Aptus Value Housing Finance India Ltd Management Discussions

Annexure - C

Global Economy

In 2023, the global economy demonstrated resilience despite tightening financial conditions caused by restrictive monetary policies, geopolitical tensions, and geoeconomic fragmentation. The global GDP grew by 3.2% in 2023, slightly down from 3.5% the previous year, primarily supported by robust performance in the US and major emerging markets and developing economies (EMDEs). Global inflation decreased to 6.8% from 8.7% the previous year, aided by monetary tightening and restoring supply chains.

However, pandemic-induced fiscal policies increased global public debt amid slow growth and high interest rates. The volume of international merchandise trade fell by 1.2% in 2023 compared to a 3.0% expansion in 2022, due to rising trade restrictions and a shift in demand from goods to services. Financial markets experienced volatility as market participants reacted to changes in monetary policy outlooks despite central banks maintaining a higher for longer stance on interest rates. Sovereign bond yields increased in the first half of FY 2023-24 and showed significant fluctuations in the second half. The US dollar remained strong throughout the year, exerting downward pressure on emerging market currencies.

Global Efforts to Counter Economic Challenges

In response to these global economic challenges, countries and international organisations like the United Nations (UN), the World Health Organization (WHO), and the International Monetary Fund (IMF) are actively working to mitigate the impacts and foster inclusive growth.

• United Nations (UN): The UN continues to drive efforts towards achieving the Sustainable Development Goals (SDGs) by advocating for policies that promote social inclusion, economic equity, and environmental sustainability. The 2024 SDG Summit has reinvigorated global commitment, with member states pledging to accelerate progress. For instance, the UNs Global Accelerator on Jobs and Social Protection aims to create 400 million jobs and extend social protection to 4 billion people by 2030. These efforts underscore the global commitment to fostering inclusive growth.

• World Health Organization (WHO): The WHO prioritises health equity and strengthens health systems worldwide. In 2024, the WHO launched the Global Health Equity Initiative, which seeks to reduce health disparities by 30% by 2030. This initiative includes a $10 billion fund to improve healthcare access in low-income countries, targeting vaccination programs, maternal health, and disease prevention.

• International Monetary Fund (IMF): The IMF provides financial assistance and policy advice to countries facing economic instability. In 2024, the IMF approved $50 billion in emergency financing for countries affected by economic shocks, focusing on measures to control inflation, manage debt, and support economic recovery. The IMFs Resilience and Sustainability Trust also aims to mobilize $100 billion for climate-related investments and sustainable development projects.

Indian Economy

Despite global uncertainties, the Indian economy demonstrated remarkable resilience in 2023-24, with real GDP growth rising to 7.6% from 7.0% in the previous fiscal year, bolstered by robust fixed investment. On the supply side, economic activity was buoyed by improved profitability in the manufacturing sector, which benefited from lower input prices and sustained momentum in the services sector, offsetting a slowdown in agriculture.

Headline inflation moderated during 2023-24, falling within the tolerance band due to anti-inflationary monetary policies, active supply management measures, and corrections in global commodity prices. Core inflation saw a broad-based decrease, dropping below 4% from December 2023. Throughout the year, domestic financial markets remained orderly. Money market rates increased as liquidity surpluses ebbed, partly due to higher government cash balances. The issuance of certificates of deposit (CDs) rose in response to sustained credit demand.

After remaining stable during the first half of 2023-24, sovereign bond yields softened due to lower domestic inflation, the announcement of Indian sovereign bonds inclusion in major global bond indices, and the lower- than-expected market borrowing program announced in the interim Union Budget 2024-25. Equity markets saw substantial gains, driven by buoyant economic activity and solid corporate performance. The Indian rupee (INR) remained stable, supported by robust domestic prospects and improvements in Indias external position. The current account deficit (CAD) moderated amidst large capital inflows, allowing for an increase in foreign exchange reserves.

Major Financial Reforms and RBI Policies in FY24

• Monetary Policy: The Reserve Bank of India (RBI) kept the policy repo rate at 6.5% to balance growth and inflation. This decision followed a cumulative increase of 250 basis points over the previous year.

• Digital Payment Initiatives: The RBI launched Project Nexus, in collaboration with ASEAN countries, to facilitate instant cross-border retail payments and enhance the efficiency and speed of international transactions.

• Central Bank Digital Currency (CBDC): The RBI continued its pilot projects for the Central Bank Digital Currency, aiming to improve the efficiency of the payment system and promote financial inclusion.

• Financial Inclusion: Emphasis on expanding financial inclusion through initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), which has opened over 480 million accounts and ensures banking services reach the unbanked populations.

• Credit Enhancement: Credit guarantee schemes for micro, small, and medium enterprises (MSMEs) were introduced to improve access to financing and support business growth.

• Green Financing: Policies to promote green bonds and sustainable financing were enhanced to attract investment in renewable energy and environmentally friendly projects.

• Infrastructure Development: The focus was on strengthening infrastructure, including setting up a national credit registry database and enhancing the ecosystem for cashless and paperless financial transactions.

• Innovation and Technology: Balancing technology with agent-based models to ensure inclusive growth supported the rise of fintech entities. Continuous oversight and regulation updates were implemented to keep pace with rapid technological advancements.

Affordable Housing in India

Indias affordable housing finance segment is poised for significant growth, driven by robust demand and supportive government initiatives. According to the rating agency Care-Edge, the momentum in this segment is expected to continue into FY25, with Affordable Housing Finance Companies (AHFCs) likely to see portfolio growth at around 30% year-on-year. The underlying demand for housing in urban regions remains strong, with even greater potential in rural and semi-urban areas.

Key Drivers of Growth

• Urbanization: Increasing urbanisation in smaller cities and towns is a significant growth driver. As urbanisation spreads, the need for affordable housing rises, presenting vast opportunities for AHFCs.

• Income Levels and Home Ownership: Rising income levels and the growing importance of homeownership are additional factors fuelling the demand for affordable housing.

• Government Initiatives: The Government of India has launched several initiatives under the Housing For All mission, aiming to provide shelter to Indian citizens. One of the most prominent schemes under this initiative is the Pradhan Mantri Awas Yojana (PMAY).

Government Support: Pradhan Mantri Awas Yojana (PMAY) The PMAY scheme has been a cornerstone of the governments efforts to boost affordable housing. Here are some key highlights:

• Budget Allocation: In the Union Budget 2022-23, the Government of India allocated Rs. 48,000 crore for PMAY, including PMAY-Gramin and PMAY-Urban schemes. This allocation was extended until March 2024 and December 2024 to complete the construction of houses sanctioned by March 31, 2022.

• Increased Budget: During the Union Budget 2023-24, the allocation for the PMAY scheme was increased by 66% to Rs. 79,000 crore.

• Sanctioned and Completed Houses: As of June 18, 2024, nearly 1.2 crore houses had been sanctioned under the scheme, of which about 0.84 crore houses had been completed.

• Commitments and Releases: The government made commitments worth Rs. 1,99,652 crore, with Rs. 1,63,926 crore already released. Since the schemes inception (2015-2022), approximately Rs. 42,000 crore has been disbursed.

Overview of Companys performance Financial Performance

Our total revenue for the financial year ending March 31, 2024 amounted to Rs. 1,417 crores, marking a 25% increase compared to the previous financial year. Our profit before tax has seen a significant increase reaching Rs. 793 crores in FY24, reflecting a 21% year- on-year growth. Our profit after tax rose by 22% to Rs. 612 crores as compared to the previous financial year. Net worth of the Company stood at Rs. 3,768 crores at the end of the financial year under review.

Key Financial Ratios

Our key financial ratios for the year ended March 31, 2024 as compared to the previous financial year are given below:

Particulars	FY24	FY23
Net Interest Margin to Assets	13.45%	13.88%
Opex to Assets	2.70%	2.75%
Return on Equity (ROE)	17.25%	16.34%
Return on Assets (ROA)	8.00%	8.44%
Provision Coverage Ratio (PCR)	1.06%	1.06%
Gross NPA	1.07%	1.15%
Net NPA	0.80%	0.86%
Debt Equity Ratio	1.38:1	1.14:1

Operational Highlights

Aptus is an entirely retail focussed housing finance company primarily serving low and middle income self-employed customers in the rural and semi-urban markets of India. We offer customers home loans for the purchase and selfconstruction of residential property, home improvement and extension loans, loans against property and business loans. We only offer loans to retail customers and do not provide any loans to builders or for commercial real estate. We target first time home buyers where the collateral is a self-occupied residential property.

During the year, the Company sanctioned loans worth Rs. 3,320 crores, marking an increase from Rs. 2,580 crores sanctioned in the previous year. Loan disbursements during the current year amounted to Rs. 3,127 crores, representing a 31% increase compared to Rs. 2,395 crores disbursed in the previous year. As of March 31, 2024, our total Assets under Management was at Rs. 8,722 crores, reflecting a healthy growth of 29% increase over the previous year, indicating a clear testament of the trust and confidence that the customers have in our loan offerings.

Aptus has streamlined the collection processes through technological advancements and enhanced analytics, resulting in more effective tracking and management of loan repayments. This has contributed to a reduction in non-performing assets (NPAs) and improved overall asset quality.

Aptus has maintained the ROA at 8% , which reflects effective management of resources and operational efficiency. The ROE of 17.25% remain best in class, which is a positive sign of financial health and strong return for the shareholders.

The customer base of the Company increased by 25% to 1,33,499 in the FY24 indicating deeper penetration to its target market segments, high levels of customer satisfaction, strong brand recognition and reputation in the market and competitive advantage over the peers.

During FY 24, Aptus augmented its branch network with the addition of 31 branches, increasing the total count to 262 branches, thereby bolstering market presence and improving customer accessibility.

Aptus has well-diversified borrowing sources, with 63% of borrowings from banks, 24% from the National Housing Bank (NHB), 5% from development financial institutions (DFIs) like IFC and large financial institutions, and the balance 8% in the form of securitization. As of March 24, the company had a robust on-balance-sheet liquidity of Rs. 1,022 crores, including an undrawn sanction of Rs. 620 crores from NHB and banks.

Aptus holds a credit rating of AA- with stable outlook from both CARE Ratings Ltd and ICRA Ltd, which demonstrates our reliability, creditworthiness and responsible financial management.

Opportunities and Threats

In 2024, housing finance companies (HFCs) in India are poised to capitalize on several opportunities amidst evolving market dynamics and government initiatives aimed at boosting the housing sector.

Opportunities:

• Rising Demand for Affordable Housing: The Indian governments focus on affordable housing schemes such as Pradhan Mantri Awas Yojana (PMAY) and initiatives like Housing for All by 2022 have bolstered demand for affordable housing. HFCs can cater to this segment by offering specialized loan products and financing options.

• Urbanization and Migration: Urbanization trends and rural-urban migration continue to drive demand for housing in urban centres. HFCs can tap into this market by providing housing finance solutions tailored to the needs of urban dwellers, including first-time homebuyers and migrant populations.

• Digital Transformation: Increasing digital adoption among consumers presents opportunities for HFCs to streamline operations, enhance customer experience through digital platforms, and leverage data analytics for targeted marketing and risk assessment.

• Government Initiatives and Subsidies: Continued government support through subsidies, interest rate incentives, and tax benefits for homebuyers and developers under schemes like PMAY-Urban and PMAY-Gramin can stimulate housing demand and affordability, benefiting HFCs.

• Expansion of Mortgage Market: The potential expansion of the mortgage market beyond Tier 1 cities to Tier 2 and Tier 3 cities presents growth opportunities for HFCs. These regions offer untapped market potential with increasing disposable incomes and aspirations for homeownership.

• Innovative Financing Models: Adoption of innovative financing models such as co-lending partnerships with banks, real estate developers, and fintech companies can enable HFCs to diversify their product offerings and reach a wider customer base.

• Focus on ESG and Sustainability: Growing awareness and emphasis on Environmental, Social, and Governance (ESG) factors among investors and consumers provide an opportunity for HFCs to develop ESG-aligned financing products and contribute to sustainable housing development.

• Regulatory Support and Stability: Regulatory reforms aimed at enhancing transparency, improving governance standards, and ensuring financial stability in the housing finance sector create a conducive environment for growth and investment in HFCs.

Threats:

• Interest Rate Volatility: Fluctuations in interest rates can affect borrowing costs for HFCs and their customers. Higher interest rates could reduce affordability and dampen demand for housing loans, while lower rates may compress margins for HFCs.

• Credit Risk and Asset Quality: Economic uncertainties, job market fluctuations, and changes in borrower profiles can increase credit risk. Nonperforming assets (NPAs) and delinquencies could rise, impacting profitability and requiring higher provisioning.

• Regulatory Changes: Regulatory changes and policy shifts, including changes in lending norms, capital adequacy requirements, and compliance obligations, may necessitate adjustments in business practices and increase operational costs for HFCs.

• Market Competition: Intense competition among HFCs, banks, and new fintech entrants in the housing finance sector could lead to pricing pressures and reduced margins.

• Liquidity and Funding Risks: Dependency on external sources of funding, exposes HFCs to liquidity risks. Market disruptions or a tightening of liquidity conditions could impact their ability to meet funding requirements.

• Cybersecurity and Data Privacy: Increasing digitalization exposes HFCs to cybersecurity threats such as data breaches, phishing attacks, and ransomware. Ensuring robust cybersecurity measures and complying with data privacy regulations are critical to safeguarding customer data and maintaining trust.

• Economic and Political Instability: Macroeconomic factors such as inflationary pressures, geopolitical tensions, and policy uncertainties can affect consumer confidence, housing demand, and overall economic stability, impacting HFCs growth prospects.

• Environmental and Climate Risks: Risks associated with environmental factors, including natural disasters and climate change impacts, could affect property values, insurance costs, and loan collateral quality, posing risks to HFCs asset portfolios.

Internal Control Systems and their Adequacy

Aptus boasts a robust organizational framework with clearly delineated structures, well-documented policy guidelines, and a definitive authority matrix. These elements collectively ensure operational efficiency, strict adherence to internal policies, compliance with relevant laws and regulations, and safeguarding of resources. Recognizing the pivotal role of a stringent internal control system, the Company places utmost importance on these processes in facilitating seamless day-to-day operations.

Aptus has implemented a highly effective internal control system that harmonizes its business processes, operations, financial reporting, fraud prevention, and adherence to regulatory guidelines and compliance standards. These stringent internal controls exemplify the Companys commitment to the highest governance principles. The Company maintains a standardized and robust internal control framework across its organization, ensuring the safeguarding of assets and the proper execution of transactions in accordance with authorized procedures outlined in the Companys internal control policies.

The internal control system is fortified by comprehensive internal audits, frequent management reviews, and standardized policies and guidelines, all of which uphold the integrity and accuracy of financial and operational records. The Management undertakes regular assessments to evaluate the frameworks robustness, efficacy, and operational efficiency concerning the Companys Internal Financial Controls.

Internal audits are meticulously conducted to scrutinize the adequacy of the internal control systems and ensure rigorous compliance with established policies and procedures. These audits serve as a critical mechanism to verify adherence to regulatory requirements and operational standards. The internal audit reports are reviewed by the Audit committee on a quarterly basis. The Company has developed a comprehensive risk-based internal audit policy as a cornerstone of its oversight function. The primary objective of this policy is to conduct audits that systematically identify key activities and controls within business processes. These audits rigorously assess the effectiveness of business processes and controls while evaluating the operational efficiency of internal controls. The findings from these audits are instrumental in providing strategic recommendations for enhancing both business processes and internal controls. This approach ensures continuous improvement and alignment with the Companys operational objectives and regulatory compliance standards.

Risk Management

Effective risk management is not just a strategic advantage but a fundamental pillar for the sustained success and longevity of any business. By embedding risk management seamlessly into every facet of our operations, we proactively balance risk and reward while steadfastly adhering to all relevant laws, rules, and regulations. This integrated approach serves as a shield against potential losses, reinforcing our Companys reputation as a dependable and responsible financial services provider. We empower our employees with comprehensive awareness of the risks inherent in their roles and equip them with the requisite knowledge and tools to navigate these challenges effectively. This proactive stance ensures that risk management becomes ingrained at all levels, driving informed decisionmaking and safeguarding the interests of our stakeholders.

The Risk Management Committee plays a crucial role in overseeing and managing various aspects of risk within the organization. The committee formulates and reviews risk management policies and strategies tailored to the specific risk profile and business model of the Company. It regularly assesses the effectiveness of the risk management framework, processes, and controls in place to mitigate identified risks. The committee monitors key risk indicators (KRIs) and other metrics to track the exposure and mitigation efforts across different risk categories.

Key Risks and Risk Mitigation

Risk	Mitigation
Credit Risk
Credit risk is the risk of loss that may occur from the default by our customers under our loan agreements.	We manage credit risk through a framework that sets out policies and procedures covering the measurement and management of credit risk. There is a clear segregation of duties between transaction originators in the business function and approvers in the credit risk function. Board approved credit policies and procedures mitigate our prime risk which is the default risk.
	Our credit team ensures the implementation of various policies and processes through random customer visits and assessment, training of branch staff on application errors, liaison with other institutions to obtain necessary information and loan closure documents and highlight early warning signals and industry developments enabling pro-active field risk management.
	Credit sanction is done through a delegation matrix where credit sanctioning powers are defined for respective levels. Portfolio analysis and reporting is used to identify and manage credit quality and concentration risks.
	Credit risk monitoring is broadly done at two levels: account level and portfolio level. Account monitoring aims to identify weak accounts at an incipient stage to facilitate corrective action. Portfolio monitoring aims at managing risk concentration in the portfolio as well as identifying stress in certain occupations, markets and states.
Market Risk
Market Risk is the risk of loss in on- balance sheet and off-balance sheet positions arising from movements in marketplace, in particular, changes in interest rates, exchange rates and equity.	In line with regulatory requirements, we have a Board approved Risk Management and Asset Liability Management policy. This policy provides the framework for assessing market risk, tracking events happening in marketplace, changes in policies and guidelines of the Government and regulators, exchange rate movement, equity market movements and money market movements.
Interest Rate Risk
Interest rates are highly sensitive to many factors beyond our control, including the monetary policies of the RBI, deregulation of the financial sector in India, domestic and international economic and political conditions, inflation and other factors.	To manage interest rate risk, we seek to optimize our borrowing profile between short-term and long-term loans. We adopt financing strategies to ensure diversified resource-raising options to minimize cost and maximize stability of funds. Assets and liabilities are categorized into various time buckets based on their maturities and our Asset Liability Management Committee reviews an interest rate sensitivity report periodically for assessment of interest rate risks.
Liquidity Risk
Liquidity risk arises due to the unavailability of adequate amount of capital at an appropriate cost and tenure.	We monitor liquidity risk through our Asset Liability Management Committee. Monitoring liquidity risk involves categorizing all assets and liabilities into different maturity profiles and evaluating them for any mismatches in any particular maturities, particularly in the short-term. We actively monitor our liquidity position to ensure that we can meet all borrower and lender-related financing requirements.
	We have an Asset Liability Management Policy in place, to manage liquidity risk, which provides for several risk management measures including diversifying our sources of capital to facilitate flexibility in meeting our financing requirements and maintaining strong capital adequacy.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and system or from external events.	Operational risk is associated with human error, system failures and inadequate procedures and controls. It is the risk of loss arising from the potential that inadequate information system, technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems may result in unexpected losses or reputation problems. We endeavour to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, such as the use of internal audit. Reports of the internal auditors as well as the action taken on the matters reported upon are discussed and reviewed at the Audit Committee meetings.
Information Technology Risk
The risk stemming from IT infrastructure failure or data loss/threats that lead to operational disruptions and financial losses.	To manage the IT risks that may arise, the Company has put in place an efficient IT risk management mechanism with adequate measures, checks, and controls. A daily automated back up of database to cloud is done, which can be restored in case of smooth business operational continuity. Disaster recovery is implemented in cloud and a mock drill is conducted in every six months to ensure availability and readiness of the disaster recovery. The Company is dedicated to ongoing enhancement of its processes and controls to effectively mitigate cyber threats by establishing an effective Vulnerability Management and Cyber Crisis Management plan. Awareness programmes are conducted for employees through e-mails for effective mitigation of cyber threats. This empowers employees with the knowledge and skills necessary to uphold stringent cybersecurity standards and proactively safeguard company assets against evolving digital risks.
Compliance Risk
Compliance risk refers to the potential threat that an organization faces due to its failure to adhere to laws, regulations, standards, or internal policies and procedures that govern its operations.	The Company effectively manage and monitor compliance risks through the implementation of a comprehensive Compliance Policy under the leadership of the Chief Compliance Officer and a dedicated team. This proactive team conducts systematic reviews of products and processes to ensure strict adherence to regulatory standards. They continuously enhance internal policies to proactively mitigate potential legal or regulatory risks, thereby safeguarding the Companys integrity and ensuring alignment with evolving regulatory landscapes.

Human Resources

We deeply value the contributions of our team members in advancing business growth and achieving operational excellence. Our ongoing commitment is to foster an empowering environment that nurtures both the professional and personal aspirations of every employee. We are dedicated to cultivating workspaces that are not only safe, inclusive, and supportive but also serve as catalysts for inspiring a positive and growth-oriented mindset among all our employees.

At Aptus, we strive to uphold our Core Values of Accountability, Professionalism, Teamwork, Unity and Success. Through regular workshops for both existing staff and new recruits, we aim to instill these core values among our people, steadily progressing towards the fulfilment of our Companys vision. The Company is dedicated to fostering a work environment that embraces and respects individuals and employees irrespective of their backgrounds or identities. The Company promotes merit-based selection criteria that consider skill sets, competency levels, years of work experience, and other relevant factors. Our appraisal processes are transparent, which is purely based on performance and merit. Through the implementation of ESOP schemes, we aim to empower our dedicated workforce and ensure their interests are aligned with the growth and success of our organization. We have also adopted various policies like Anti-bribery & Anti-corruption policy, Health & Safety policy, Appointment Remuneration and Evaluation Policy, Equal Employment Opportunity Policy and Diversity & Inclusion policy to support our employees and to foster an inclusive work environment. We ensure a fair and transparent grievance process to address employee concerns promptly. By providing a supportive platform, we aim to maintain a harmonious and respectful workplace.

Outlook

The global outlook for the finance industry in recent years has been marked by rapid evolution and transformative shifts driven by technological advancements, regulatory changes, and shifting consumer behaviours. Digitalization continues to reshape traditional banking and financial services, with fintech innovations paving the way for enhanced customer experiences, streamlined operations, and new market entrants challenging incumbents. Moreover, sustainability and ESG (Environmental, Social, and Governance) considerations are increasingly influencing investment decisions and shaping corporate strategies. Financial institutions are not only integrating ESG factors into their risk management frameworks but also responding to growing investor demand for responsible investing options. Geopolitical tensions, trade uncertainties, and economic fluctuations remain significant factors impacting global markets and financial stability. Central banks and policymakers navigate these challenges while striving to support economic recovery post-pandemic and manage inflationary pressures.

Looking ahead, resilience, agility, and innovation will be key for finance industry players to navigate complexities, capitalize on emerging opportunities, and address evolving regulatory landscapes and customer expectations in a rapidly changing global economy.