Ashika Credit Capital Ltd Management Discussions

ECONOMIC SCENARIO

Global Economic Review

There are signs that the global outlook has begun to spur, though growth remains modest. The impact of tighter monetary condition continues, especially in housing and credit markets, but global activity is rather resilient, inflation is falling faster than initially projected and private sector confidence is improving. Supply and demand imbalances in labour markets are easing, with unemployment closer to record lows. Real incomes have begun to improve as inflation has moderated and trade growth has turned positive. There is divergence in growth across countries, with softer outcomes in many advanced economies, especially in Europe, on the contrary strong growth is expected in the United States and many emerging market economies.

Outlook

Global growth in 2023 continued at an annual rate of 3%, despite tighter financial conditions and other adverse factors, including Russias war of aggression against Ukraine and the evolving conflict in the Middle East. Global GDP growth is projected at 3.1% in 2024 and 3.2% in 2025, little changed from the 3% in 2023. This is weaker than a decade ago i.e. before the global financial crisis, but close to current estimated growth rates in both advanced and emerging market economies.

A projected fall in headline and core inflation should enable central banks to begin lowering policy rates this year in many economies, although real rates will remain restrictive (above estimated neutral levels) for some time. Nevertheless fiscal policy is projected to be tightened modestly in most OECD countries, leaving the overall macroeconomic policy stance restrictive. Continued fiscal and monetary stimulus is expected in China, but in Brazil, India, and several other large emerging-market economies, policy interest rates are projected to decline with fiscal policy projected to be mildly restrictive in 2024 and 2025.

Artificial intelligence (AI) has the potential to play a huge role in helping to revive the economy during tough times like a recession. By using technology like algorithms and machine learning, AI can help companies work smarter and more efficiently, ultimately leading to more job opportunities and economic growth. Number of firms making use of AI has risen rapidly, though most of these are large companies. The net effect of AI on aggregate productivity will depend on many factors, encompassing the extent to which new technologies are widely diffused or concentrated in a few leading firms, further AI is labour enhancing as opposed to labour replacing.

Indian Economic Review

India is one of the fastest growing economies of the world and is poised to continue with aspirations to reach high middle income status by 2047, the centenary of Indian independence. It is also committed to ensuring that its continued growth path is likely to face challenges of climate change, and in line with its goal of achieving net-zero emissions by 2070. Following a successful moon mission and hosting the G20 Summit, India is positioned to emerge with increased stability and optimism towards its growth and future prospects. The countrys attractiveness as an investment destination remains robust, given the size and scale of operations it has to offer to global companies, abundant skilled talent pool, and prowess in technology and innovation.

The industrial manufacturing sector has experienced a significant boost, attracting global technology giants like Apple eager to expand their supplier networks within India. This momentum is further supported by the implementation of state industrial policies that complement sector-specific incentive schemes. Concurrently, substantial investments in logistics and infrastructure development, including the construction of new roads, highways, and rail tracks, underscore the governments commitment to bolstering this critical sector.

Strong economic growth in the first quarter of FY23 helped India leave behind UK to become the fifth-largest economy after it recovered from the COVID-19 pandemic shock. Nominal GDP or GDP at Current Prices in the year 2023-24 is estimated at Rs.293.90 lakh crores (US$ 3.52 trillion), against the First Revised Estimates (FRE) of GDP for the year 2022-23 of Rs.269.50 lakh crores (US$ 3.23 trillion). The growth in nominal GDP during 2023-24 is estimated at 9.1% as compared to 14.2% in 2022-23. Strong domestic demand for consumption and investment, along with Governments continued emphasis on capital expenditure are seen as major drivers of the GDP (Source: IBEF).

Outlook

Indias gross domestic product (GDP) during 2024-25 (FY25) is expected to grow by 7%. The triggers for FY25 growth is expected to come from higher capital expenditure on infrastructure development both by central and state governments, rise in private corporate investment, strong service sector performance, and improved consumer confidence. Growth momentum is expected to pick up in FY26 backed by improved goods exports and an increase in manufacturing productivity and agricultural output.

A new government initiative to support urban housing for middle-income households is expected to further spur housing growth. Private corporate investment is expected to increase with stable interest rates. With inflation moderating to 4.6% in FY25 and easing further to 4.5% in FY26, monetary policy may become less restrictive, which will facilitate rapid off-take of bank credit. The demand for financial, real estate and professional services will grow while manufacturing will benefit from muted input cost pressures that will increase industry sentiment.

INDUSTRY STRUCTURE AND DEVELOPMENTS

NBFC segment in India

During times of economic turmoil, financial institutions are essential in maintaining stability and enforcing regulatory measures to support households and businesses. The impact of ongoing geopolitical conflicts has hindered countries post- pandemic recoveries and accelerated the normalization of monetary and fiscal policies following years of unprecedented stimulus efforts. Non-Banking Financial Companies (NBFCs) have emerged as key players in providing credit financing to unorganized and underserved sectors, thus significantly contributing to the Indian financial system. By revolutionizing the lending landscape through financial inclusion, NBFCs have expanded access to credit for individuals who face barriers to traditional financing. Leveraging digitalization and technology, NBFCs deliver efficient customer financing solutions, particularly catering to low-income and overlooked creditworthy populations. Their service offerings encompass a variety of financial products, such as MSME financing, microfinance, and other retail segments. The NBFC sector has enhanced its business offerings by incorporating fintech and creating innovative products in the modern technological landscape. Through a hybrid approach combining physical and digital channels, these companies have capitalized on industrial opportunities. The Government is prioritizing the development of NBFCs with a strong emphasis on promoting sound corporate governance practices within these organizations.

Non-banking financial companies (NBFCs) employ a customized approach to engage with borrowers, utilizing specific criteria for different customer segments, incorporating various data sources, and making credit decisions based on scorecards. After facing slow growth due to liquidity challenges, NBFCs have shown a robust recovery with increased capital reserves, improved stability in loan repayment defaults, enhanced asset quality, and expanded balance sheets. Strengthened risk evaluation frameworks, government assistance such as debt relief and liquidity enhancement measures, and broader economic recovery have enabled NBFCs to navigate through difficulties and adopt innovative strategies to capitalize on emerging opportunities.

The growth of NBFCs in the country will be significantly influenced by the MSME sector. Despite its significant contribution to the economy, the MSME sector is facing a credit gap from financial institutions. Among the 64 million MSMEs in the country, only 14% have access to credit. The overall finance demand in the MSME market is around Rs.1.95 lakh crores with a 3.8x debt-to-equity ratio. The demand for debt-based finance was pegged at 1.54 lakh crores. Nearly 47% of the debt demand from MSMEs is estimated to be unaddressable. This is primarily because many of these businesses are not financially viable or they prefer being funded by non-transparent informal sources that end up charging high rates of interest. This leaves a debt demand of 82,000 crores, of which 29,000 crores demand is currently fulfilled by formal credit lenders like private banks. The remaining unfulfilled demand of 53,000 crores makes up a huge addressable market for FinTechs and NBFCs.

NBFCs have the opportunity to help bridge this gap by offering customized products and digital solutions to support the growth of the MSME sector. Rationalizing and consolidating the MSME industry in India is a necessary step that is expected to bring numerous benefits to the sector. The RBIs initiatives to enhance the digital ecosystem in India play a crucial role in facilitating the transition. The Account Aggregator network, for example, is anticipated to bring substantial value by offering a secure and efficient platform for the exchange of financial information. This will simplify access to credit for MSMEs and enable lenders to evaluate creditworthiness effectively. Likewise, the OCEN network is poised to transform the credit flow process in the economy by providing a seamless platform for all parties involved. In general, the integration of digital technologies and the consolidation of the MSME sector in India are projected to generate a potent synergy that could unleash significant economic opportunities. The RBI has also introduced the co- lending mechanism to streamline the availability of affordable funds from banks to NBFCs serving underserved regions and meeting the requirements of MSMEs, EWS, LIG, and MIG. This initiative targets the banks hesitancy to provide loans in these sectors due to elevated operational expenses and credit risks.

According to the Reserve Bank of India (RBI) data, the credit exposure of banks to Non-Banking Financial Companies (NBFCs) stood at 15.2 lakh crores in December 2023, indicating a 15.1% year-on-year (y-o-y) growth, much slower than the rate witnessed in November 2023 and the approximately 27% average growth for the prior 12 months. According to CareEdge report, growth rate of advances to NBFCs has fallen below the overall bank credit growth, which was last seen in March 2022. Furthermore, the proportion of NBFC exposure in relation to aggregate credit has risen from 9.9% in December 2022 to 9.5% in December 2023. On a month-on-month (m-o-m) basis, the amount rose by 1.8%. Mutual Fund (MF) debt exposure to NBFCs, including Commercial Papers (CPs) and Corporate Debt, reached Rs.1.87 lakh crores in December 2023 witnessing an increase of 30.8% y-o-y and 19.9% sequentially, with CPs crossing the 1 lakh crores mark last seen in August 2023. Meanwhile, given the general credit risk aversion of Mutual Funds (MFs), the exposure to NBFCs, particularly those rated below the highest levels, is not expected to witness significant traction. Consequently, the aggregate dependence of mid- sized NBFCs on the banking sector for funding is likely to remain high. MFs debt exposure to NBFCs rose to 14.2% as a percentage of "Banks advances to NBFCs" in December 2023 from 11.3% in December 2022, and sequentially from 11.3% in November 2023.

The GNPA and NNPA ratio of NBFCs continued its downward trajectory with improvement across sectors. Among major sectors, the personal loans segment, which had grown rapidly in the last few years, continues to have the lowest GNPA ratio in September 2023 at 3.6%. The GNPA ratio of Government and private NBFCs moderated further to 2.5% and 6.1%, respectively, but that of private NBFCs industrial advances remains high at 12.5% and constitutes 21.6% of overall GNPA of the NBFC sector. NBFCs are expected to play a crucial role in financing Indias transition from the worlds fifth-largest to the third-largest economy by the end of this decade.

OPPORTUNITIES AND THREATS

OPPORTUNITIES

Increasing disposable income: India is witnessing arise in disposable income levels, which provides a significant opportunity to the financial services sector with new and innovative investment products and services. With rising disposable income, consumers are looking for investment options beyond traditional savings account and Fixed Deposits and moving towards mutual funds, stocks, bonds and other financial instruments, thereby providing an opportunity to the NBFC sector to capitalise on the changing trends.

Digital Transforma- tion: By embracing digital technologies and expanding on- line services, the NBFCs can enhance customer conven- ience and broaden the reach to a larger customer base.

Wider and effective reach: NBFCs are now reaching out to Tier-2, Tier-3 and Tier-4 markets, distributing loan across varied customer touch- points. Furthermore, they are also building a connected channel experience, that provides an omni-channel, seamless experience with 24/7 sales and service. With the consumer of today evolving and accessing digital media like never before, NBFCs have embarked on new and better ways to engage with the customer.

Tailored product offerings: NBFCs have adapted their product offerings to meet specific customer group and are focused on addressing appropriate needs by carefully analysing this target segment and customising pricing models.

The Government of India unveiled several initiatives aimed at addressing some of the structural issues stressing the small business lending segment. These include granting licenses to account aggregators, initiating the Pradhan Mantri Mudra Yojana (PMMY), launching UPI platforms, unveiling platforms such as TReDS, GeM and Open Network for Digital C ommerr e (ONDC ) and implomontinn GST.

THREATS

The possibility of a market slowdown is conditional to the global economic downturn and other geopolitical crisis: The performance of the NBFC sector is affected not only by the domestic economic situation but also by the global economic scenario. Emerging markets like India are particularly at risk during a global economic downturn. Factors such as fluctuating capital flows, currency volatility, and trade barriers can significantly impact the operations of NBFCs. Hence, it is crucial for NBFCs to closely monitor global economic trends to mitigate risks and adjust to changing market conditions. Domestic players need to continuously upgrade their products and services in order to stay competitive in this dynamic market.

Macroeconomic challenges: India is subject to various external and internal factors that can lead to economic challenges, thereby impacting the financial services sector. External factors such as changes in global trade policies, fluctuation in commodity prices, and changes in global interest rates can affect the Indian economy and hence, the financial services sector. Internal factors such as Inflation, Government policies and domestic market conditions can also impact the sector.

Potential regulatory changes may impact our companys operations: In India, the sustainable growth of the financial sector heavily relies on the effective regulation and supervision of Non-Bank Financial Companies (NBFCs). The regulatory framework for NBFCs has undergone developments to emphasize responsible supervision and regulation. However, sudden and unexpected regulatory changes or restrictions could result in heightened compliance costs and disrupt NBFC sector, for example, changes in tax policies, capital adequacy requirements and so on, can hamper the profitability and viability of financial profits and services. Hence, regulatory authorities should ensure that any changes are communicated clearly and implemented gradually to mitigate any adverse effects on the sector.

A reduction in liquidity may hamper the lending capabilities of Non-Banking Financial Companies (NBFCs): Non-banking financial companies (NBFCs) play a vital role in facilitating access to credit for both individuals and businesses in India. However, NBFCs heavily rely on external funding sources such as banks, mutual funds, and capital markets to meet their financing needs. Disruptions in external funding availability or liquidity constraints resulting from factors like reduced loan recovery, unexpected events, or market volatility can have a significant impact on NBFCs loan disbursement processes, leading to subdued performance. Therefore, it is crucial for NBFCs to maintain a robust balance sheet and develop effective contingency plans to mitigate these risks. Co-lending, co-origination, and direct assignments serve as important strategies in this regard

Cybersecurity Risks: As digital adoption has increased in the financial services sector, there is also a risk of increasing cyber attacks and data breaches. These cybersecurity risks can result in financial losses, damage to reputation and loss of customer trust. The financial services sector needs to invest in robust cybersecurity measures in order to protect against these risks.

OUTLOOK

The NBFC sector in India is poised for continued growth, driven by several factors. The governments commitment to financial inclusion, coupled with the sectors digital transformation, is expected to contribute to sustained demand for NBFC services. The regulatory changes, while imposing stricter guidelines, aim to ensure the sectors stability and prevent excessive risk-taking. The integration of emerging technologies, including AI and ML, is anticipated to redefine credit appraisal processes, enabling faster, more accurate decision-making.

The role of NBFCs in achieving the goals outlined in the Atmanirbhar Bharat vision is crucial. As businesses aim to expand capacities post-pandemic, NBFCs have the opportunity to facilitate the flow of credit to both businesses and households. The upcoming budget in 2024 presents an opportunity to establish targeted schemes, especially for micro-businesses, aligning with the governments push for economic recovery. As NBFCs adapt to the changing terrain, success in FY 2024-25 and beyond will hinge on strategic collaborations, embracing technological advancements, and a dedicated focus on promoting financial inclusivity.

COMPANY OVERVIEW

Ashika Credit Capital Limited (ACCL) is a RBI registered NBFC categorized as Base Layer NBFC, incorporated in Kolkata West Bengal, three decades ago. The Company is engaged in fund-based activities, including providing loans and advances and inter-corporate deposit and investment in securities. The Companys financial statements were prepared in accordance with Indian Accounting Standards (referred to as "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. The Company has only one segment, i.e. "Financial Services" and the entire revenue is generated from financial activities. Hence, there is only one segment reporting under Accounting Standards 17.

DISCUSSION ON FINANCIAL PERFORMANCE OF THE COMPANY WITH RESPECT TO OPERATIONAL PERFORMANCE

During the Financial Year 2023-2024, the Company delivered a stellar performance with considerable increase in Operational Income and Net profit (after tax) as compared to preceding Financial Year 2022-2023.

• During the year under review, the Operational Income (Revenue from Operations) stood at 1,838.31 Lakhs, registering a robust growth of 73.48% as compared to 1,059.65 Lakhs earned in preceding Financial Year. The increase in Operational Income during the Financial Year 2023-2024 pertains mainly to gain from investments in securities market.

• Expenses grew 40.83% to 578.60 Lakhs in Financial Year 2023-2024 from 410.84 Lakhs in Financial Year 2022-2023, mainly owing to increase in finance costs and other expenses.

• Profit after Tax for Financial Year 2023-2024 grew radically by 81.88% to 1,070.38 Lakhs as compared to 588.52 Lakhs earned in preceding Financial Year 2022- 2023.

The highlights of Financial Performance of the Company during the Financial Year 2023-2024 is as below:

(Amount in Lakhs)

Particulars	Financial Year ended 31st March, 2024	Financial Year ended 31st March, 2023
Revenue from Operations	1,838.31	1,059.65
Profit before Tax	1,276.14	794.37
Tax expenses	205.76	205.85
Net Profit	1,070.38	588.52
Total other comprehensive income (net of tax)	1.89	1.59
Total comprehensive income	1,072.27	590.11

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in Key Financial Ratios, along with detailed explanations thereof including:

Ratios	2023-2024	2022-2023	% Change	Reason (if more than 25% change)
Debtors Turnover	NA	NA	NA	NA
Inventory Turnover	NA	NA	NA	NA
Interest Coverage Ratio	18.38	69.72	(73.64)	Increase in short term borrowing
Current Ratio	3.61	41.52	(91.31)
Debt Equity Ratio	0.37	0.0006	100
Operating Profit Margin (%)	73.41	76.06	(3.48)	NA
Net Profit Margin (%)	58.23	55.54	4.84	NA
Return in Net Worth (%)	17.07	11.44	49.21	Better profitability

HUMAN RESOURCE MANAGEMENT

Human Resource Management plays a very important role in realizing the Companys objective. The Company is managed by the active involvement of the promoters along with strategic inputs from a well-diversified and competent board.

The employees are its key assets and pillars of success. The Company has adopted practices that enable the Company to attract, retain and nurture talent in an increasingly competitive market and to foster a work culture that is always committed to providing them with the best opportunities. Your Company is committed to maintain the highest standards of health, safety and security for its employees and business associates and to operate in a healthy and safe environment.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

ACCL has robust internal controls system in place, driven through various procedures and policies which are reviewed and tested periodically, across processes and functions. The Company has various committees including Risk Management Committee and the Asset and Liability Committee which are designed to review and oversee critical aspects of ACCLs operations.

The Company has implemented controls through systems and processes ensuring a robust control framework. The Internal Audit department and compliance function review the business units adherence to internal processes and procedures as well as to regulatory and legal requirements providing timely feedback to management for corrective action, including minimising the design risk, if any. The Audit Committee of the Board also reviews the performance of the audit and compliance functions and reviews the effectiveness of controls and compliance with regulatory guidelines. In the opinion of Board and the Senior Management, internal control systems are well placed and work in a satisfactory manner.

ACCL has a system of internal control over financial reporting that adequately addresses the risk that a material misstatement in the Companys financial statements would not be prevented or detected on a timely basis and that these controls are operating effectively

RISK MANAGEMENT

Risk management is a process to identify and manage threats that could have an impact on the operations of the Company. Generally, this involves reviewing business operations, identifying potential threats to the company and the likelihood of their occurrence and then taking appropriate actions to address the most likely threats. The Company adopts a systematic approach to mitigate risks associated with accomplishment of objectives, operations, revenues and regulations. The Company believes that this would ensure mitigating risks proactively and help to achieve stated objectives. ACCLs commitment to effective risk management practices has proven invaluable in navigating through challenging and uncertain times.

ACCL promotes a strong risk culture that is embedded across the organisation. At the highest level, the Board of Directors has established a Risk Management Committee (RMC), which assists the Board in maintaining oversight and review of the risk management principles and policies, strategies, risk appetite, processes, and controls. Key risk exposures of the Company along with risk mitigation measures are provided in the table below. The risks furnished below are not exhaustive and assessment of risk is based on management perception. Credit risk, market risk, interest rate risk, liquidity risk, operational risk, compliance and governance risk, reputation risk are the primary risks associated with the NBFC business.

Risk category	Risk description	Risk mitigating measures
Credit Risk J	Credit risk is the risk of debt default resulting from a borrowers failure to make principal or interest payments to the lender. If the customer is unable to pay within 90 days of the due date, the loan is classified as an NPA on the Companys balance sheet.	The Company has proper procedures for credit risk mitigation including credit evaluation, risk appraisal, proper verification of customers like borrowers income, reports from Credit Information bureaus and so on. Fraud checks are performed well before any disbursal of loan.
A s Market Risk J	Market Risks are risks on account of adverse and un anticipated market and economic conditions which could impact market value of investments.	To effectively manage market risk on its investment portfolio, ACCL has formulated an Investment Policy which guides its investment decisions. Financial Year 2023-2024 was a spectacular year for the Company; it has diverted its focus from lending to investment in securities market since last Financial Year 2022-2023. The Company calibrates the duration of investment portfolio to balance the twin objectives of maintaining liquidity for business and minimum fair value change impact on its investment portfolio.
Interest Risk	Interest rate risk refers to fluctuations in a Companys net interest income and the value of its assets and liabilities resulting from unfavourable interest rate movements, such as hardening or softening due to market forces or RBI intervention.	ACCLs prudent interest rate risk management ensures that amidst a rising interest rate environment the Company had no adverse mark to market impact on its investment portfolio. In addition, the Asset Liability Committee (ALCO) of the Company reviews the interest rate scenario and monitors the ALM position, whenever necessary, in order to take necessary actions.
(^) Liquidity Risk	It is the risk of not having sufficient liquid assets or limited access to the financing market to satisfy contractual maturities of liabilities, regulatory requirements, or the Companys investment needs.	The management establishes standards for maintaining liquid investments in order to meet immediate liquidity requirements. The Companys borrowing strategy is based on the fluctuation in liquidity market conditions and business needs. To mitigate these risks, the Companys well-diversified pool of resources aims to optimise its short- and long-term borrowings.
Operational Risk	Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems, or human factors, or from external events.	The Companys dependable internal control systems and regular monitoring procedures guarantee efficient operations and adequate control. We have robust systems and stringent processes in place Transactions are recorded in custom software to enable easy retrieval of information as needed.
Governance and Compliance Risk	These are risks that could arise due to in-effective governance as well as Non- adherence to the applicable laws / regulations	As a Listed NBFC, having its Equity shares listed in Bombay Stock Exchange Limited (BSE), ACCL is obligated to abide by a variety of Regulatory Authorities like SEBI, RBI and MCA. The Company abides by all applicable rules and regulations in letter and spirit and completes its compliances within the prescribed time period. The Companys Company Secretary and Compliance Officer take the utmost care of all obligations on an ongoing basis.

CAUTIONARY STATEMENT

Some statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward looking or tentative within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied. Actual results may vary from such statements contained in this report due to various risks and uncertainties. The information contained herein is of the date referenced and the Company does not undertake any obligation to update these statements. ACCL has obtained all market or industry data and other information from sources believed to be reliable or through its internal estimates unless otherwise stated though its accuracy or completeness cannot be guaranteed. All information provided in this Report has been prepared solely by the Company and has not been independently verified by anyone else.