AAVAS Financiers Ltd Management Discussions

GLOBALECONOMY

Overview: The global economic growth was estimated at a 3.2% in 2022 as compared to 6.1% in 2021 (which was on a smaller base of 2020 on account of the pandemic effect). The relatively slow global growth of 2022 was marked by the Russian invasion of Ukraine, unprecedented inflation, pandemic-induced slowdown in China, higher interest rates, global liquidity squeeze and quantitative tightening by the US Federal Reserve.

The challenges of 2022 translated into moderated spending, disrupted trade and increased energy costs. Global inflation was 8.7% in 2022, which was amongst the highest in decades. US consumer prices decreased about 6.5% in 2022, which was the highest in four decades. The US Federal Reserve raised its benchmark interest rate to its highest in 15 years. The result is that the world ended 2022 with the concern that the following year would be slower. The global equities, bonds and crypto assets reported an aggregated value drawdown of USD26 trillion from peak, which was equivalent to 26% of the global gross domestic product (GDP). In 2022, there was a concurrently unique decline in bond and equity markets; 2022 was the only year when the S&P 500 and 10-year US treasuries delivered negative returns of more than 10%.

Gross FDI inflows into equity, reinvested earnings and other capital – declined 8.4% to $55.3 billion in April-December. The decline was even sharper in the case of FDI inflows as equity: these fell 15% to $36.75 billion between April and December 2022. Global trade expanded by 2.7% in 2022 (expected to slow to 1.7% in 2023). The S&P GSCI TR(Global benchmark for commodity performance) fell from a peak of 4,319.55 in June 2022 to 3495.76 in December 2022. There was a decline in crude oil, natural gas, coal, lithium, lumber, cobalt, nickel and urea realisations. Brent crude oil dropped from a peak of around USD 120 per barrel in June 2022 to USD 80 per barrel at the end of the calendar year following the enhanced availability of low-cost Russian oil.

Regional growth (%)	2022	2021
World output	3.2	6.1
Advanced economies	2.5	5
Emerging and developing economies	3.8	6.3

Performance of major economies

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

Outlook

The global economy is expected to grow by 2.8% in 2023, influenced by the ongoing Russia-Ukraine conflict. Concurrently, global inflation is projected to fall marginally to 7%. Despite these challenges, there are positive elements within the global economic landscape. The largest economies like China, USA, the European Union, India, Japan, United Kingdom and South Korea are not in a recession. Approximately 70% of the global economy demonstrates resilience, with no major financial distress observed in large emerging economies. The energy shock in Europe did not result in a recession, and significant developments, including Chinas progressive departure from its strict zero-covid policy and the resolution of the European energy crisis, fostered optimism for an improved global trade performance.

Despite high inflation, the US economy demonstrated robust consumer demand in 2022. Driven by these positive factors, global inflation is likely to be still relatively high at 4.9% in 2024. Interestingly, even as the global economy is projected to grow less than 3% for the next five years, India and China are projected to account for half the global growth.

(Source: IMF)

INDIANE CONOMY

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

Growth of the Indian economy

	FY 20	FY 21	FY 22	FY23
Real GDP growth (%)	3.7	(6.6)	8.7	7.2
Growth of the Indian economy quarter by quarter, FY 22-23
	Q1FY23	Q2FY23	Q3FY23	Q4FY23
Real GDP growth (%)	13.1	6.3	4.4	6.8

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

The agriculture sector in India grew at an average annual growth rate of 4.6% during the last six years. This growth can be partly attributed to good monsoon years coupled with various reforms undertaken by the government to enhance agricultural productivity. In FY 22-23, bank credit registered a growth of 15%, compared to 9.6% in previous year. Till the end of Q3FY23, total gross non-performing assets (NPAs) of the banking system fell to 4.5% from 6.5% a year ago. Gross NPA for FY 22-23 was expected to be 4.2% and a further drop is predicted to 3.8% in FY 23-24.

The steel sector plays a pivotal role in sectors like construction, infrastructure, automobile, engineering and defence. India is a global force in steel production and has emerged as the second largest crude steel producer in the world. The steel sectors performance in 2022-23 has been robust with a cumulative production and consumption of finished steel at 88 MT and 86 MT, respectively during April-December 2022, higher than the corresponding period during the previous four years. The growth in finished steel production is aided by a double-digit growth in consumption

(11% on a YoY basis), bolstered by a pick-up in the infrastructure sector significantly driven by the increased capex of the government.

Till Q3, FY 22-23, Indias current account deficit, which is a crucial indicator of the countrys balance of payments position, decreased to $18.2 billion or 2.2% of GDP from $22.2 billion (2.7% of GDP) a year ago. Indias fiscal deficit was estimated in nominal terms at ~ H17.55 lakh crore and 6.4% of GDP for the year ending March 31, 2023. Indias headline foreign direct investment (FDI) numbers rose from US$74.01 billion in 2021 to a record $84.8 billion in 2021-22, a 14% Y-o-Y increase due to 100% FDI approval via automatic route in the Insurance sector, civil aviation, coal sector, telecom, pharma and infrastructure. In the Union Budget 2023-24, the government has set a disinvestment target of H51,000 crore, a reduction of nearly 21% from the budget estimate for the current year and just H1,000 crore more than the revised estimate. Moreover, the Centre has not met the disinvestment target for 2022-23 having realised H35,293 Cr as on year ending FY 22-23. (source: DIPAM) out of which H20,516 crore or close to a third of the budgeted estimate came from the IPO of 3.5% of its shares in the Life Insurance Corporation (LIC). After three consecutive years of rise, Indias forex reserves declined by around $ 70 billion in 2022 amid rising inflation and interest rates. The countrys forex reserves, which stood at $606.47 billion on 1 April 2022, declined to $578.44 billion on March 31, 2023. Indias currency weakened from H75.91 to a US dollar to H82.34 as on March 31, 2023 due to a stronger dollar and weaker current account deficit. The divergence between a relatively high wholesale price index (WPI) inflation and lower consumer price index (CPI) inflation widened in May 2022 primarily owing to a difference in relative weights of the two indices and the lagged effect of imported input costs on retail prices. However, the gap between the two measures of inflation has reduced since then, demonstrating a tendency towards convergence. An important measure of demand-pull inflation remains sticky. RBI projects CPI inflation is projected at 5.1% for 2023-24, with Q1 at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2%.

India moved up in the Ease of Doing Business (EoDB) rankings from 100th in 2017 to 63rd in 2022.

The total gross direct tax collection for FY 22-23 was H18.10 lakh crore, an average of H1.51 lakh crore a month and up 22% from FY 21-22, Indias monthly goods and services tax (GST) collections hit the second highest ever in March 2023 to H1.6 lakh crore. Per capita income almost doubled in nine years to H1,72,000 during the year under review, a rise of 15.8% over the previous year. Indias GDP per capita was 2,320 USD (March 2023), close to the magic figure of 2500 USD when consumption spikes across countries. Outlook: India is expected to grow 6.8% in FY 23-24, catalysed in no small measure by 35% capital expenditure growth by the government. The growth could also be driven by broad-based credit expansion, better capacity utilisation and improving trade deficits. Headline and core inflation rates could trend down. Private sector investments could revive.

According to the World Bank April 2023 projections, Indias GDP is projected to expand by 6.3% in FY 23-24, supported by domestic demand and increased public investment. Indias retail inflation rate could decline from 6.6% to 5.2% in FY 23-24.

Indias production-linked incentive appeared to catalyse downstream sectors. Inflation was steady. India was at the cusp of making significant investments in renewable energy and other sectors and emerging as a suitable industrial supplement to China. India is poised to outpace Germany and Japan and emerge as the third-largest economy by the end of the decade.

Broad-based credit growth, improving capacity utilisation, governments thrust on capital spending and infrastructure should bolster investment activity. The global economy is recovering from the setback of the pandemic while geo-political conflicts persist. India could effectively steer through the situation owing to its dedicated support to infrastructure creation through increased capex and strong macro-economic fundamentals.

Union Budget FY 23-24 provisions

The Budget 2023-24 sought to lay the foundation for the future of the Indian economy by raising capital investment outlay by 33% to H10 lakh crore, equivalent to 3.3% of GDP and almost three times the FY 19-20 outlay, through various projects like PM Gatishakti, Inclusive Development, Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition and Climate Action, as well as Financing of Investments. An outlay of H5.94 lakh crore was made to the Ministry of Defence (13.18% of the total Budget outlay). An announcement of nearly H20,000 crore were made for the PM Gati Shakti National Master Plan to catalyze the infrastructure sector. An outlay of H1.97 lakh crore was announced for Production Linked Incentive schemes across 13 sectors. The Indian government intends to accelerate road construction in FY 23-24 by 16-21% to 12,000-12,500 km. The overall road construction project pipeline remains robust at 55,000 km across various execution stages. These realities indicate that a structural shift is underway that could strengthen Indias positioning as a long-term provider of manufactured products and its emergence as a credible global supplier of goods and services.

HOUSING FINANCE SECTOR REVIEW

The home loan market is expected to double in the next five years with 70 per cent of home loans potentially be less than the ticket size of 50 lakh, catalyzed by urbanisation and affordable mortgage rates. In 2021, the affordable housing segment with ticket size up to H35 lakh comprised 90% of the market in terms of volume and about 60% based on value. Growth in FY 22-23 was driven by healthy demand and growing economic activity without compromising growth and asset quality estimates. According to the Housing Price Index (HPI) published by the National Housing Bank, the overall increase in composite HPI assessment and HPI market price in the quarter ending September 2022 compared to the quarter ending September 2021 indicates a revival in the housing finance sector.

Assets under management (AUM) of housing finance companies were expected to grow 10-12% in FY 22-23 compared to 8% in FY 21-22. Structural factors driving end-user housing demand remained intact in FY 22-23 despite rising real estate prices and interest rates (accounting for 13-15% growth in the home loan segment). The proportion of homebuyers aged under 35 increased as a proportion of the whole and families buying second homes increased as buyers moved into larger homes. Collection efficiency for NBFCs and housing finance companies remained in the range of 97-101% when last estimated at the beginning of FY 22-23. Tightening pool selection criteria by the investors for securitised pools and strengthening of prevailing credit appraisal processes and parameters by lenders following the pandemic had a positive bearing on collection efficiency. Housing finance companies registered a double-digit growth rate of 11% in FY 22-23 on year, surpassing 7% growth by banks. The growth of the housing finance sector in FY 21-22 was 9%, driven largely by the affordable housing segment. At present, Indias home loan market is valued at about H24 lakh crore and is expected to double in the next five years with mortgage to GDP ratio rising commensurately from 11% in 2022.

(Source: Business Standard, Business Insider, Financial Express, the Hindu business line, KPMG, ICRA)

THE AFFOR DABLE HOUSING FINANCE SEGMENT

Housing prices in some of Indias mega cities reported double-digit growth in the last year. Firming up in Tier-II and Tier-III witnessed most of the action with the advent of remote working. The global geo-political uncertainty hardened prices of construction materials. Fresh disbursals witnessed maximum YoY growth in Tier-III and below districts in FY 21-22 over FY19. Among the top 20 Tier-III districts, maximum numbers of districts are from Punjab and Karnataka. Among the Tier-IV districts, Uttar Pradesh topped the list of six districts among the top 20 with maximum growth in fresh disbursals in FY 21-22 compared to FY19. The number of women borrowers in new disbursements grew significantly in FY 21-22 in Tier-III and IV.

(Source: Hindu Business Line)

GROWTH DRIVERS

Population growth: India surpassed China as the worlds most populous country in 2023. Growing population leads to increase in household demand creating an increased lending opportunity. Indias working-age population is expected to grow to 988.5 million by 2036, catalyzing affordable housing growth.

Rising middle class population: The share of the middle class population with an annual household income of H5-30 lakh, doubling from 14% in 2004-05 to 31% in 2022. The middle class population is expected to reach 63% by 2047.

Health awareness: The Covid-19 pandemic has generated greater awareness related to safe and healthy housing, creating a greater emphasis on affordable housing projects.

Rise in nuclear families: According to Morgan Stanley, Indias average household size is expected to reduce from 5.5 persons in 1991 to 4.5 persons by 2031. As a result, nuclearisation is expected to drive the demand for affordable housing.

Improved affordability: The property prices have a grown at a mere 2.8% CAGR between December 2018 and December 2022. Improved affordability is expected to drive the growth of the segment.

Housing shortage: As per a technical study by the Ministry of Housing and Urban Poverty Alleviation, the urban housing shortage in India was estimated at ~19 million in 2022. This gap was expected to widen to an estimated 38 million homes by 2030 on account of a growing population and increased urbanisation.

Mortgage penetration: As of 2022, Indias mortgage penetration was 11% of the GDP, much lower than Asian economies (20-30%). However, with increased demand, it is expected that India would be able to double home loans to USD 600 billion by 2027.

Government support: The Government announced H48,000-crore allocation under the Pradhan Mantri Awas Yojana, emphasising the need for affordable housing. By 2023, around 8 million dwellings are scheduled to be finished across the country. The interest-subvention scheme, interest deduction from taxable income, tax exemption for principal repayment and capital gains exemption are expected to drive the sector.

Growing urbanisation: Indias urban population is expected to stand at 675 million (accounting for 43.2% of the countrys population) by 2035. This is expected to lead to a rise in housing and housing finance sector demand.

(Source: realtyplus.com, Financial Express, KPMG, CRISIL Research, the hindu.com)

M O R T G A G E A S A % O F N A T I O N A L G D P A C R O S S R E G I O N S

India	11%
China	18%
Malaysia	34%
Japan	39%
Singapore	44%
Germany	45%
US	52%
UK	68%
Netherlands	89%
(Source: KPMG)

G O V E R N M E N T P O L I C I E S

Special refinance facilities: The government facilitated special refinance facilities for NBFCs and HFCs.

Urban Infrastructure Development Fund: The Indian government will establish this fund to develop urban infrastructure through public agencies in tier-II and tier-III cities. The fund is expected to be managed by the National Housing Bank with an estimated allocation of H10,000 crore annually.

Alternative Investment Fund: The Union Cabinet set up an Alternative Investment Fund with a corpus worth

H25,000 crore. This will provide relief to developers with unfinished projects and ensure timely delivery of homes to buyers.

Pradhan Mantri Awas Yojana (Urban): The government of India has been facilitating higher budget allocations towards affordable housing — the Pradhan Mantri Awas Yojana (PMAY) launched in June 2015 to provide quicker urban housing approvals, was allocated an outlay of H79,000 crore from the Union Budget 2023–24

Pradhan Mantri Awas Yojana

(Gramin): In FY 22-23, the government has targeted to complete around 5.3 million rural houses, a growth of 25% from the previous year. In FY 21-22, the centre targeted to build around 6.1 million rural houses out of which over 4.3 million were completed. The overall target is to build 29.5 million houses under the scheme to ensure Housing for all by FY 23-24.

Tax moderation: Homebuyers have to pay a goods and services tax (GST) on the purchase of under-construction properties like flats, apartments and bungalows at the rate of 1% for affordable housing . The GST rate stood at 5% for properties under the luxury residential building category.

Outlook

The long-term prospect of Indias affordable housing finance sector remains intact due to the growing number of Indians construct or purchase homes. As the Indian economy grows, the mortgage to-GDP ratio of 11% (considerably less compared to other countries) could improve, doubling the sector in five years. The housing finance sector is expected to enhance on account of consistent population growth, enhanced non-metro growth, higher per capita income, home ownership preference, affordable home costs, consistent government support and sectorial under-penetration.

C O M PA N Y O V E R V I E W

Aavas is a housing finance company in the NBFC sector, having its Corporate and Registered office at Jaipur, Rajasthan. The Company is mainly engaged in providing housing loans in rural and semi-urban under penetrated markets in States of Rajasthan, Maharashtra, Gujarat, Madhya Pradesh, Haryana, Uttar Pradesh, Chhattisgarh, Uttarakhand, Punjab, Himachal

Pradesh, Delhi, Odisha and Karnataka. The Companys branch network stood at 346 (as on March 31, 2023) and assets under management of H14,167 crore as on March 31, 2023.

A AVA S P E R F O R M A N C E R E V I E W, F Y 2 2 - 2 3

Financial performance

Income and profits

Total Income of the Company for the year ended March 31, 2023, was H1,610 crore compared to H1,306 crore in the previous year, growing 23%. During the year ended March 31, 2023, the Company reported a Profit Before Tax of H549 crore as against H455 crore in the last financial year, growing 21%. The Company reported a Total profit of H428 crore for the year ended March 31, 2023, as against H358 crore for the year ended March 31, 2022, a growth of 20% over the previous year.

Statement of Profit and Loss

Key features of the Statement of Profit and Loss for the year ended March 31, 2023 were: Profit Before Tax stood at H549 crore, a growth of 21% over H455 crore in the previous year.

Total Profit after tax increased 21% compared to H357 crore in the previous year.

Net interest margin stood at H1,012 crore registering a growth of 23%. The Companys Return on Average Total Assets stood at 3.51% for the year ended March 31, 2023. Total expenses increased 24.7% during the year under review. The Earnings per Share (Basic) stood at H54.44 compared to H45.31 in the previous year.

Return on average net worth was 14.1% compared to 13.72% in the previous year.

Debt-equity ratio stood at 3.01 times compared to 2.84 times in the previous year.

The Companys Operating Expenses ratio (to average total assets) stood at 3.68% for the year ended March 31, 2023.

Operational performance

Aavas is a retail affordable housing finance company aiding the low and middle-income self-employed customers in the semi-urban and rural areas of India. The Company majorly provides its customers home loans for the purchase or construction of residential properties and the extension and repair of existing housing units. As of March 31, 2023, majority of the home loans disbursed by the Company were for single-unit properties, out of which, almost all of them were to be occupied by the borrowers. Most of the Companys customers have limited access to formal banking credit for a mortgage loan.

Loan products: The Company provides customers home loans for the purchase or construction of residential properties and for the extension and repair of existing housing units. In addition to home loans, the Company provided other mortgage-backed loans, comprising loans against property and mortgage backed MSME loan which accounted for 30% of total loan asset as of March 31, 2023. As of March 31, 2023, 63% of our gross loan assets were from customers who belonged to the economically weaker section(EWS) and low-income group(LIG), earning less than H50,000 per month.

Sanctions: The Company sanctioned H5,169 crore loans during the year compared to H3,762 crore in the previous year, a growth of 37%. The cumulative loan sanctions since inception stood at H23,390 crore. Disbursements: The Company disbursed H5,025 crore mortgage loans during the year compared to H3,602 crore in the previous year, a growth of 39%. The cumulative loan disbursement since inception stood at H22,382 crore by the end of the year.

Asset under Management (AUM): The AUM of the Company stood at H14,167 crore (Including pool buyout of H2,757 crore) as of March 31, 2023, compared to 11,350 crore in the previous financial year, a growth of 25%. As of March 31, 2023, the average loan sanctioned was H8.90 lakh.

Spread on loans: The average yield on loan assets as on March 31, 2023, stood at 13.12% per annum compared to 12.65% as on March 31, 2022. The cost of funds stood at 7.61% per annum as on March 31, 2023, as against 6.88% as on March 31, 2022. The spread on loans was 5.51% as on March 31, 2023.

Non-performing assets: The Company maintained its gross NPAs at H107 crore (0.92% of the loan assets) as on March 31, 2023. The Company reviewed its delinquency and loan portfolio on a regular basis. The Company followed a defined policy with procedures to address delinquencies and collections. As a result, Gross NPA and Net NPA as of March 31, 2023, were 0.92% and 0.68% respectively (compared to 0.99% and 0.77% respectively as of March 31, 2022).

Capital adequacy ratio: The Company is required to maintain a capital adequacy ratio of 15% on a standalone basis from March 31, 2023. The Companys capital adequacy ratio as of March 31, 2023 stood at 46.96% as against 51.93% in the previous financial year, which was far above the minimum required level of 15%.

Lending operations: The Companys lending operations continued to be robust with the growing demand for housing loans. Loans to the EWS and LIG segment increased by 18.4% and 21.2% respectively, in value terms compared to the previous year. The average home loan to the EWS and LIG segment was H4.83 lakh and H9.09 lakh.

Branch network: Aavas engaged in contiguous on ground expansion across regions; as of March 31, 2023, the Company conducted operations through 346 branches covering 13 States, of which it accounted for a significant presence in four states (Rajasthan, Gujarat, Maharashtra, and Madhya Pradesh). The Company has its registered office in Jaipur, Rajasthan. The Company added 32 branches in FY 22-23.

Resource mobilisation

Share capital: The issued and paid-up Equity Share Capital of the Company as on March 31, 2023, stood at H79,05,68,740 (Rupees seventy-nine crore five lakh sixty eight thousand seven hundred forty ) consisting of 7,90,56,874 (Rupees Seven crore ninety lakh fifty six thousand eight hundred seventy four) equity shares of H10 each compared to H78,93,64,510 (Rupees seventy-eight crore ninety-three lakh sixty four thousand five hundred and ten) consisting of 7,89,36,451 (Rupees seven crore eighty nine lakh thirty six thousand four hundred and fifty one) equity shares of H10 each in previous year.

ESOP allotment: The Company issued and allotted 1,20,423 equity shares during the year pursuant to the exercise of stock options by the eligible employees of the Company under ESOP plans.

Term loans: During the year under review, the Company received aggregate fresh loan sanctions amounting to H3,200 crore and has availed loans aggregating to H2,765

crore. The outstanding term loans from Banks and Financial Institutions as on March 31, 2023 stood at H5,627 crore with average tenure of 9.23 years.

Securitisation/assignment of loan portfolio: During the year under review, the Company received a purchase consideration of H954 crore from assets assigned in pool buyout transactions. The pool buyout transactions were de-recognised in line with the applicable accounting standards.

Refinance from National Housing Bank (NHB): During the year under review, the Company received fresh sanction of refinance assistance of H900 crore under the NHB refinance scheme. The Company availed funds of H1,044 crore under various refinance scheme such as for affordable housing fund and regular refinance scheme. Total outstanding refinance at the end of the current Financial Year stood at H2,603 crore (previous year H2,207 crore).

Non-convertible debentures (NCDs):

I. Multilateral/development financial institutions (Domestic issuance): As on March 31, 2023, the Companys outstanding NCDs stood at H683 crore as compared to H879 crore as on March 31, 2022.

II. Domestic financial institutions: As on March 31, 2023, the Companys outstanding NCDs from Domestic Financial Institutions stood at H124 crore (including subordinate debt of H25 crore) as compared to H124 crore (including subordinate debt of H25 crore) as on March 31, 2022.

III. Banks: As on March 31, 2023, the Companys outstanding NCDs from Banks stood at H210 crore (including subordinate debt of H75 crore) as compared to H250 crore (including subordinate debt of H75 crore) as on March 31, 2022.

IV. Rupee Denominated External commercial Borrowing Issuance: As on March 31, 2023 the outstanding balance of Rupee Denominated External Commercial Bond stood at H508 crore (including outstanding balance of social masala bond of H358 crore). One of the masala bond aggregating to H358 crore issued under social bond programe is listed on NSE international exchange in IFSC, Gift city.

Further, the interest on Non-Convertible Debentures and Rupee denominated ECB bond issued on private placement basis were paid by the Company on their respective due dates and there was no instance of interest amount not claimed by the investors or not paid by the Company

Commercial paper (CP): The Company had not issued any commercial paper and short-term instrument during the Financial Year FY 22-23 and as on March 31, 2023, the Companys commercial paper outstanding was nil.

Credit rating: During the financial year under review, ICRA Limited and CARE Ratings Limited have upgraded the credit rating of the Company from AA-/ Positive to AA/Stable.

The details of the same are mentioned below:

Nature of debt instrument	Rating Agency	Term	Credit ratings
Non-convertible debentures	CARE	Long Term	AA/Stable
	ICRA	Long Term	AA/Stable
Bank loans	CARE	Long Term	AA/Stable
	ICRA	Long Term	AA/Stable
Subordinated debt	CARE	Long Term	AA/Stable
Commercial paper	CARE	Short Term	A1+
	ICRA	Short Term	A1+
	India Ratings	Short Term	A1+

The ratings validate the Companys healthy earnings profile, substantial capitalisation, robust net worth base and gradual improvement in its scale of operations.

Prominent risks and mitigation initiatives, FY 22-23

Risk	Potential consequences	External stimulus and our strategic response
Economy risk The Companys performance could be affected by an economic slowdown	Regulatory uncertainty Lower revenues and Increased costs	Indias economy grew by 7.2% in FY 22-23; Aavas reported 39.48% increase in disbursement and 20.54% increase in Profit after Tax (PAT)
		Lower credit penetration in the geographies of the Companys presence could counter restrained market conditions
Customer risk	Customer attrition	The Company added 32 branches during the financial year 70% of the loan enquiries are responded within 15 minutes through the omni-channel powered contact centre
The Companys inability to provide adequate service could dissatisfy customers	Delayed repayments	The Company invested in technology to reduce turnaround time and improve collection efficiency
Underwriting risk	Increased delinquent loan assets	The Company possesses strong customer assessment standards
The Companys inability to accurately assess customer credibility could increase delinquencies	Inaccurate earning assessment	The Companys underwriting team comprised of experienced professionals including Chartered Accountants
Employee risk The Companys inability to retain experienced talent could affect growth	Increased repayment defaults increased employee cost Mismatch in employee skills and business targets Decline in talent productivity	The Company created adequate risk provisions during the period under review Investing in upskilling and reskilling of employees to sustain personal as well as organisational growth 50% of the Middle layer management was associated for more than three years Average employee age stood at 30.9 years

Risk	Potential consequences	External stimulus and our strategic response
Reputation risk The Companys inability to service customers might affect the brand image	Increase in customer attrition Weak market reputation	Customer app rating stood at 4.4 Aavas has been rated as ‘Strong on ESG risk parameters by CRISIL ESG Score 2022 with 66 points, a score which is one of the best among its peers in the BFSI sector Building a digital platform to enhance scalability and customer experience
Liquidity risk The Company could incur losses from an inability to pay lenders on schedule	Weaker credit rating Weaker financial performance	The Company had a net worth of H3,270 crore The Company borrowed across long tenures, enduring a stability in liabilities
	Higher borrowing cost	The weighted average borrowing cost as at March 31, 2023 was 7.61% (including securitisation/ assignment) The long term credit rating of the Company improved from AA-/Positive to AA/Stable by ICRA and CARE The Liquidity Coverage Ratio (‘LCR) was 212.16% as against the regulatory requirement of 60%
Regulatory risk The Company may be unable to fulfill norms and conditions	Penalisation by the regulatory body for non- conformances Impaired reputation, functions and outcomes	The Company monitors all compliances using software No penalties/regulatory action has been levied/taken on the Company

E N V I R O N M E N T S O C I A L G O V E R N A N C E

As the lines between profitability and wellbeing are blurring at a global level, there is a greater emphasis on sustainable growth and shared prosperity. Environment, Social and Governance (ESG) is moving towards the centre stage of corporate governance strategy. Aavas is leading the way in embracing ESG practices, placing great emphasis on transparency, governance and sustainability.

Aavas observes national and international ESG best practices across all its operations and functionalities. Aavas onboarded Churchgate Partners for real time mapping and independent review of ESG initiatives with international ESG standards such as UN SDG, SASB, WEF, UNGC etc. (https://www.aavas.in/esg-reporting). With comprehensive ESG disclosures on its website, Aavas has ensured 100% adherence to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations). In terms of Regulation 34(2)(f) of the SEBI LODR Regulations, Aavas submits the Business Responsibility and Sustainability Report (BRSR) which forms a part of its Annual Report from last two year. Aavas has been rated as ‘Strong on ESG risk parameters by CRISIL ESG Score 2022 with 66 points, a score which is one of the best among its peers in the BFSI sector.

Robust governance: Aavas has strengthened its policy level ESG framework by implementing Environment & Social Policy, Equal Opportunity Policy, Human Rights Policy Flexible-Working Hours Policy, Whistle-blower Policy and Anti-Bribery and Corruption policy etc. As a part of its commitment to accuracy and transparency in reporting environmental impact, Aavas conducted Independent GHG Assurance of the GHG Statement and also obtained Independent Auditors Certificate on its disclosures under the GRI Reporting Standards.

Diversity and inclusion: Aavas continues to nurture a diverse and inclusive work environment where employees feel motivated to achieve their full potential with ‘Udaan Leadership Development Program with IIM Ahmedabad, Advanced Program in Strategic Management with IIM Kolkata, Advanced Management Program for Corporate Leaders with IIM Indore and Women Managers Empowerment Program. Aavas is embracing a gender-intelligent approach with "Project Prerna" aimed at enhancing the role and recognition of women across all levels in the organisation.

Sustainability: Aavas started with making its own Head Office a LEED Gold certified green building and became a global pioneer in improving access to affordable green housing finance to lower and middle-income communities. Aavas has reached a monumental milestone with the international certification of 80 green homes across India.

Digital transformation: Project ‘Gati is a major landmark in Aavass digital transformation journey by minimising the need of physical documentation, streamlining loan process and enhancing customer service.

Through these concerted efforts, Aavas not only demonstrates exemplary corporate citizenship but also cultivates a culture for resilience and climate-conscious growth.

H U M A N R E S O U R C E S

Aavas believes that its competitive advantage lies in its people. The Companys people bring to the stage multi-sectoral experience, technological experience and domain knowledge. The Companys HR culture is rooted in its ability to subvert age-old norms in a bid to enhance competitiveness. The Company always takes decisions in alignment with the professional and personal goals of employees, achieving an ideal work-life balance and enhancing pride in association. The Companys permanent employee count stood at 6034 as of March 31, 2023.

I N T E R N A L C O N T R O L S Y S T E M S A N D T H E I R A D E Q U A C Y

The Companys internal financial control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys internal financial control over financial reporting includes those policies and procedures that: (1) Pertaining to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorisations of Management and Directors of the Company and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements. The Company has a robust internal audit programme, where the independent assurance function of internal audit of the Company, supported by domain specific specialist firms where necessary, conduct a risk based internal audit with a view to not only test adherence to policies and procedures as well as to suggest improvements in processes and systems. Their audit program is carried out as per a plan and calendar approved by the Audit Committee of the Board. Internal audit observations recommendations and ongoing remediation where applicable are reported to the Audit Committee, which monitors the same.

C A U T I O N A R Y S TA T E M E N T

This statement made in this section describes the Companys objectives, projections, expectation and estimations which may be ‘forward looking statements within the meaning of applicable securities laws and regulations. Forward– looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised by the Company. Actual results could differ materially from those expressed in the statement or implied due to the influence of external factors which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements based on any subsequent developments.