat into its networth. The Company must ensure that it maintainsminimal delinquency levels.
MMFSL has formulated a robust Enterprise-wide Risk Management program (ERM) whichinvolves risk identification, assessment and risk mitigation planning for business,strategic, operational, financial and compliance related risks. The ERM framework has beendeployed across various processes in the organisation and is governed by the corporaterisk office. A robust internal check process is deployed to prevent and limit risk ofnon-compliance.
The Risk Report prepared by the Chief Financial Officer covers inter alia, the keyrisks, movement in the pro file of high risk category, root causes of risks, and theirimpact, the risk management measures and controls adopted to mitigate the risks. The RiskReport is reviewed by the Risk Management Committee and placed before the Board ofDirectors periodically.
The key Business Risks and the mitigation measures adopted by the Company are asfollows
|The Company is exposed to high credit risk given the unbanked rural customer base and diminishing value of collateral.||The Company manages credit risk through credit norms established through adequate experience in this line of business. Deep insight about the nature of borrowers and a strong business model reduces the risk of default significantly.|
|General industrial or economic slowdown affects the consumer sentiment and cash flows and may result in the slowdown of demand for vehicles consequently affecting Companys business.||The Companys diversified business portfolio coupled with customer reach enables it to sustain growth even in difficult financial conditions.|
|Disruption in funding could lead to liquidity crunch.||The Company gets funding requirements from diverse sources, including Banks, FIIs etc securitization of receivables, and other credit facilities like retail Fixed Deposits.|
|Sharp fluctuations in interest rate may lead to a decline in the Companys net interest margin and ability to offer competitive lending rates to its customers.||The Company has prudently evolved a strategic fund mix to reduce dependence on banks and enables it to strike a balance between various sources of funding while reducing the cost of borrowing. The Company enjoys an excellent credit rating on its financial instruments which enables it to raise funds at competitive rates.|
|The shortage of skilled manpower in the local areas of operation pose a considerable risk given the Companys customer centric business model.||The Company strives to attract and retain the best talent from local markets, adopts a robust performance management system, employee engagement and training practices, learning and development initiatives to create an inspiring and rewarding work environment.|
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