Banas Finance Ltd Management Discussions

The Management Discussion and Analysis Report for the year ended 31st March, 2024 as stipulated under Regulation 34 (2) (e) read with Schedule V of SEBI (LODR) Regulations 2015 have been included in consonance with the Code of Corporate Governance as approved by The Securities and Exchange Board of India (SEBI).

Investors are cautioned that these discussions contain certain forward looking statements that involve risk and uncertainties including those risks which are inherent in the Companys growth and strategy. The company undertakes no obligation to publicly update or revise any of the opinions or forward looking statements expressed in this report consequent to new information or developments, events or otherwise.

The operational performance and future outlook of the business has been reviewed by the management based on current resources and future development of the Company.

Banas Finance Ltd. is a Non deposit-taking Non-Banking Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI). It is mainly engaged into business of Finance and Share Trading activity. The Company has a good lending portfolio.

MACRO ECONOMIC ENVIRONMENT:

Despite three turbulent years which witnessed a global pandemic, supply chain disruptions, conflict in Ukraine, and elevated interest rates to counter high inflation, India emerged as the fastest growing major economy of the world. Notwithstanding conflicts in Europe and Gaza and rising tensions in West Asia, a global recession that experts thought was imminent has not occurred. Indeed, the key indicators have turned positive: inflation is falling across all major countries; unemployment has not risen as economists thought it would; and the major central banks have put an end to monetary tightening, though they have not yet begun reducing their key interest rates.

According to the IMFs World Economic Outlook (April 2024), inflation is falling faster than expected in most regions; and it has forecasted global headline inflation to fall to 5.9% in 2024 and further to 4.5% in 2025, with the possibility of the 2025 forecast being further revised downwards. In a milieu where the IMF has projected the worlds real GDP growth at 3.2% in 2024 and 3.2% in 2025, its forecasts for India are impressive: 6.8% in 2024 followed by yet another stint of 6.5% in 2025. Indeed, the IMF has placed India as the fastest growing major economy in the world.

The major driver of growth has been the central government led capital expenditure. The present government had considerably raised this to counter the overall demand and GDP suppression during the pandemic; and it has continued to rely upon it as a significant component of growth. To give an example: according to the second advance estimate for FY2024, gross fixed capital formation (GFCF) is expected to contribute over 34% of the GDP in FY2024 an impressive ratio by any standard. Indias current account deficit (CAD) for Q3 FY2024 stood at US$10.5 billion, or 1.2% of GDP versus US$11.4 billion (1.3% of GDP) in Q2 FY2024. For the first three quarters of FY2024, the CAD aggregated US$31 billion, or 1.2% of GDP compared to 2.6% over same period of FY2023. This narrowing of the CAD was due to a fall in merchandise trade deficit, robust growth in the export of services exports and strong remittances. According to the RBI, India is the largest recipient of remittances in the world

INDUSTRY OVERVIEW:

NBFCs have become important constituents of the financial sector and have been recording higher credit growth than scheduled commercial banks (SCBs) over the past few years. NBFCs are leveraging their superior understanding of regional dynamics and customised products and services to expedite financial inclusion in India. Lower transaction costs, quick decision making, customer orientation and prompt service standards have typically differentiated NBFCs from banks. Considering the reach and expanse of NBFCs, they are well-suited to bridge the financing gap in a large country like India. Systemically Important NBFCs have demonstrated agility, innovation, and frugality to provide formal financial services to millions of Indians.

The growing importance of NBFCs is reflected in the consistent rise of their credit as a proportion to GDP as well as in relation to credit extended by SCBs to the NBFC sector.

Given the increasing importance of NBFCs, the RBI, in the last few years, has increased its regulatory oversight over the sector. Multiple guidelines such as (i) vigil over asset-liability management practices, (ii) maintaining liquidity ratios, (iii) increased reporting requirements, and (iv) scale-based regulation, have led to NBFCs adopting practices in line with banks. The regulatory vigil is based on four key cornerstones of: (i) responsible financial innovation, (ii) accountable conduct, (iii) responsible governance, and (iv) centrality of the customer.

The recently adopted changes to the finance bill withdrawing exemptions on long term capital gains to investors in debt mutual funds is estimated to have minimal impact on the NBFC sector given limited exposure of mutual funds in long term papers of NBFCs.

OUTLOOK FOR FY 2024-2025:

Although many of these factors are still relevant, inflation is converging towards target levels across regions, thereby building expectations that policy rates will decline. Globally, the near-term priority for major central banks is to facilitate a ‘soft landing by neither lowering rates prematurely nor delaying rate cuts too much. According to the International Monetary Fund (IMF), global growth is projected at 3.2% in 2024 and 2025. Meanwhile, inflation is expected to fall to 5.9% in 2024 (vs. 6.8% in 2023) and to 4.5% in 2025. However, new commodity price spikes from geopolitical tensions and property sector woes in China could prolong tight monetary conditions and pose downside risks to growth forecasts. In summary, with the likelihood of a ‘hard landing receding as adverse supply shocks unwind, risks to the global outlook are broadly balanced.

ECONOMIC OVERVIEW OF FINANCE INDUSTRY:

GLOBAL ECONOMY:

The global economy has held itself in good stead, amidst a volatile environment. The economic recovery process remained resilient, and inflationary pressures eased from record high levels in FY 2022-23. The International Monetary Fund (IMF) has predicted the global economy to expand by 3.2% in 2024, after a similar growth in 2023. This is remarkable, considering the severe economic shocks faced by advanced and emerging economies over the last 36 months. These ranged from breakdown in global supply chains, food and energy crisis, stresses in cost of living and a severe monetary tightening by major central banks. Despite these challenges, economic activity did not slip into recession and is poised to expand at a steady rate over the next 5 years.

With inflationary pressures easing, central banks are expected to start easing policy stance, lowering borrowing costs across markets. This will potentially lead to further easing in financial conditions and redirect capital flows to Emerging Markets. However, the recovery will be contingent upon geopolitical factors, which remain highly volatile.

INDIAN ECONOMY:

The official estimates from Central Statistical Office (CSO) indicated that Indias real GDP grew by 8.2% year-on year (y-o-y) in FY 2023-24. With this, Indian GDP clocked 7%+ growth for 3 consecutive years, unlike any other G20 nation. Indias resilience amidst global headwinds was due to its domestic strengths like high public capital expenditure, digitisation, rising ease of doing business, political stability, diminishing fiscal deficit and as well as a robust external sector. Indian industries have been undergoing a steady recovery led by construction and manufacturing. These are estimated to have expanded by 9.9% each y-o-y in FY 2023-24. Services continue to rise at a steady pace, with the FY 2023-24 y-o-y growth being 7.6%.

Inflation in India too has come down significantly but remains higher than RBIs target level of 4%. This is primarily due to high food inflation. A good Rabi harvest and adequate rainfall during Kharif sowing is expected to lower food inflation in FY 2024-25. As inflation declines further, interest rate trajectory is expected to shift downwards, supporting the revival of private capex within the economy. While urban consumption continues to remain strong, rural spending is expected to gather momentum in FY 2024-25, supported by better agricultural productivity. Indian Metrological Department (IMD) has predicted a higher-than-average monsoon in FY 2024-25, which should support the agriculture sector.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

NBFCs have emerged as the crucial source of finance for a large segment of the population, including SMEs and economically unserved and underserved people. They have managed to cater to the diverse needs of the borrowers in the fastest and most efficient manner, considering their vast geographical scope, understanding of the various financial requirements of the people, and extremely fast turnaround times.

NBFCs play an important role in credit intermediation, providing last-mile credit delivery with the help of technology. They are critical to the financial inclusion process, complementing the banking system by supporting the growth of millions of MSMEs, and independently employing people. Over the years, NBFCs have seen a rising credit-to-GDP ratio (“credit intensity”) and a growing role in credit provisioning vis-a-vis scheduled commercial banks

NBFCs:

Over the past few years, NBFCs have undergone a significant transformation and today they form an important component of Indias financial system. Playing a critical role in the development of infrastructure, transport and employment generation, NBFCs are changing the business loan landscape in the country. Most NBFCs, leverage alternative and tech-driven credit appraisal methodologies to assess the credit worthiness of prospective borrowers.

This difference in approach allows them to meet loan requirements of individuals and businesses left traditionally underserved by banks. With the introduction of e-KYC, making borrowing an instant and hassle-free experience, NBFCs are already offering the right financial products to consumers and small businesses in a customized manner. The use of technology to optimize business processes also keeps cost overheads to a minimum, enabling credit to be availed at highly competitive interest rates.

KEY OPPORTUNITIES:

Increasing the penetration in the Micro, Small and Medium Enterprise (MSME) segment with new and dynamic operating models.

Synergistic alliances with fintech companies to tap niche markets.

Accessing new customers and cheaper funding sources by developing a viable co-lending business model. Tapping into the fast-growing e-commerce segment.

Diversifying assets by targeting new profitable segments and developing the capabilities required to serve those segments. Developing digital capabilities to boost sales productivity.

Increasing fee income through advisory services.

Using digital competencies and tools to improve sales productivity the use of advanced analytics and machine learning to build propensity models for lead generation, making real-time offers available to sales representatives by using customer data from multiple internal and external sources.

OPERATIONAL REVIEW:

Total Revenue/income from Operations on standalone basis is Rs. 7364.40 lakhs for the FY 2023-2024 comparison to FY 2022-2023 Rs. 2088.09 lakhs.

Total Revenue/ Income from operation on consolidated basis is Rs. 7364.40 lakhs for the FY 2023-2024 comparison to FY 2022-2023 Rs. 2088.09 lakhs.

SUBSIDIARY COMPANY:

As there are no subsidiaries of the Company, Investment made in Subsidiaries is NIL. However the company has an Associate Company i.e M/s. Tilak Ventures Limited.

SEGMENT-WISE PERFORMANCE:

The Company operates in single reported segment with main business of Finance and Share Trading activity.

OPPORTUNITIES AND THREATS:

India is one of the fastest growing major economies in the world. IMF expects Indias GDP will grow by 6.8% in 2024, making it the fastest growing major economy, once again. Indias growth in 2024 will be supported by strong agricultural productivity, improved employment conditions, upturn in private capex, declining inflation, and higher domestic consumption. The Performance Linked Incentive schemes will trigger large investments across multiple industries, raising the demand for credit.

Indias household debt to GDP ratio is one of the lowest among emerging markets. As per official estimates, Household Debt (as a percent of GDP) has been rising, from 33.5% in FY19 to 37.6% in FY 2022-23. As per the latest figures, it is expected to have breached 40% in FY 2023-24. However, this is still much lower than other major economies, including USA, China, Japan, Germany, and United Kingdom. At the same time, Indias debt servicing ratio at 6.7% (March ‘23) is also one of the lowest among major economies, though improving gradually.

There are several large and profitable opportunities for NBFCs and the sector plays an important role in the Indian financial system. The key is for the NBFC sector to grow in a prudential manner while focusing on financial innovation and in having in place, the adequate risk management systems and procedures before entering into risky areas. The regulator constantly endeavors to balance the multiple objectives of financial stability, consumer and depositor protection and regulatory arbitrage concerns.

RISKS AND CONCERNS:

NEW RISK MANAGEMENT FRAMEWORK

However, another green shoot that emerged from the regulatory intervention as the RBI introduced a new liquidity risk management framework to holistically counter future risks in the sector.

Under the new framework, non-deposit taking NBFCs with asset size of more than INR 10,000 crore and all deposit taking NBFCs will have to maintain a liquidity coverage ratio (LCR) requirement of 50 per cent by December 1, 2020, and progressively increase it to 100 per cent by December 2024. Similarly, non-deposit taking NBFCs with asset size between INR 5,000 crore and INR 10,000 crore would be required to have a minimum LCR of 30 per cent by December 1, 2020.

This might have produced short-term pain in the industry but its an excellent long-term measure to protect the sector from externalities and improve the overall risk management frameworks across the industry. This will not only boost the confidence in the robustness of the sector, but it could also potentially lower the cost of funds for NBFCs as their risk perception goes down massively due to the new LCR reporting framework.

Moreover, the RBIs emphasis on its commitment to not let any NBFC fail came as a strong signal from the government that it firmly stands behind the sector. Due to the easier liquidity provisions, the flow of funds to NBFCs from banks improved by over 30 per cent in just a year.

As a result, the sector now stands on a firm footing with the right regulatory provisions in place along with liquidity windows which have allowed NBFCs to raise funds. Overall, the signs are encouraging as the asset quality for SME lending remains stable and lower than commercial lending non-performing asset rates in India.

According to CIBIL, SME 1 segment had just 9 per cent delinquencies compared to NPAs reaching up to 14 per cent in the larger ticket size segment. Meanwhile, NBFCs looked outwards for funds to keep the credit cycles running. Many players have raised funds outside the country and these offshore borrowings are expected to continue going into 2020, at least till the time credit flow in the Indian economy resumes.

The crucial bit to note here is that lending by NBFCs forms the backbone of Indias economy, especially for the micro, small and medium enterprises sector.

As an NBFC, Banas is exposed to Credit, Liquidity and Interest Rate Risk. The Company takes risk management seriously and its procedures and policies in the area are well defined and considered appropriate for the assessment and management of individual risk categories. Sustained efforts to strengthen the Risk Framework have yielded consistently better outcomes for the company.

Company is well placed on the liquidity front and appropriate policies exist for underwriting credit risk. The Company endeavors to continuously learn and modifies its policies to manage the aforementioned risks.

The Audit Committee has been periodically reviewing the risk profile of the Company and evaluating the adherence by the branches / functions of the systems and processes in place for monitoring, evaluation, assessment and mitigation of risk through a systematic and effective audit programme. The observations of Audit Committee, if any, on the risk management are reported to the board.

The key risks are: i) Liquidity risk ii) Interest rate risk iii) Credit risk iv) Business risk v) Regulatory risk vi) Pandemic risk.

INTERNAL CONTROL SYSTEM & ADEQUACY:

The company has adequate internal control system commensurate with its size and business. The company Com- plied with all applicable statutes, policies, procedures, listing requirements and management guidelines. It Adheres to applicable accounting standards and polices.

Banas has robust internal audit programme, where the internal auditors, an independent firm of chartered accountants, conduct a risk-based audit with a view to not only test adherence to laid down policies and procedures but also to suggest improvements in processes and systems. Their audit program is agreed upon by the Audit Commit- tee. Internal audit observations and recommendations are reported to the Audit Committee, which monitors the implementation of such recommendations.

HUMAN RESOURCE:

The Company has excellent combination of experienced and talented employees. The Company also undertakes on regular basis various training programmes to keep its employees updated on new technical developments and information which directly results in optimum capacity utilization and cost effectiveness. The Companys relation with its employees continues to be cordial. The Company always reciprocates commitment to its employees in order to motivate them to perform the best.

FULFILLMENT OF RBI NORMS AND STANDARDS:

The Company continues to fulfill all applicable norms and standards laid down by the Reserve Bank of India pertaining to prudential norms, income recognition, accounting standards, asset classification as applicable to NBFCs (ND) except few, explanation pertaining to which has been provided in Boards report.

OUTLOOK:

The company is cautiously optimistic in its outlook for the year 2024-2025. The outlook of the company for the year ahead is to diversify risk and stabilize its asset quality. The Corporate Finance Division will adopt a cautious approach and focus on customer relationships. This division will look to grow its supply chain, structured finance and leasing business.

CAUTIONARY STATEMENT:

Statements in foregoing paragraphs of this report describing the current industry structure, outlook, opportunities, etc., may be construed as “forward looking statements”, based on certain assumptions of future events over which the Company exercises no control. Therefore, there can be no guarantee as to their accuracy. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those that may be implied by these forward looking statements.

FOR & ON BEHALF OF THEBOARD
Sd/-	Sd/-
Tanu Agrawal	Girraj Kishor Agrawal
Executive Director & CEO	Director
DIN: 00290966	DIN:00290959
Place: Mumbai
Date: 01/08/2024