athena financial services ltd Directors report

ATHENA FINANCIAL SERVICES LIMITED ANNUAL REPORT 2004-2005 DIRECTORS REPORT To The Members Athena Financial Services Limited Your Directors present the Fifteenth Annual Report of the business and operations of the Company together with the audited accounts for the year ended 31st March, 2005. Financial Results The financial results of your Company for the year ended 31st March, 2005 as compared to the previous year have been summarised below : 31.03.2005 31.03.2004 (Rs. in crores) (Rs. in crores) Gross Income 17.17 17.21 Gross Profit/(Loss) before Provision for Tax (122.44) (95.28) Provision for Tax - - Net Profit/(Loss) (122.42) (96.71) Balance brought forward from Previous year (95.70) 1.01 Appropriations : Statutory Reserve Fund Balance carried to Balance Sheet (218.13) (95.70) The year under review : The Gross Income for the year under review is Rs.17.07 crores as compared to Rs. 17.21 crores in the previous year. Your Company during the year has incurred a loss of Rs. 122.42 crores as compared to loss of Rs. 96.71 crores in the previous year. Out of the total income of Rs.17.07 crores, insurance income amounts to Rs.1.63 crores. During the year under review your Company has processed 110452 policies. Due to losses incurred your Directors do not recommend any dividend. However as per the terms and conditions of 11% Redeemable Cumulative Preference Shares of Rs.10/- each, the accumulated dividend would be paid in the year of profit. The main business of your company has been hire purchase financing of Kinetic two-wheelers with focus on the retail segment. Though the operations of your company have been profitable in the past and your Company had achieved healthy growth in such financing of two-wheelers your Company is at present going through a crucial and critical phase. Your Company is currently facing a very difficult financial situation mainly due to stoppage of fund based business and very slow recovery from its existing assets. There has been no lending business of your Company due to lack of funds. The new age banks and other nationalised banks have also ventured into rural and semi urban towns for retail financing as retail financing and especially vehicle financing has been identified as a major thrust area. Your Company also faced stiff competition from the nationalised banks, who themselves were offering loans to retail consumers at much lower rates than the rates at which your Company were getting credit facilities from these very Banks. Interest rates have fallen substantially in the last two years for all types of consumer loans with intense competition among the various players in the financial sector. In fact, present yield on vehicle financing is much lower than your Companys borrowing cost and hence discontinuation of fund-based business was a very timely, sensible and unavoidable decision by your Company. With the introduction of newer models by almost every two-wheeler manufacturer, there has been a considerable fall in the value of those second hand two-wheelers which are repossessed and sold, leading to much higher losses in such cases. As a result of this, even though your Company has been taking appropriate legal action in case of default, the amount of realisation from sale of repossessed vehicles have been declining and your Company has been incurring substantial losses on sale of these two- wheelers. The introduction of new models at same or reduced prices as compared to utility value of existing models has led to more and more consumers going for newer models at the cost of earlier two-wheelers financed which has resulted in a high level of default in recovery of hire purchase instalments covering old models of two-wheelers. As a result of these factors, a large number of loan accounts of your Company have become sticky. Also due to the small size of individual finance, recovery cost is quite high in several cases making recovery drive unviable. Your Companys operations have also suffered due to expenditure cut and other cost cutting measures adopted by various Government bodies specially municipalities and health departments, who are the institutional customers of your Company. Most of these Government Institutional customers have been under tremendous economic pressure due to their own precarious financial conditions and have thus defaulted on the instalment payments of your Company. Your Company was earlier operational in about 400 locations including small remote locations resulting in high cost of lending and collection thereby making business from these areas as unviable. Besides this, increasing instances of bad debts due to general economic slowdown and change in the lending habits of consumers have also contributed to the dip in the fortunes of your Company. As aforesaid, being unviable your Company had to discontinue its fund based business model. However your company has to continue its infrastructure, else recovery from existing assets would have suffered. Your Company had a network of twenty seven branches out of which some unviable branches have been closed. Though your Company has changed the business model from fund based to a fee based, the near business model has not produced the desired results till now and as a result, there has been drastic reduction in the income of your Company and your Company is currently operating at figures below break- even. Current Operations arid Future prospects : Your Company has ventured into a new business model that is a fee-based model by optimally utilizing the infrastructure available with your Company. The new business model ensured that your Company would continue to do business and therefore have adequate earnings to cover the expenses of collection. Your Company had in the past operations at around 400 locations all over India, which has now been reduced to about 150 centres in view of identification of certain locations as small and unviable. Though your company would save on operating costs at these centres, it would incur additional expenditure on various initiatives taken by your company for strengthening of its collection mechanism. Your Company has also taken steps to reduce administrative and other operational costs. All the branches / regional offices of your Company have been given specific cost budgets. Your Company has started distributing various retail finance products thereby widening the revenue stream of your Company. Your Company also functions as service provides for insurance related activities and the said function is a natural extension and complementary for your Company. Your Company is also envisaging that there shall be a huge demand for service provides in the retail finance industry and your Company in future shall look for such opportunities where it can leverage its experience and learning in retail finance specially in the areas of credit risk and back office support. This new business model, though a move in the long-term interest of your Company, would take some time to stabilize and returns can be expected only over a period of time. The slow down of recoveries coupled with the time required for building up the new business model and the increase in legal and other expenses for effectively monitoring the collection process has put a considerable strain on the bottom line of your Company. The above steps taken by your company is expected to yield results in the future. Fixed Deposits : a As on 31st March, 2005 your Company has. no Fixed Deposit outstanding on its books for which provision has not been made in the escrow account. Since your Company does not have any Fixed Deposit outstanding on, its books your Company has been listed category B Company i.e. a, Non Public Deposit taking company by Reserve Bank of India. Management Discussion and Analysis Report : Management Discussion and Analysis Report, pursuant to Clause 49 of the Listing Agreement entered into with the Stock Exchanges forms a part of this report and the same is annexed as Annexure - A. Directors Responsibility Statement : Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956 with respect to Directors Responsibility Statement, your Directors confirm that : i) in the preparation of the annual accounts for the year ended 31.03.2005, the applicable accounting standards have been followed; ii) appropriate accounting policies have been selected and applied consistently and that in judgements and estimates due care has been taken that the same are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the loss of the Company for the year ended as on that date; iii) proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; iv) the annual accounts for the year ended 31st March, 2005 have been prepared on a going concern basis. Directors : During the year Mr. R. Ramkumar and Mr. S.D. Joshi resigned from the Board of Directors of the Company. Mr. G.S. Kulkarni has been appointed as director in casual vacancy under section 262 of the Companies Act, 1956. Appropriate resolution proposing the appointment of Mr. G.S. Kulkarni as director of the Company appear in the notice of the Annual General Meeting and your Directors recommend its adoption. Mr. M.I. Kochar and Mr. D.M. Shingavi, Directors of the Company retire by rotation at the ensuing Annual General Meeting and being eligible offer themselves for reappointment. Auditors : M/s Lakhani & Co., Chartered Accountants, Mumbai Auditors of the Company have resigned as Auditors of the Company vide their letter dated 17th January, 2005. The members of the Company at the Extra Ordinary General meeting held on 16.07.2005 have approved the appointment of M/s. Pawan Jain & Associates, Chartered Accountants, Pune as Auditors of the Company to fill casual vacancy caused by resignation of M/s Lakhani & Co., Chartered Accountants, Mumbai and to hold office until the conclusion of the ensuing Annual General Meeting. M/s Pawan Jain & Associates, Chartered Accountants, Pune hold office until the conclusion of the ensuing Annual General Meeting and being eligible have given their consent for re-appointment. Corporate Governance : As per the Listing Agreement with the Stock Exchanges, your Company has implemented the various requirements of Corporate Governance. Your Company had taken adequate steps to ensure compliance of the requirements of Corporate Governance. A separate Report on Corporate Governance is given in Annexure - B. Particulars of Employees : Particulars of employees as required under Section 217(2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) Rules 1975, forms a part of this report. However as per the provisions of Section 219(1)(b)(iv) of the Companies Act, 1956 the report and the accounts are being sent to the shareholders of the Company excluding the statement of particulars of employees under Section 217(2A) of the Companies Act, 1956. Any shareholder interested in obtaining, a copy of the said statement may write to the Secretarial Department at the Registered Office of the Company. Information as per Section 217(1)(e) of the Companies Act, 1956. The Company has no activity relating to the conservation of energy or technological absorption and also there was no foreign exchange earnings and outgo. Acknowledgement : Your Directors place on record their grateful appreciation to the Companys Bankers, Financial Institutions, Customers, Dealers, Depositors, and Shareholders for their continued and whole hearted support extended to the Company and also express their appreciation for the dedicated service rendered by the employees of the Company. FOR AND ON BEHALF OF THE BOARD OF DIRECTORS Place: Pune Date : 15-10-2005 DIRECTOR DIRECTOR Annexure - A MANAGEMENT DISCUSSION AND ANALYSIS REPORT The Company is engaged in finance business since 1990. The following Management Discussion and Analysis Report presents the Companys current strategy to face the challenges that are before the NBFC sector today and to consider ways of earning additional revenue by offering better services to the customers. The Industry : A number of nationalised and new age private sector banks have entered the retail loan sector and have started targeting the retail as well as various consumer loan sector leading to stiff competition in the NBFC industry today. This has lead to an increase in the cost of funds available to the NBFC industry. The new players have access to cheaper sources of funds and accordingly can lend at substantially lower rates than NBFCs. The two-wheeler market in India. has become highly competitive in the last 2-3 years with substantial increases in number of models introduced by two- wheeler companies. The introduction of new models at lower costs coupled with reduction in interest rates on new vehicles has prompted customers to opt for new vehicles resulting in a high level of default in recovery of hire purchase instalments which cover old models of two-wheelers. The introduction of newer models by almost every two-wheeler manufacturer has led to a substantial fall in the value of those second hand two- wheelers which are repossessed and sold, leading to much higher losses in such cases. The accompanying decline in the price of two-wheelers and changes in the spending habits of retail consumers has led to a sea change in market dynamics of the NBFC Industry. Opportunities, threats, risks and concerns : The change in the business environment has led to turbulent times for the NBFC sector. The aggressive entry of new age private sector banks, more and more nationalised banks entering the retail sector and targeting the retail as well as various consumer loan sector, the banks offering loans to retail consumers at much lower rates, various discount schemes and other promotional offers offered by various big finance companies are the various possible,threats. faced by your Company. Being an NBFC, the companys cost of funds is higher than the other competitors in similar line of business. Most of the new players are PSU banks, Big NBFCs and private banks. These new players have access to cheaper sources of funds and accordingly can lend at substantially lower rates than NBFCs like us. Continuous decrease in the lending rates would lead to lower margins in the business. Business Outlook and Overview : The Company has started distributing various retail finance products thereby widening the revenue stream. The Company also functions as service provider for insurance related activities and the said function is a natural extension and complementary for the Company. The Company is also envisaging that there shall be a huge demand for service providers in the retail finance industry and the Company in future shall look for such opportunities where it can leverage its experience and learning in retail finance specially in the areas of credit risk and back office support. Financial performance vis-a-vis Operational Performance : The Gross Income for the year under review is Rs. 17.07 crores as compared to Rs. 17.21 crores in the previous year. Your Company during the year has incurred a loss of Rs. 122.42 crores as compared to loss of Rs. 96.71 crores in the previous year. Out of the total income of Rs.17.07 crores, insurance income amounts to Rs.1.63 crores. During the year under review your Company has processed 110452 policies. Internal Control Systems and Cost : The Company presently has an adequate internal control system. The Company has also appointed an external firm of Chartered Accountants for a continuous internal audit of the affairs of the Company at its branches and the reports are sent to the Director of the Company. The Audit Committee of the Board also meets regularly and amongst its various functions ensures compliance of internal control systems and statutory compliance and reviews the internal audit procedures and all aspects forming part of the internal audit function including discussion with the internal auditors periodically about internal control systems, scope of audit including the observations of auditors and on all aspects of internal audit. Human Resource development : The company believes that human resources are the key resources for the success of any organisation. Thus the Company strives to create a culture of openness and empowerment amongst its employees and provide good career development. The Company is committed to the welfare of the employees and their families. Cautionary Statement : This report is based on Companys projections and contains estimates and expectations which could be `forward looking. This report is also based on estimates and perceptions on socio economic conditions, government policies etc. Actual results however might differ from expectations as the same depends upon many uncertainties.