Ashika Credit Management Discussions


MANAGEMENT DISCUSSION AND ANALYSIS REPORT

ECONOMIC SCENARIO

Global economy is on the crossroad, as a fight between containing inflation and supporting fragile growth is taking centre stage. Unlimited money printing along with ultraloose monetary policy adopted during COVID time by the western economy has come back to haunt them in the form of high inflation in 40-45 years. This has resulted in a huge swing in the response from the major central banks across the world and also challenging many earlier well-established ways to address these issues. Further, event on geo-political theatre is further complicating the matter post the start of Russia-Ukraine war which could damage only crude has engulfed wheat and other agri-commodities. Further, its seems that the US is adamant on opening another front by instigating China by making a statement that it will defend Taiwan in case of any Chinese aggression.

Europe is fighting with its own troubles, not able to decide which way to head. Germany and Italy are facing the gas woes post the war and post Brexit Britain is trying to emerge on its own. It is still grappling with high inflation, which is expected to remain beyond control.

On the backdrop of the above scenario, global growth is projected to slow to 3.6% in 2022 vs. 6.1% in 2021. Over the medium-term, global growth is expected to slow to 3.3% a^er 2023. Inflation for 2022 is seen at 5.7% for advanced economies and 8.7% for the emerging/developing economies. Multilateral measures are critical in responding to humanitarian crisis, preventing further economic fragmentation, maintaining global liquidity, managing financial distress, combating climate change, and ending the pandemic. (Source: IMF)

Outlook

Growth for all key economies is holding up well, close to their pre-COVID levels and unemployment is at the record lows. Whilst the central banks have started raising rates, they are unlikely to take the rates to levels that could impede growth. Therefore, unless we see a paradigm shiri in geopolitical dynamics closer to the embargoes of the 70s, the probability of stagflation appears to be fairly low. The Fed would prefer to get through the current phase with a moderately strong economy and save it from slipping into recession. A very aggressive rate hike could lead to a hard- landing (read: recession), which would eventually need fiscal and monetary support all over again.

However, unrelenting global inflationary pressure continues to intensify, with increasingly adverse implications on growth outlook. Recent COVID-19-related lockdowns in China put further pressure on global manufacturing supply-chain. Energy and food supply disruptions due to Russia-Ukraine war are having a swi^er-than-expected impact on European inflation. Inflationary pressures are also building up in the services sector, particularly in the US and UK, where tight labour markets are boosting nominal wage growth. World GDP is expected to be 4.3% in 2022 and 3.3% in 2023. While the developed economies are expected to grow by 4% in 2022 and 2% in 2023, the emerging markets are expected grow by 4.6% in 2022 and 4.3% in 2023. (Source: Nomura)

Beyond the immediate challenges of the war and the pandemic, the policymakers are expected to keep a hawk-eye on the long-term goals. Notably, pandemic-led disruptions have highlighted the productivity of novel ways of working.

• The governments are expected to harness positive structural change wherever possible thereby embracing the digital transformation and retooling/reskilling the workers to meet the challenges.

• Carbon pricing and fossil fuel subsidy reform can also help with the transition to a cleaner energy, less exposed to fossil fuel prices. The green energy transition will also entail labour market reallocation across occupations and sectors.

• On climate change, the advanced economies are expected to progress towards COP26 climate summit pledges. The emerging and developing economies are also expected to take measures to reduce emissions.

• The governments are expected to use all tools to combat the re-emergence of coronavirus, both by meeting vaccination targets and by ensuring equitable access of the same to poor nations thereby ensuring the return to normalcy levels of both life and businesses.

INDIAN ECONOMIC REVIEW

In the time of global turmoil, Indian economy is relatively better-placed than its peer on both growth and inflation front. Indias GDP is expected to grow by 7.7% in FY23 making the country one of the fastest-growing major economies in the world. GDP growth is expected to come from sustainable segments like manufacturing, construction and capital formation. GST collection, auto sales number, direct tax collection and continued pick-up in capex indicate continued buoyancy on economic front. Meanwhile, the IMD has also upwardly revised its forecast of the southwest monsoon to 1 03% from 99% of LPA.

Wholesale and retail inflation continue to surge on the back of imported inflation and rising pump prices. However, a dual action plan seemed to be carried out to rein in inflation in India i.e., aggressive rate hike by the RBI and reduction of excise duty on petroleum products. Further, India is relatively insulated from global food price inflation, as it is more of selfreliant on this front. The government has also banned wheat and sugar exports to tackle rising domestic prices. Further, expectation of good monsoon is expected to tame the food price inflation in the coming months.

Indias trade deficit touched record high on the back of continued higher imports. Though this has been adding pressure on the INR for a while, net FDI inflows and the RBIs intervention have kept the Indian currency much less volatile and range-bound.

Further, the governments PLI scheme seems to be taking off and expected to add 0.3% to annual GDP in the coming years. The budget boosted our conviction on the Indian growth story with the manufacturing and industrials/ infrastructure segments as a growth driver apart from the financials. Supply-side push of the government is likely to bring about steady and sustainable growth for India.

India was also able to tame the damage of COVID-19 third wave compared to its neighbour China. Strong credit growth, huge increase in investment intentions announced by the corporate sector and a high budgetary allocation for capital spending by the government indicate that the investment cycle is strengthening.

According to the provisional estimates released by the National Statistical Office (NSO), Indias real gross domestic product (GDP) growth in 2021-22 was 8.7 per cent. This works out to 1.5 per cent above the pre-pandemic level (2019-20). The RBI projects real GDP growth at 7.2% for 2022-23 driven by recovery in economic activities and improvement in both rural and urban consumption.

F.Y. 2021 F.Y. 2022 F.Y. 2023 (E)
GDP -6.60% 8.70% 7.20%
CPI Inflation 6.20% 5.50% 7.70%

(Ministry of Statistics and Programme Implementation, RBI)

Outlook

India stands in a much better place than it has been in the past. Its growth is in recovery mode and as the pandemic- led stringencies ease, we expect a continued recovery that would be driven by urban consumption/services. Thus, we expect medium-term domestic macro drivers to remain conducive for healthy growth.

With overall capacity utilisation just shy of 75%, we see a pick-up in capex over the next few quarters. In addition, Indias retail inflation has limited exposure to global food prices. While employment is back to pre-COVID levels in India, it is yet to become broad-based. On rates, while the RBI prioritises inflation, it would certainly not be at the cost of growth. While rate rises would be frontloaded and calibrated, the pace would not be as aggressive as the Feds current trajectory.

With the visibility on economic variables, which we witness today, it is reasonable to expect another 25-50bps of rate hikes over the next two MPC meetings, taking the repo rate to 5.15-5.45%.

On the whole, synchronous global stimulus measures, higher vaccination coverage, restart of the trade engine and contained commodities prices are the key global events, which we believe would be a positive for India in the year ahead.

Although private consumption is still trailing behind prepandemic levels, factors such as opening up of mobility, growing consumer confidence and high-capacity industrial utilization suggest economic recovery. Higher capital expenditure by the government and investments in infrastructure and manufacturing sector are expected to reduce the unemployment rate and further consumption.

Although the Indian economy is anticipated to maintain its strong growth trajectory, recent geo-political developments have harmed the domestic stock indices and caused volatility in crude oil prices and currency exchange. Given Indias reliance on imported crude oil, natural gas and other commodities, a rise in inflation and widening current account deficit should be closely monitored, especially in light of the countrys changing geo-political environment. Uncertainty over the fourth COVID wave and virus mutations also represents a huge risk to Indias economic growth. Other issues such as semi-conductor shortage and high commodity prices also pose challenges to the growth of industrial sector.

INDUSTRY REVIEW - NBFC SEGMENT IN INDIA

Non-Banking Financial Companies (NBFCs) in India have been meaningfully contributing to the economy over the past few years. The NBFCs are increasing their presence, as the lending capacity of the public sector banks (PSBs) is declining especially in rural areas due to heavy debt. The main reasons for the success of NBFCs are: (1) lower cost; (2) wider reach; and (3) strong risk management capabilities with a better understanding of customers need. Credit demand of our country can be fulfilled with the help of NBFCs where the traditional banks have not been able to penetrate. In India, ensuring financial access to fuel growth and entrepreneurship is not an easy task. However, with the help of government initiatives there has been a substantial increase in the number of bank accounts in all over the country. It will provide an opportunity to the NBFCs to increase market share to ensure sustainable growth over a period of time.

The pandemic has tested the resilience of NBFCs. They are expected to remain buoyant due to revival in the economy and increased pace of vaccination coverage. This sector has emerged stronger with reasonable balance sheet growth, increased credit intermediation, higher capital and lower delinquency ratio and enlarged liquidity cushions. The NBFCs, on the other hand, surpassed their pre-COVID-19 levels of disbursements in 4QFY21 on the back of the governments support and focus, as well as the RBIs various liquidity measures such as repo rate cuts, Targeted Long-term Repo Operations, Special Liquidity Scheme and Partial Credit Guarantee Scheme. 57 NBFCs, each having a loan book of >Rs50bn, accounted for 90.1% of total credit disbursal. Overall credit outstanding of the NBFCs, which stood at Rs23.75 trillion in FY21, is predicted to expand by 6% to 7% in FY22 (Source: Crisil). Smaller NBFCs with asset size of <Rs5bn, accounted for only 0.9% of total NBFC credit outstanding (Source: Business Today).

NBFC sectors loan growth in FY23 is expected to be 14% YoY (excluding government NBFCs). NBFCs stage 3 assets could increase to 6% by FY23 from 5.6% in 3QFY22, primarily due to slippages from restructured and ECLGS-supported book. However, the credit cost impact is likely to be moderate, as the NBFCs have created adequate provisioning buffers (Source: Indiainfoline and Ind-Ra Research).

In October 2021 and December 2021, the RBI introduced the Scale Based Regulation (SBR) and Prompt Corrective Action (PCA) framework for the NBFCs, which would come into force from October 1, 2022 that include:

a) All non-deposit taking NBFCs with asset size of Rs50bn and above and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of LCR. This measure ensures that in the event of liquidity crisis, the NBFCs will be in a position to meet their short-term financial obligations. The moot point of introducing LCR appears to keep a check on asset liability mismatch.

b) Earlier classification of NBFCs into deposit taking and non-deposit taking has now been replaced with (a) NBFC Base Layer (NBFC-BL); (b) NBFC Middle Layer (NBFC - ML); and (c) NBFC Upper Layer (NBFC- UL). There is also an NBFC Top Layer (NBFC- TL), which is expected to remain empty until the RBI feels it necessary to move NBFCs from the NBFC- UL. The intention behind this four-tier classification is to ensure that the NBFCs not taking public funds will remain in the base layer since that warrants a lesser degree of scrutiny. All deposit-taking NBFCs and non-deposit-taking NBFCs with an asset size exceeding Rs10bn have been placed in the middle layer to ensure more focus on those entities, which are more likely to fail and on whose failure, there would be a significant impact on the functioning of financial institutions. The upper layer is intended to be populated with those entities, which in the opinion of the RBI require intense scrutiny.

c) The RBI has introduced PCA for NBFCs. PCA will enable supervisory intervention at appropriate time and require the supervised entity to initiate and implement remedial measures in timely manner to restore its financial health. PCA for NBFCs is based on the financial position of NBFCs on or after March 31,2022. It will be applicable to all deposit-taking NBFCs excluding government NBFCs, primary dealers and housing finance companies and other non-deposit-taking NBFCs in the middle, upper and top layers.

(Source: Mondaq)

In October 2021, the RBI released circulars for clarification on master circular on prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to advances (IRCAP). Thereafter, the clarifications were issued by the RBI on the same, vide circular dated November 12, 2021 and February 15, 2022 which include:

1) NPA classification in case of interest repayments, increasing consumer awareness among the borrowers to be complied by March 31,2022.

2) Paragraph 10 of circular stipulates that loan accounts classified as NPAs may be upgraded as standard asset only if the entire arrears of interest and principal are paid by the borrower. NBFCs shall have time till September 30, 2022 to put in place the necessary systems to implement this provision.

The RBI released circular on March 14, 2022 in which it removed caps on pricing of small loans given by NBFC- MFIs, bringing them to the same level as other such lenders, including banks. With this, the underwriting of loans will be done on a risk-based analysis and a risk premium will be charged.

OPPORTUNITIES AND THREATS

Over the years, the NBFC sector has evolved in terms of its size and assumes an important role in the process, as it is a valuable source of financing for many firms, micro and small units as well as individuals/small business owners and facilitating competition amongst the credit providers. Further, niche NFBCs fulfil the unmet and exclusive credit needs of various segments such as infrastructure, factoring/ leasing, operations and technological sophistication. The NBFC sector has also grown significantly and more interconnected with the financial system.

NBFC are strongly focused on unorganized and underserved segments of the economy, which led the companies to create a niche for themselves through frequent interactions with their customers and deep understanding of their needs. They are ensuring last-mile delivery and enhanced customer experience of products and services.

According to the MSME Ministry, India has >60mn entities under the MSME category, which contribute ~29% to the countrys GDP. They are an important part of the rural economy with ~30mn MSMEs (51% of all MSMEs). Given the sectors overall economic importance, they need simple access to capital for growth. The government has helped the MSME sector by providing collateral-free loans with credit guarantees, subordinate loans for stressed MSMEs and equity injections. However, there is still a credit deficit, and the NBFCs are likely to play a key role in addressing the issue.

Financing would be critical to Indias transformation into a $5 trillion economy. Working capital financing was in high demand in FY21, as a buffer against the shocks of COVID- 19-induced lockdown. This demand would fuel future economic growth following the economic recovery. Expected expansion and development across sectors will increase the demand for working capital. The NBFCs are prepared to fulfil expanding demand and catapult the country to attain economic superpower status.

The use of technology is helping the NBFCs to customize credit assessment models and optimize business processes to reduce the time to market and improve customer experience. The NBFCs are investing in data analytics and AI to build robust relationship with their target customers. With the rising internet penetration across the country, digital financial payments are ready to push digital lending to the next orbit of growth.

Challenges/Threats

The RBI red-flagged the NBFCs, as it observed that balance sheets of the shadow banks expanded even as their asset quality deteriorated. The balance sheet of NBFCs expanded in 2021-22 but the sectoral asset quality witnessed deterioration, although capital cushions showed an improvement. Whilst contribution of NBFCs towards supporting real economic activity and acting as supplemental channel of credit intermediation alongside the banks is well-recognised, higher risk appetite of the NBFCs has contributed to their size, complexity and interconnectedness, thereby posing potential threat to financial stability of the country.

Thus NBFCs need to be mindful of frailty and ensure robust asset-liability management apart from improving the quality of their credit portfolios. The central bank also introduced scale-based regulatory framework for the sector, wherein larger NBFCs will be subject to tighter regulations, given their systemic importance.

The current geo-political scenario can also alter the status of domestic NBFC sector. The Russia-Ukraine war and associated sanctions/disruptions are leading to a stressful macro situation for NBFCs in India. Inflation, which is already high, is likely to spurt due to supply chain issues across sectors and high energy prices. The RBI may be forced to raise rates to defend the INR, especially if the US Fed proceeds to hike policy rates and lighten its balance sheet. This could mean a downgrade in earnings expectations and market valuations of domestic NBFCs.

1) Unpredicted changes in regulatory norms

2) Inflation

3) Liquidity crunch

4) Long-term impact of COVID-19

5) Economic slowdown

NBFC SEGMENT - OUTLOOK

The pandemic has tested the resilience of NBFCs, as the sector has emerged stronger with reasonable balance sheet growth, increased credit intermediation, higher capital with lower delinquency ratio and enlarged liquidity cushions. The financial system is maturing from a bank-dominated space to a hybrid system, wherein the non-banking intermediaries are gaining prominence.

Various policies in the aftermath of the pandemic ensured liquidity support and eased financial conditions and gave the NBFCs adequate time and wherewithal to withstand the shock and leverage on their grass-root level reach to channelize credit and revive growth. NBFCs have started adopting strong credit risk assessment framework to ensure improved credit quality. The RBI introduced scale- based regulation to enhance regulatory oversight over the sector. To further strengthen the supervisory tools applicable to NBFCs, it issued a prompt corrective action framework for NBFCs effective October 2022. Recent amendment of the Factoring Regulation Act can incentivise all NBFCs to boost the MSME sector (Source: Business Today).

NBFCs have used the pandemic to reinvent their business models, realising the power of data analytics and Big Data in business applications. However, they need to be better equipped and focused on cyber fraud prevention. Going forward, given the growing population and underpenetration, the NBFCs have a bigger role to play in the financial inclusion trajectory of the country.

Its brief financial performance for FY22 is given below:

BUSINESS AND FINANCIAL OVERVIEW

Incorporated 28 years ago, Ashika Credit Capital Limited is a name synonym in the domestic NBFC segment. Its business encompasses providing loans/advances, inter-corporate deposit and investment in securities. The company has extended its strong focus on investment in securities through capital markets.

The companys financial statements were prepared in accordance with Indian Accounting Standards (Ind AS) notified under Section 133 of the Companies Act, 2013 ("the Act") read with the companies (Indian Accounting Standards) Rules, 2015 as amended, other relevant provision of the Act and guidelines issued by the RBI.

Financial Highlights - FY22

Operational income increased by 3.74% from Rs. 652.12 lakh to Rs.676.54 lakh

Other income increased by 47.13% from Rs.31.89 lakh to Rs.46.92 lakh

Net-worth increased by 7.36% from Rs.4,793.02 lakh to Rs.5,145.68 lakh

PAT increased by 114.49% from Rs.163.49 lakh to Rs.350.67 lakh owing to reversal of provisioning on account of recovery of NPAs.

Employee expenses increased by 222.91% from Rs.83.37 lakh to Rs.269.21 lakh

(Rs. Lakh)
Particulars Y/E March 31, 2022 Y/E March 31,2021
Revenue from Operations 623.29 652.12
PBDIT 553.30 437.16
Interest and Financial Charges 8.49 -
Cash Profit 544.81 247.83
Tax Expenses 193.59 83.85
Net Profit 350.67 163.49

Details of significant changes (i.e. change of 25% or more as compared to immediately previous financial year) in key financial ratios, along with detailed explanations thereof

Ratios 2021-22 2020-21 % Change Reason (if more than 25% change)
Debtors Turnover NA NA
Inventory Turnover NA NA
Interest Coverage Ratio 65.11 - 100 No interest expense in previous year
Current Ratio 5.72 51.02 (88.79) Fresh short-term borrowing availed in current year
Debt Equity Ratio 0.19 - 100 No debt in previous year
Operating Profit Margin (%) 81.70 37.93 115.40 Increase in profit due to reversal of provision for
Net Profit Margin (%) 51.83 25.07 106.74 expected credit loss
Return on Net Worth (%) 7.32 3.53 107.37

RISK MANAGEMENT

At Ashika, the risk is managed through an efficient risk management architecture as well as through policies and processes as approved by the Board of Directors and the management, encompassing independent identification, measurement and management of risk across various businesses. We have formulated comprehensive risk management policies and processes to identify, evaluate and manage the risks that are encountered during conduct of business in an effective manner. A team of experienced and competent professionals identify and monitor these risks on an ongoing basis and evolve processes/systems to monitor and control the same to keep the risks at minimum levels. Continuous monitoring by our officials helps in identifying and mitigating the risks at an early stage.

Credit Risk Credit risk is the most basic risk of lending business i.e., the risk of non-payment whether due to inability or lack of intent to repay. There is an additional risk of recovery of unpaid dues, either from the co-borrower or from the collateral.

Ashikas Response:

• Better client selection and stringent assessment of cash flows.

• Collateral-backed lending (of asset being created) and conservative loan to value ratio.

• Reduction in portfolio risk by diversifying business verticals.

• The company has a finance committee comprising of directors to consider large credit proposal, while small proposals are approved at appropriate level.

Operational Delivering loans and collecting repayments is the key to protect margin. Ashika is exposed to the risk Risk of loopholes in operations associated with complying with lending policies, creation of security on loans, watertight documentation and accounting/booking of loans - these could impair the ability to proceed against the borrowers if the loan repayments are missed / overdue.

Ashikas Response:

• Proper legal documentation and KYC norms are in place.

• Clear defined risk parameters and checks.

• Centralised and safe storage of documents.

• Recording of transaction in online software for immediate retrieval of information / reports.

• Tracking system and follow reports are in place.

• Carrying out extensive credit appraisal.

• Conducting periodic reviews.

Liquidity Risk Being in the business of borrowing and lending, the company is prone to the risk of liquidity mismatches i.e. delayed inflow of collections of lent money or inability to refinance borrowed money when due. This could lead to potential defaults even if the business is profitable and the company is solvent.

Ashikas Response:

• Effective governance framework.

• Longstanding relationship with leading banks/financial institutions.

• Access to credit at competitive rates.

• Ensuring short-term and long-term fund resources are favourably matched with deployment.

• Timely review of portfolio quality/risk, and reporting to senior management.

Regulatory Risk The risk arises out of a change in laws and regulation governing our businesses. It could also arise on account of inadequate addressal of regulatory requirements or differences in interpretation of regulations.

Ashikas Response:

• Adequate capitalisation.

• Zero tolerance to regulatory issues and timely addressal with involvement of senior management.

• Close tracking of regulatory development through regular connect with the RBI and other relevant agencies.

• Experienced professionals reporting to company secretary, who also heads compliance and legal section. This takes care of compliance with applicable laws, rules, regulations and guidelines affecting businesses.

Reputation Risk

Reputation Risk is the current or prospective risk to business, earnings and capital arising from adverse perception of the organisation on the part of customers, counterparties, shareholders, investors or regulators. It is a very high risk and can cause long-term and sometime irreparable loss to business/ revenue.

Ashikas Response:

• Business is conducted with due diligence keeping in mind the stakeholders and their needs.

• Adequate training to employees to conduct their activities with utmost care and diligence keeping in mind the reputation and status enjoyed by the company.

• Monitoring and timely resolving customer grievances.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Pursuant to the provisions of the Companies Act, 2013, every listed company has to lay down internal financial controls and ensure that they are adequate and operating effectively. Internal financial controls are the policies/procedures adopted by the company to ensure the following:

• Orderly and efficient conduct of business.

• Adherence to companys policies.

• Safeguarding its assets.

• Prevention and detection of frauds and errors.

• Accuracy and completeness of accounting records and timely preparation of reliable financial information.

• Preparation of annual budget and its monitoring.

• Well-documented authorization matrix, policies, procedures and guidelines covering all important operations of the company.

The company has adequate and suitable internal control systems that are continuously monitored and updated to ensure that its assets are safeguarded. These systems also ensure that established regulations are complied with and pending issues are addressed promptly. Adequacy of internal control systems are audited by internal auditors and the reports are reviewed by the audit committee on quarter basis.

DMKH & Co., the statutory auditors of the company, has audited the financial statements included in this annual report and have issued an attestation report on our internal control over financial reporting (as defined in section 143 of Companies Act 2013). The company has appointed M/s Shyamsukha Amit & Associates, Chartered Accountant to oversee and carry out internal audit of activities of the company. In line with companys business and presence, the conduct of internal audit is oriented towards the review of internal controls and risks.

Based on the report of internal audit, the committee makes note of observations and undertakes corrective actions, if necessary. It maintains a constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS

The company is committed to help its people to gain varied experiences, accomplish challenging assignments, learn continuously and build their career. Our endeavour has been to create home-grown leaders who focus on its customers needs aligned to its core values and operate with an ethical governance mind-set.

Integral to the companys approach to human resource development is its focus on developing and nurturing distributed leadership so that each business of the company is managed by competent, passionate and inspiring leaders, who are capable of building a future-ready organization through continuous learning, innovation and execution. The key aspects of our HR practice include recruitment, training and development and compensation.

INFORMATION TECHNOLOGY AND SYSTEMS

The companys constant drive for growth leads to strengthening of its information technology too. All the systems of the company are connected by integrated tailor-made software. It also has a well-developed MIS and accounting system and database to manage the information related to the borrowers.

CAUTIONARY STATEMENT

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. Forwardlooking 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 result could differ materially from those expressed in the statement or implied due to 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 on the basis of any subsequent developments.