Capital First Ltd(Merged) Management Discussions.



The past few years have established a solid foundation for continued growth of the Indian economy in the future. During the last few years, the Government proactively undertook structural reforms to enable the country graduate to the next level of growth. One of the biggest successes of this Government has been controlling inflation at an average rate of 4.3% for four years. Early in its tenure, the Government deregulated petrol and diesel prices thereby eliminating subsidy which at one time had exceeded Rs. 1 trillion a year. Further shifting to direct benefit transfer saved precious resources otherwise prone to leakage. These and other such initiatives such as restrained MSP increase reduced fiscal deficit which has helped control inflation. The Real Estate Regulation Act helped secure homebuyers interest and stop massive rerouting of resources by developers. Large-scale digitisation efforts based on a vast mobile base and a vast Aadhaar base, about a billion each, coupled with India-stack and proliferation of electronic platforms have significantly formalised the economy. Significant FDI norms have rapidly scaled up foreign investment in India.

FY18 has been another year of reforms. Undoubtedly, the single biggest reform of FY 2017-18 has been the implementation of GST which required a constitutional amendment and multiple legislations, and clearly the most important tax reform in the post-independent era. The Government subsumed multiple taxes into one single tax through GST. Though the initiative faced initial hiccups and uncertainties post its launch, it has brought in more transparency and efficiency into the system. Driven by concerns regarding its impact on business, majority of corporates and industries across the country took a cautious approach, which in turn brought down manufacturing and economic activity during the Q2FY18. However, since then, GST has had a positive impact on the countrys economy, leading to mass scale formalisation and the entry of a large number of that resulted in a 50% upsurge in number of tax payers to 34 lakh businesses.

TheimplementationofGSTwillfurtherlead to an increase in financial transparency of MSMEs, who more or less have been operating anonymously. This would enable financial services companies to better evaluate credit profile of MSMEs.

Besides, it would also facilitate MSMEs, who previously have been understating income, to procure credit for expansion. With this, it is estimated that the share of lending revenues from MSMEs will increase by nearly 400 basis points to 24% in FY22 up from 20% in FY17.

The Insolvency and Bankruptcy Code (IBC) another such landmark reform which India sorely lacked. Further, during the year, the Government also proposed a funding of Rs. 2.11 lakh crore as a part of a recapitalisation plan to support stressed public banks. This will enable distressed banks to revive their lending activities.

Though in the short run, these initiatives have caused a temporary slowdown, with GDPgrowthdecliningto6.6%inFY2017-18 compared to 7.1% in FY 2016-17, the outlook remains positive. The good news is that the Indian economy is showing signs of acceleration with growth in corporate sales, depleting finished goods inventories and restart of investment in fixed assets by corporations indicating revitalisation of CAPEX cycle.

The positive impact of the Governments reformative initiatives was affirmed by Moodys Investors Services, when it upgraded the countrys credit rating from a stable ‘Baa2 to positive ‘Baa3. The upgrade, which came after a gap of 14 years, indicates the confidence the players have in the Indian economy. This was further reinforced by a 30 position jump to the 100th spot in the World Banks Ease of Doing Business rankings and a rating as the eighth most attractive FDI destinations by A. T. Kearney.

All international eyes are on India as it is now the worlds sixth largest economy, displacing France and joining the leading five the United States, China, Japan, needs. Germany and United Kingdom, as per the estimate from the International Monetary Fund (IMF). Institutions like the IMF and World Bank are bullish on the Indian economy as it is likely to become the 5th largest economy very soon. The IMF projects it to grow at 7.4% in FY19 and 7.8% in FY20, while the World Bank expects growth to touch 7.3% in FY19 and accelerate to 7.5% in FY20.


The MSME segment offers a huge untapped opportunity owing to the significant million MSMEs in India, 40 million have current accounts and of these, only 4.5 million are borrowers. This indicates a vast business potential.

Use of data analytics and information from credit bureaus will be important to make quick decisions on lending to self-employed and those working in the informal sector. ratios. Its total


Capital First Limited (Capital First) is one of Indias leading financial institutions. Formed on the theme of financing Indias 50 million MSMEs and its emerging middle class consumers by leveraging a differentiated model and new technologies, Capital First came into existence in FY13 as a result of a management buyout of the existing listed NBFC supported, by equity backing from leading global private equity.

The Company primarily focusses on financing salaried and self-employed consumers, a rapidly growing segment, driven by rising affluence, aspirations and favourable demographics. It also has a large and growing presence in the MSME segment, where it caters to their multiple financing

The Companys successful new models of financing MSMEs and Indian consumers in the unbanked and under-penetrated segments, using new technologies and deep analytics, enabled it to register strong growth over the years. The Company rapidly expanded its business operations to more than 225 locations, cumulatively financed over 6.0 mn customers, disbursed over Rs. 58,000 Crore (US$ 8.92 billion) and built a loan portfolio of Rs. 26,997 Crore (US$ 4.15 billion) as on March 31, 2018. While remaining focussed on growth, the Company consistently maintained high asset quality and continued to build the institution on the strong pillars of ethics, values and corporate governance.

During FY 2017-18, the Company registered a strong performance in all key parameters including business growth with strong focus on the retail segments, robust asset quality and improved profitability

Assets Under Management (AUM) increased by 36% from Rs. 19,824 Crore (US$ 3.05 billion) as on March 31, 2017 to Rs. 26,997 Crore (US$ 4.15 billion) as on March 31, 2018. Continued focus on the retail sector resulted in the Retail AUM increasing to Rs. 25,243 Crore (US$ 3.73 billion) as compared to Rs. 18,353 Crore (US$ 2.82 billion) as on March 31, 2017, accounting for 94% of the overall AUM. As on March 31, 2018, its Gross and Net NPA stood at 1.62% and 1.00%, respectively. The Net Profit of the Company grew by 37% from Rs. 239 Crore (US$ 37 million) in FY17 to Rs. 327 Crore (US$ 50 million) in FY18.


The recent years have seen the countrys financial services sector being impacted by the NPA crisis, largely driven by mid-sized corporates and large corporates. Besides, from a funding perspective, the revenue pool of mid and large corporates is likely to remain subdued over the next few years, driven by the recent stress in lending books in India. In this scenario, it is more likely that the credit growth in the coming years will be driven by the smaller SME segments that have been relatively stable in terms of asset quality.

One big challenge in lending to this segment has been the lack of reliable audited financial records. However, with the increasing availability of surrogate digital data (i.e., tax payments, etc.), introduction of GST, which will drive greater transparency and increasing digital point of sale payments, credit offtake has the potential to continuously grow in the future.

Capital First was late to the game as we started retail operations only in FY10 and many other large established banks and lenders were operating in India since decades or centuries. Yet a focussed and dedicated approach to the segment coupled with strong technology competencies has enabled it to cater to diverse financing requirements of these segments. Strong customer connect, product innovation, faster processing and service quality position it as a specialised player for the segment.

The Companys brand is now recognised in the market as a live and vibrant organisation which has had significant success in the market.

Additionally, Capital First also provides affordable housing finance to various categories of customers, largely self-employed, through its wholly-owned subsidiary Capital First Home Finance Limited (CFHFL). CFHFL has obtained a Housing Finance Company license from National Housing Bank and operates on a pan-India basis. The subsidiary has displayed strong performance and its assets under management has surged to Rs. 2,078 Crore (US$ 320 million) as on March 31, 2018.


The Company has not observed any significant of the portfolio, especially for the loans to MSMEs on account of GST implementation. The asset quality has been steady and the business growth has been improving continuously.


Capital First has structured its entire operations with inherent checks and balances for effective risk management. Its sales, credit, operations and collection teams operate independently and have separate reporting lines to ensure there is no conflict of interest.

The Company has a well-devised and rigorous credit underwriting process to maintain asset quality. The process begins with shortlisting of loan accounts meeting the necessary lending norms defined in the credit policy by the business origination team. These accounts are then transferred to the credit underwriting team, where the credentials of borrowers are independently assessed. Post this, the loan booking and operations recheck details and finallydisburse the loan. On disbursal of the loan, an independent portfolio monitoring team takes charge to oversee the portfolio and independent collections team make follow-ups to ensure recovery. The entire process prevents fraudulent practices and ensures each account goes through multiple rounds of checking, to maintain the credit health of each account.

The Company takes corrective actions as and when necessary, to constantly improvise and fine tune the lending criteria and services to make it more effective.

For example in the Companys mortgages business, every application passes through multiple level of scrutiny including cash flow evaluation and checks from credit bureau and references. Post this, only 38% of the applications get disbursed. Most of the rejections happen, primarily on account of lack of financial health visibility or insufficient cash flow service debt.


Asset quality is one area where Capital First truly has a competitive edge. As on March 31, 2018, the Companys Gross NPA and Net NPA stood at 1.62% and 1.00%, respectively, on a 90 DPD basis. Despite having passed through difficult phases (decline in GDP, rupee and liquidity crisis, demonetisation, GST) that saw many players in the financial services sector witness an increase in NPAs, the Company, on the contrary has been able to improve its asset quality and profitability.

The Company reported NPA at 180 DPD till FY15, 150 DPD till FY16, at 120 DPD till FY17, and at 90 DPD since FY18 as per RBI norms. The reported NPA of the respective year are not comparable. Hence, in order to enable easy comparability of NPA as a common scale, the NPA chart above has been compiled at 90 DPD basis for the last 9 quarters.


The Companys balance sheet strength is evident in its consistently growing capital. The total capital (T1+T2) available with the Company has grown at a CAGR of 21% in the past five years to reach Rs. 3,993 Crore. As of March 31, 2018, the Companys overall capital adequacy ratio stood at 15.88% with Tier-I capital adequacy at 12.32%.


During the year, Capital First has successfullydiversified its borrowing portfolio with financial more than 290 institutions including banks, mutual funds, superannuation funds, provident funds, gratuity funds and insurance companies. The Company has raised more funds from the debt capital market in FY18. The debt capital market now contributes to 54% of the overall borrowing portfolio as of March 31, ws and 2018 as compared to 48% as of March 31, 2017.


The Company follows a conservative and prudent policy for matching funding of assets, which translates into a robust Asset-Liability stability. Its strategy of borrowing on longer tenor than the actuarial maturity of its assets enables it to achieve healthy cash ensure the total inflow in each maturity bucket is higher than the total outflows.

This enables the Company to maintain adequate liquidity at all times. The Companys strong ALM strategy is one of the key pillars strengthening its structural foundation.


FY18 turned out to be another year of strong performances across all parameters in spite of overall macro and policy changes. The year saw the Companys total income increase by 48% from Rs. 1,640 Crore (US$ 252 million) in FY17 to Rs. 2,430 Crore (US$ 374 million) in FY18. Profit before tax 38% from Rs. 357 Crore (US$ 55 million) in FY17 to Rs. 494 Crore (US$ 76 million) in FY18. Profit 37% from Rs. 239 Crore (US$ 37 million) in FY17 to Rs. 327 Crore (US$ 50 million) in FY18. Over the last 5 years, the Profit

After Tax of the Company has consistently outpaced the growth of assets every year, signifying increased profitability.

With enhanced business operations, the Return on Equity of the Company has continuously improved over the quarters, from 2.28% in Q1FY14 to 14.82% in Q4FY18, increasing the shareholders value.


As on March 31, 2018, the total number of shares of the Company stood at 9,89,65,244by with a Book Value of Rs. 264.49 (US$ 4.07) per share. The Companys strong business model and growth have attracted investmentsafter tax from several marquee FIIs and DIIs. These include Warburg Pincus, Government of Singapore &

Government Pension Fund Global, Jupiter Asset Management, Ashburton Limited, Birla Asset Management, HDFC Mutual Fund, HDFC Standard Life Insurance Company.


The present economic scenario augurs well for the financial services industry. The demonetisation led to financialisation of savings and the implementation of GST is bringing in more efficiency and transparency while augmenting formalisation. Adoption of digital technologies and biometric identification are easing the customer onboarding process and enabling reaching out to wider audiences. This is boosting financialby inclusion and enabling financiers to tap underserved markets. These changes will also assist financial services companies to get more insightfulcompanies, data relating to MSME customers, who largely operate informally, making it difficult to analyse their creditworthiness.

As on date, nearly 90% of the market is still untapped.

The Company already has a strong portfolio catering to MSMEs and the retail sector. With a more focussed approach and the ability to ride the wave of various positive external factors audit– in the observationsform of regulatory changes andare prevailing demographics and business demands, the Company is of sustaining its growth momentum. The Company will focus on continuous innovation in the product side to remain relevant to changing customer needs and also leverage technology to target right customer segments and geographies. The Company will continue to emphasise on the necessary checks and internal controls to ensure that the growth is sustainable with strong asset quality.


Capital First has internal control systems that are adequate and commensurate with the size and nature of its operations. These systems ensure effectiveness and efficiency of operations, assets safeguard adequacy, reliability of financial controls and compliance with applicable laws and regulations. The system ensures authorisation, recording and reporting of all assets and transactions to safeguard from unauthorised use or disposition of assets that may lead to losses. The Company has further strengthened its system controls by implementing robust Loan Management Systems.

The Company has an Internal Audit Department, which reports to the Audit Committee of the Board of Directors. This department undertakes comprehensive audits of the Companys functional areas and operations to examine the adequacy of and compliance with policies, plans and statutory requirements.

Significant reported to the Audit Committee and follow-up actions are taken accordingly. The Audit Committee also reviews the adequacy and effectiveness of the Companys internal control environment and monitors the implementation of audit recommendations.


Capital First continues to invest in technology and digital processes as the Company acknowledges that these are vital elements for mitigating various risks posed by the environment.

Credit Risk Management: Capital First has established detailed procedures and policies for underwriting across various product categories. The Company underwrites loans on the basis of assessed cash flows of customers or other such credit evaluation tools as it deems necessary, including inputs from credit bureau information reports as required. While it does lay emphasis on detailed credit underwriting processes, it also considers various other factors like the underlying collateral and the LTV ratios approved for the customer. These policies are regularly monitored against desired outcomes for the organisation and revised as necessary.

Interest rate volatility: Fluctuations in interest rates could adversely affect borrowing costs, interest income and net interest margins of companies in the financial sector. Being well funded with a strong capital base, Capital First is in a position to tide over such spells. Further, the Company ensures that it maintains an appropriate proportion of asset and liabilities at floating rate to avoid interest rate mismatches across buckets.

Competition: The financial services space in India is quite competitive. The Company is of the belief that from the countrys point of view India needs an ever-growing number of players to address the large markets in the country. There is scope for sustained business growth despite competition. Further, being a Company that is well capitalised accompanied with high governance standards, robust internal controls and advanced IT & Risk management systems, the Company is comfortable and confident on this count.

Changes in policies towards NBFC: There is a growing trend towards more stringent regulation in the NBFC sector. The Company is of the view that these changes are structurally beneficial for the financial services industry. Anticipating such regulations and implementing good governance norms before they are mandated has been a constant practice at Capital First. Accordingly, the Company feels confident on this count as well.

For example, the Company smoothly transitioned from the 180 DPD NPA regime to the 90 DPD NPA regime, and transited from standing asset provisioning of 25 bps to 40 bps.

Operational Risk Management: Towards minimising operational risks, the Company has put in place a mechanism with system based ‘maker-checker processes for critical controls. Further, it has laid down detailed process manuals with Service Level Agreements (SLA) for data and document processing and handling.


Capital First recognises the significance of robust IT infrastructure in the current era, where it is crucial to offer customers faster and more efficient services. Towards this end, the Company makes a sizeable investment each year to ensure adoption of best technologies that can streamline operations, brings in efficiency and enable to provide better customer service to make the Company more competitive in the market. The Company further understands the relevance of information security and accordingly it has invested in globally accepted platforms and solutions for Enterprise Security solutions. The Companys operations are ISO 27001:2013 and compliant.


Capital First recognises that people play a critical role in achieving its goals. We therefore understand that it is imperative that we have employees who are highly capable, are engaged and have the motivation to convert vision into a reality.

We strive that employees at Capital First get an opportunity to succeed and we make efforts to facilitate their work life as much as possible. We continued to drive rigour in our performance management, rewards and recognition practices which shows in the great results and consequently there is higher levels of motivation among employees.

Engagement of our employees is of prime importance. We are successful owing to a culture of transparency, empowerment, quick decision-making, non-hierarchical, where every employees opinion counts. This has been supplemented by initiatives around health - e.g. employees were encouraged to run marathons. We received a wonderful response.

Over 900 employees, most of them first timers, ran a race of at least 10 km or more in the last 6 months! We put together a Goodwill Challenge where employees of each branch got together to volunteer for a social cause. Our Chairman personally champions these causes in his personal capacity and encourages all our employees to support the causes which the Company supports under its CSR programme by their personal involvement.

The Regional HR Team introduced this year helped build higher engagement among employees through their availability to quickly sort out employee grievances, educate our employees on HR policies and practices and help drive key initiatives around talent management.

We take compliance to all laws and regulations very seriously.


Statements made in this Management Discussion and Analysis Report may contain certain forward-looking statements based on various assumptions on the Companys present and future business strategies and the environment in which it operates. Actual results may differ substantially or materially from those expressed or implied due to risk and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India and abroad, volatility in interest rates and in the securities market, new regulations and Government policies that may impact the Companys businesses as well as the ability to implement its strategies. The information contained herein is as of the date referenced and the Company does not undertake any obligation to update these statements. The Company has obtained all market data and other information from sources believed to be reliable or its internal estimates, although its accuracy or completeness cannot be guaranteed.