Capital Trade Links Ltd Management Discussions

LOBAL ECONOMY remains remarkably resilient, with growth holding steady as

inflation returns to target. The journey has been eventful, starting with supply-chain disruptions in the aftermath of the pandemic, a Russian- Ukraine war that triggered a global energy and food crisis, and a considerable surge in inflation, followed by a globally synchronized monetary policy tightening.

Despite many gloomy predictions, the world avoided a recession. The banking system stayed strong, and major emerging market economies didnt face sudden stops. The surge in inflation, though severe and causing a cost-of-living crisis, didnt lead to uncontrolled wage-price spirals. Markets were very positive about the prospect of central banks easing tight monetary policies. Financial conditions improved, equity valuations increased significantly, capital flows to most emerging market economies (excluding China) were strong, and some low-income and frontier economies regained market access.

Monetary tightening in advanced economies is concluding, but real policy interest rates are expected to remain elevated for some time as inflation returns to target only gradually. This will keep the stance of advanced-economy monetary policies restrictive in the near term. The world economy continues to face multiple crises, jeopardizing progress towards the Sustainable Development Goals (SDGs). These challenges underscore the need for global cooperation and concerted efforts towards sustainable and inclusive growth.

CHALLENGES FOR GLOBAL ECOMONY

The economic survey identifies various challenges confronting the global economy:

Israel- Hamas War and rising political tension- Middle East wars of the past, the conflict between Israel and Hamas that broke out this past week has the potential to disrupt the world economy — and even tip it into recession if more countries are drawn in. Ongoing conflicts in Eastern Europe and the Middle East, considered crucial food and energy supply regions, pose substantial threats. The Middle East contributes about 30% of global oil production.

Declining Chinas Growth- With a projected growth rate of 4.5%this year, China is anticipated to experience its slowest economic expansion since 1990, excluding the COVID-19 period. This deceleration is likely to impact numerous advanced and developing economies that rely heavily on trade with China.

Inflation- Headline inflation has continued to come down in many countries, driven by the decline of food and energy prices in the first half of 2023. However, core inflation - inflation excluding the most volatile components, energy and food- hasnt significantly slowed. It remains well above central banks targets. A key risk is that inflation could continue to prove more persistent than expected, meaning interest rates need to tighten or remain higher for longer.

Indian ecomony is a major global economic player with a nominal GDP at current

prices estimated at Rs. 296.58 trillion (US$3.56 trillion) in 2023-24. The country has the third largest population of unicorns in the world, reflecting a vibrant startup ecosystem. The government is committed to renewable energy and aims to produce 40% of energy from non-fossil sources by 2030 and aims to achieve zero emissions by 2070 through the Panchamriti strategy. India ranks third in the Renewable Energy Country Attractiveness Index, indicating a favourable environment for renewable energy investments.

However, there are certain challenges with Indian economy. First, higher interest rates, which are typically employed to control inflation by reducing borrowing and spending, can help ease inflationary pressures. Second, a reduced fiscal stimulus, which means a decrease in government spending or an increase in taxes, can influence inflation dynamics by affecting consumer spending and overall economic activity. Lastly, the normalizing impact of net taxes on demand refers to tax changes that could influence consumer purchasing power and, as a result, inflation trends.

The Interim Budget for 2024-25 allocates a significant amount for capital expenditure, focusing on infrastructure and development projects. This investment is expected to stimulate economic activity and contribute to GDP growth. Tax receipts are estimated to increase, with GST collections crossing significant benchmarks. This increase in tax collections indicates a robust economy.

The fiscal deficit is estimated at 5.1% of GDP in 2024-25, aligning with the goal of reducing it below 4.5% by 2025-26. This reduction in fiscal deficit is a positive sign of fiscal responsibility and economic stability.

In conclusion, while there are challenges ahead, India is well-positioned to maintain strong economic performance in the future. The governments focus on infrastructure development, fiscal responsibility, employment generation, and sustainable energy sources are key factors that will contribute to this growth

financial sector

Indias financial sector is undergoing significant growth and diversification, comprising a wide range of entities, including commercial banks, insurance companies, non-banking financial companies, cooperatives, pension funds, mutual funds, and other smaller financial entities.

The financial sector in India is predominantly a banking sector, with commercial banks accounting for more than 64% of the total assets held by the financial system. The Government of India and the Reserve Bank of India (RBI) have introduced several reforms to liberalize, regulate, and enhance this industry. These measures aim to facilitate easy access to finance for Micro, Small, and Medium Enterprises (MSMEs).

In the fiscal year 2024, the mutual fund (MF) industry experienced a remarkable surge in new investors, with an increase of 70% compared to the previous year. This significant rise was largely driven by the recovery in the equity market. As a result, 6.8 million unique investors joined the mutual fund market, bringing the total number of MF subscribers to 44.5 million. The industrys assets under management (AUM) saw substantial growth, increasing by 35%, which is the second-highest growth rate recorded in a fiscal year. Additionally, the number of folios reached an unprecedented 147.8 million, reflecting the robust expansion of the industry. Investor enthusiasm was not limited to mutual funds; it extended to other equity investment opportunities, indicating a broader trend of growing participation in the capital markets. Active Systematic Investment Plan (SIP) accounts also saw a significant increase, with net additions doubling from the previous year. Over 82% of these new SIP accounts were dedicated to active equity schemes.

The fiscal year 2024 highlighted a notable shift towards an investment culture driven by market performance, advancing financial literacy, and the ongoing transition from saving to investing in the economy. The recovery in equity market indices such as Nifty 50 and Sensex by over 25%, combined with the introduction of new fund options in popular categories, boosted investor confidence. The adoption of mobile wallets is rapidly rising in India, outpacing traditional payment methods like cash and cards. Global Data forecasts mobile wallet transactions to exceed$6.39 trillion (Rs. 531.8 trillion) by 2028, growing at a robust compound annual growth rate (CAGR) of 18.3% between 2024 and 2028. This growth is fueled by government initiatives promoting digital payments, particularly through the unified payments interface (UPI), which saw transactions valued at $2.5 trillion (Rs. 202.8 trillion) in 2023, with a staggering CAGR of 72.1% from 2019 to 2023.

Indias financial sector is experiencing a significant transformation, characterized by the expansion and diversification of financial institutions, reforms initiated by the government, and the swift integration of digital payment technologies, notably mobile wallets. This evolution signifies a promising outlook for Indias capital markets, showcasing vibrant growth prospects and abundant opportunities for both investors and enterprises.

MARKET SHARE

The Bombay Stock Exchange (BSE) will set up a joint venture with Ebix Inc. to build a robust insurance distribution network in the country. In FY23, $7.17 billion was raised across 40 initial public offerings (IPOs), and the number of companies listed on the NSE increased from 135 in 1995 to 2,113 by FY23.

The countrys private wealth management industry shows immense potential, with India projected to have 16.57 lakh high-net-worth individuals (HNWIs) by 2027, positioning it as the fourth-largest private wealth market globally by 2028. Furthermore, Indias insurance market is anticipated to reach

$250 billion by 2025, offering an opportunity for an additional $78 billion in life insurance premiums from 2020 to 2030.

Moreover, India witnessed a significant surge in Private Equity/Venture Capital (PE/VC) investments, soaring to US$ 77 billion in 2021, representing a remarkable 62% increase compared to the previous year. In 2023, the government revamped the credit guarantee scheme. The inflow of INR 9,000 crores into the corpus of the Credit Guarantee Fund T rust for Micro and Small Enterprises (CGTMSE) will give MSMEs more access to collateral-free loans.

The National Stock Exchange of India Ltd. (NSE) emerged as the worlds largest derivatives exchange in 2020 in terms of the number of contracts traded and was ranked 4th worldwide in cash equities by number of trades in 2020. The Association of Mutual Funds in India (AMFI) is targeting a nearly fivefold growth in AUM to $1.15 trillion and more than three times growth in investor accounts to 130 million by 2025.

According to Goldman Sachs, investors have been pouring money into Indias stock market, which is likely to reach over $5 trillion, surpassing the UK, and become the fifth-largest stock market worldwide by2024.

There have been several growth drivers for the sustainable growth of financial services in India in future:

Growing Demand:

> Increasing income levels are fuelling the need for financial services across various income groups.

> The investment potential in the Indian insurance industry is projected to reach US$ 1 trillion by 2025.

> With over 2,100 FinTech companies currently operational, India is poised to emerge as one of the largest digital markets due to the rapid expansion of mobile and internet usage.

Growth Penetration

^ Access to credit, insurance, and investment opportunities is on the rise in rural areas.

^ High Net Worth Individual (HNWI) involvement is increasing in wealth management.

^ Despite mutual fund penetration currently standing at 5-6%, there remains substantial room for growth, indicating latent opportunities.

NbFC Sector has emerged as a vital source of finance for a diverse range of individuals and

businesses, including Small and Medium Enterprises (SMEs) and economically unserved and underserved people. NBFCs have excelled in meeting the varied needs of borrowers with remarkable speed and efficiency, leveraging their extensive geographical reach, understanding of diverse financial requirements, and rapid turnaround times. By supporting the growth of millions of MSMEs and facilitating independent employment opportunities, nonbank money lenders have played a pivotal role in fostering financial inclusion.

Non-Banking Financial Companies (NBFCs) are an integral part of Indian financial system. They are lender of first resort for the large group of niche segments which remains underserved by the mainstream banking sector such as financing of second-hand vehicles, construction equipment, working capital financing, customized loans to micro and small industries, etc. Moreover, they also provide basic financial services such as micro-insurance, loans, savings instruments etc. to the poor and marginalized sections which do not have access to mainstream banking. Apart from this, NBFCs also broaden the capital base of the economy by providing finance to the infrastructure projects and invest heavily in the real estate segment through Infrastructure Finance Company (NBFC-IFC), Infrastructure Debt Fund (NBFC-IDF) and Housing Finance Company (HFC).

A significant catalyst for the expansion of the NBFC sector has been the escalating demand for credit from MSMEs, who often face challenges in accessing loans from traditional banks due to stringent eligibility criteria. In response, digital lenders offering alternative financial solutions have emerged, playing a crucial role in driving the growth of the NBFC sector. This growth has been accompanied by the entry of numerous players with diverse business models, signaling a transformation in the Indian financial services landscape. The increasing adoption of neo-banking, digital authentication, the proliferation of UPI and mobile phone usage, and the spread of mobile internet have led to the modularization of financial services, particularly in the realm of credit.

KEY REASONS FOR GROWTH

> Deep demographic and addressable market understanding: With their operations in the unorganized and underdeveloped segments of the economy, NBFCs have created a niche for themselves by understanding what customers want from them and guaranteeing last-mile delivery of goods and services.

> Tailored product offerings: NBFCs have adapted their product offering to meet the specific characteristics of a customer group and are focused on meeting appropriate needs by carefully analysing this target segment and customizing pricing models.

> Wider and effective reach: NBFCs are now reaching out to Tier 2, Tier 3 and Tier 4 markets, distributing the loan across several customer touchpoints. In addition, they are building a connected channel experience that provides an omnichannel, seamless experience of sales and service 24 hours a day, seven days a week.

> Co-lending: RBI, in November 2020, issued co-lending norms that enable banks and NBFCs to collaborate for priority sector lending (PSL).

Overall, between FY2023 and FY2025, research shows NBFC credit will increase at a CAGR of 13- 15per cent.

The Retail AUM of NBFCs (NBFC-Retail; excluding HFCs) continued the growth momentum in Q2 FY2024, expanding 29% YoY. ICRA expects the NBFC-Retail segment to grow by 21-23% in FY2024, moderately lower than the growth witnessed in H1 FY2024, given the base effect of the expansion seen in H2 of FY2023. The growth is expected to moderate further in FY2025 on the back of a tighter market liquidity expectation and large base created from the strong growths witnessed in FY2023-FY2024.

Regulatory developments and tighter liquidity shall push up the weighted average cost of funds (CoF) by 30-50 basis points (bps) in H2 FY2024 and further 20-40 bps in FY2025. Moreover, as most NBFCs have a fixed rate loan book, they are expected to face further margin pressure in FY2025. This, along with the bottoming out of credit costs, would impact the net profitability, which would moderate by 2040 bps in FY2025 vis-a-vis FY2024.

SOURCES OF BORROWINGS

In Fiscal 2023, there was a notable surge in NBFCs borrowings from banks, leading to a significant uptick in their share of total funding to 36%, up from 29%at the conclusion of Fiscal 2022. Over the past decade, the proportion of bank lending to NBFCs has nearly doubled. However, it is anticipated that NBFCs will continue to rely heavily on funding from banks, as well as from other NBFCs and small finance banks, throughout Fiscal 2024and Fiscal 2025.

Emerging sources of fund in addition to traditional sources are as following;

> Green bonds and sustainable funding: NBFCs inclined towards environmental sustainability can issue green bonds, attracting investors keen on making positive social and environmental impacts.

> Co-lending: Co-lending, also known as co-origination, is gaining prominence as a collaborative lending model where multiple financial entities jointly extend loans to borrowers, sharing risks and rewards based on pre-agreed terms. This model, typically involving banks and NBFCs, offers increased liquidity and profitability opportunities if utilized effectively.

> Securitization and asset reconstruction: Securitization and asset reconstruction are increasingly adopted strategies by NBFCs, involving the sale of loan portfolios to investors and collaboration with Asset Reconstruction Companies (ARCs) to optimize balance sheets and manage risk.

REGULATIONS

> Capital adequacy requirements: Regulatory directives regarding capital adequacy requirements entail an increase in risk weights for consumer lending from100 percent to 125 percent. Consequently, NBFCs with a higher proportion of such loans in their portfolio will be impacted. Maintaining a balanced mix of secured and unsecured assets becomes crucial to meet capital adequacy parameters effectively.

> Bank borrowing for NBFCs with higher rating: This signifies that banks will be required to maintain higher capital on loans extended to such NBFCs, potentially influencing the funding profile of these entities. Additionally, the cost of borrowing funds from banks may escalate as banks could adjust interest rates to compensate for their elevated cost of capital.

COST OF FUNDS

During the pandemic period, NBFCs became cautious in lending to preserve the asset quality, which restricted AUM growth. The restricted demand drove AUM growth, especially across higher-yielding segments, which impacted profitability positively. The low-interest environment translated into lower cost of funds, resulting in higher spreads, which further impacted profitability positively. The microfinance segment also witnessed equity infusion from private equity and Alternative Investment Funds (AIFs). This in turn has helped the NBFCs to increase their spreads and decrease their debt levels in F.Y.2023 which is expected to remain consistent for the next 2 years with a marginal increase in the cost of funds only due to the rate hikes.

NBFCs are gaining market share from banks in small business loans, here is why

> Quick Disbursal of Funds: Small businesses often operate with tight cash flow and may need capital quickly to seize opportunities or address emergencies. NBFCs streamlined processes ensure faster loan approvals and disbursements, allowing businesses to act swiftly and not miss out on crucial moments.

> Competitive Interest Rates & Lower Fees: For small businesses, keeping costs down is essential. NBFCs competitive interest rates and lower processing fees compared to banks make borrowing more affordable. This allows businesses to invest a higher proportion of their capital back into growth initiatives.

> Flexible Eligibility Criteria: Many small businesses, especially startups or those in their early stages, may not meet the strict credit score or business history requirements of traditional banks. NBFCs, with their more relaxed approach, open the door for these businesses to access much- needed funding and fuel their growth.

> Pre-Approved Loan Limits: Pre-approved loan limits from NBFCs provide small businesses with financial flexibility. Businesses can access funds as needed, managing their cash flow efficiently and keeping loan repayments manageable. This also offers a safety net for unexpected expenses.

Company outlook Capital Trade Links Limited (CTL) is a RBI-licensed and one of

the top listed non deposit accepting NBFC established in 1984 with the mission of extending inclusive financial services to individuals and organizations across a diverse spectrum of society. Since 2001, CTL has been dedicated for more than two decades to realizing the aspirations of people belonging to low- income brackets, emerging small entrepreneurs and corporate groups. We leverage technology to offer tailored financial assistance in the form of Personal Loans, Business Loans, Corporate Bridge Loans and E-Vehicle Loans.

Headquartered in Delhi, CTL operates in five states across the country committed to fostering financial inclusion and empowering a wide range of stakeholders. The company has established its own standards and norms for evaluating different needs of its clients and always provides a suitable payment option to its customers.

CTL has professionally qualified board of directors and key managerial persons qualified as Chartered Accountants, Company Secretary, Advocates having vast experience in the field of capital market, corporate governance, financial management, compliance management and banking. Being a professionally managed company enables CTL to have a strong corporate governance foundation always.

Our aim is to align with the governments vision of supporting renewable energy sources by extensively financing electric vehicles, promoting an environmentally friendly and sustainable mode of transport.

KEY STRENGHTS

The company operates with the following key strengths:

Robust Technology: The use of technology in conducting operations enhances efforts of financial inclusion by placing transparency, accessibility and technology at the heart of in this endeavor. The technology is mainly based on:

2. Digio: The use of digio in bank statement and KYC verification ensures credit availability to right borrower and maintains quality of assets. This enhances efficiency of the borrower verification process.

3. Payment: We provide multiple secure payment options to borrowers to suit their convenience which includes dynamic QR code for specific amount payment, Payment Aggregators, NACH etc.

4. Automation: Customers now get recorded calls for their due amount, arrears and newer eligible loans using OBD calls, SMS etc. the staff has been enabled with real-time information of customers demand sheet, arrears etc.

5. Effective Internal Audit: The Company has strong internal audit teams who do frequent internal audits of the branches. The frequency being quite regular helps in reduction in frauds and implementation of companys policies.

6. Customer Identification: We use geographical tagging application to ensure identification of borrower location on real time basis, which in turn helps us I securely expanding our reach to rural area borrowers and suitably serve their needs.

KEY WEAKNESS

Technology Adoption: With the proliferation of digital technologies, Company leverages mobile banking, digital payments, and online application processes to reach remote rural areas cost-effectively and efficiently.

OPPORTUNITIES

Unmet Demand: There is often a considerable unmet demand for credit in rural areas due to the limited presence of traditional banks. NBFCs can fill this gap by offering customized loan products tailored to the needs of MSMEs in these regions.

THREATS:

Economic Downturns: Economic downturns pose a significant threat to NBFCs that cater to corporates. During periods of economic slowdown, business often experience reduced cash flow and revenue, which can severely impact their ability to repay loans. This leads to higher default rates, affecting the financial health of NBFCs. Additionally, certain sectors are more vulnerable to market fluctuations, resulting in inconsistent repayment patterns and increased credit risk for lenders.

Regulatory Changes: Regulatory changes present another critical threat to NBFCs. New compliance requirements can increase operational costs and complicate business processes, thereby reducing profitability. The regulatory environment for financial institutions is constantly evolving, necessitating quick adaptation from NBFCs. Sudden shifts in government policies or financial regulations can create uncertainty, making strategic planning and consistent operations challenging.

RISK MANAGEMENT

The company has a robust risk management framework in place to identify, which measures, monitors and manages the critical risks. While risk is inherent to every institution, it assumes greater significance in the context of Micro Credit due to the very nature of the business with its absence of collaterals quality and the vulnerable, financially excluded customer segment it serves.

Risks may be avoided through pre-emptive action and hence the need to identify the risks and put in place various mitigation mechanisms. CTL has identified the following potential risks that could have an adverse impact on the company:

Credit Risk

Credit Risk for CTL is the risk of loss of interest income and the Companys inability to recover the principal amount of the loan disbursed to its customers.

This risk can result from Information asymmetry and excessive reliance on Credit Bureau check, not backed by soft information or market intelligence on a territory or group of borrowers, leading to adverse selection of borrowers.

Mitigation

Credit Bureau Check - A credit check is done for every customer through an automated system-to- system integration with the Credit Bureau. As part of this check, the parameters like default history, multiple borrowings, Indebtedness and income check are looked at to verify a customers creditworthiness and also ensure that they are not overburdened. This mitigates the risk of customer defaults.

Multi-Step Customer Verification CTL has established separate customer relationship (acquisition and maintenance) and customer evaluation (credit) personnel in order to ensure the quality of customers acquired as well as eliminate coerced borrowing practices which may lead to genuine customers becoming delinquent.

Operational Risk

Operational Risk is the risk of possible losses, resulting from inadequate or failed internal processes, people and systems or from external events, which includes legal risks but excludes strategic and reputation risk. The risk can emanate from Procedural lapses arising due to higher volumes of small- ticket transactions.

Mitigation

CTL has an independent Internal Audit department which carries out surprise checks on field branches and rates them on pre-defined compliance parameters, identifies gaps in process compliance and rolls out initiatives to correct loopholes. This is done primarily to Ensure that the designed processes are being followed on the field - including interaction with the customers during various stages of the relationship lifecycle.

Portfolio Concentration Risk

Portfolio Concentration Risk is the risk to the company due to a very high credit exposure to a particular business segment, industry, geography, location, etc. though in the context of micro finance, it pertains predominantly to geographical concentration.

Mitigation

CTL intends to maintain a diversified exposure in advances across various states to mitigate the risks that could arise due to political or other factors within a particular state. With this in mind, Capital T rust has steadily diversified its presence from Delhi to 4-5 states.

Compliance Risk

Capital Trade is present in an industry where the Company has to ensure compliance with regulatory and statutory requirements. Non-Compliance can result in stringent actions and penalties from the Regulator and/or Statutory Authorities and which also poses a risk to CTL reputation.

Mitigation

The company has implemented a Compliance Management with in-built work-flows to track, update and monitor compliances. The company has strong compliance team who monitors statutory compliances.

Reputation Risk

Reputation risk is the risk to earnings and capital arising from adverse perception of the image or the company, on the part of customers, counter parties shareholders, investors and regulators. It refers to the potential adverse effects, which can arise from the companys reputation getting tarnished due to factors such as unethical practices, regulatory actions, customer dissatisfaction and complaints leading to negative publicity.

Mitigation

We have in place Strict Adherence to Fair Practices Code, Grievance, Redressal Mechanism, Customer Connect and Delinquency Management. The Company does not resort to any coercive recovery practices and has an approved delinquency management policy including restructuring of loans where necessary.

Strategic Risk

It is the risk to earnings and capital arising from lack of responsiveness to changes in the business environment and/or adverse business decisions, besides adoption of wrong strategies and choices.

Mitigation

This is being addressed and the risk mitigated to a great extent, by referring matters of strategic importance to the Management, consisting of members with diversified experience in the respective fields, for intense deliberations, so as to derive the benefit of collective wisdom

Internal control system is crucial for a (NBFC) to ensure operational

efficiency, financial accuracy, and regulatory compliance. It involves a comprehensive framework of policies, procedures, and practices designed to safeguard assets, prevent fraud, and ensure the accuracy and reliability of financial reporting. By implementing robust internal controls, an NBFC can mitigate risks, maintain transparency, and uphold stakeholder trust, ultimately contributing to its long-term stability and success.

HUMAN RESOURCES

CTL policy offers equal employment opportunity for all persons, without bias or discrimination. It applies to all employment practices including (but not limited to) recruitment, promotion and training. It is CTL,s policy to maintain a working environment free of harassment and intimidation. Any type of harassment (including sexual harassment, verbal or implicit), or intimidation, is a violation of CTL policy, and is dealt with in accordance with corrective action procedures. The company has in place the Sexual Harassment policy, where the company has zero tolerance for any offence.

The human capital is major component in the finance industry besides capital. So having the right people in right place is one of the major strengths of CTL. We believe that the employees working with CTL are realizing their dreams and in return the company achieves its goal.

CTL does not hesitate in recognizing the co-existence of the Company and its Human Capital. Some of the employees in the company have been for more than 8 years with us. The company believes in longterm relations with employees and the company has good retention rate.

The company has hired some senior people from reputable companies who are expert in their area of activity. With professionals at the top and a fully motivated team at the field, the company is bound to grow in the future.

CA UTIONARY STA TEMENT

The Management Discussion and Analysis report containing statements used for describing the Companys objectives, projections, estimates, expectation or predictions are forward looking in nature. These statements are within the meaning of applicable securities laws and regulations. Though, Company has undertaken necessary assessment and analysis to make assumptions on the future expectations on business development it does not guarantee the fulfilment of same. Various risks and unknown factors could cause differences in the actual developments from our expectations. The key factors that can impact our assumptions include macro-economic developments in the country, state of capital markets, changes in the Governmental regulations, taxes, laws and other statues, and other incidental factors. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect future/likely events or circumstances.