Capital Trust Ltd Management Discussions.

ECONOMIC SCENARIO

Global Economy

Global growth is expected to remain at 3.0 per cent in 2019 and 2020, however, the steady pace of expansion in the global economy masks an increase in downside risks that could potentially exacerbate development challenges in many parts of the world, according to the World Economic Situation and Prospects 2019. The global economy is facing a confluence of risks, which could severely disrupt economic activity and inflict significant damage on longer-term development prospects. These risks include an escalation of trade disputes, an abrupt tightening of global financial conditions, and intensifying climate risks.

Over the course of 2018, there was a significant rise in trade tensions among the worlds largest economies, with a steep rise in the number of disputes raised under the dispute settlement mechanism of the World Trade Organization. Moves by the United States to increase import tariffs have sparked retaliations and counter-retaliations. Global trade growth has lost momentum, although stimulus measures and direct subsidies have so far offset much of the direct negative impacts on China and in the United States.

One year ago economic activity was accelerating in almost all regions of the world and the global economy was projected to grow at 3.9 percent in 2018 and 2019. One year later, much has changed: the escalation of US–China trade tensions, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies have all contributed to a significantly weakened global expansion, especially in the second half of 2018.Global growth, which peaked at close to 4 percent in 2017, softened to 3.6 percent in 2018, and is projected to decline further to 3.3 percent in 2019.

While 2019 started out on a weak footing, a pickup is expected in the second half of the year. This pickup is supported by significant policy accommodation by major economies, made possible by the absence of inflationary pressures despite closing output gaps.With improvements expected in the second half of 2019, global economic growth in 2020 is projected to return to 3.6 percent.

(Source- World Economic Outlook)

The Gross domestic product per capital, constant prices (PPP) of the major economies show increasing trend from 2017 to 2024, with India showing major jump of 52% in 2024 over the figures in 2017.

INDIAN ECONOMY

During the last five years, Indias economy has performed well. By opening up several pathways for trickle-down, the government has ensured that the benefits of growth and macroeconomic stability reach the bottom of the pyramid. To achieve the objective of becoming a USD 5 trillion economy by 2024-25, as laid down by the Prime Minister, India needs to sustain a real GDP growth rate of 8%. International experience, especially from high-growth East Asian economies, suggests that such growth can only be sustained by a "virtuous cycle" of savings, investment and exports catalysed and supported by a favourable demographic phase. Investment, especially private investment, is the "key driver" that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.

The economy of India is a developing mixed economy. It is the worlds seventh-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). The country ranks 139th in per capita GDP (nominal) and 119th in per capita GDP (PPP) as of 2018. After the 1991 economic liberalisation, India achieved 6-7% average GDP growth annually. Since 2014 with the exception of 2017, Indias economy has been the worlds fastest growing major economy, surpassing China.

World output grew at 3.6 per cent in 2014 and again in 2018. In the intervening period, when the world did not appear to have changed much, India took a few giant strides forward. India became the sixth largest economy by sustaining growth rates higher than China, thereby earning the epaulette of being the fastest growing major economy in the world. Importantly, this pace of growth was sustained while re-establishing macroeconomic stability.

The projected growth for the Indian Economy is highest at 7.3% for the year 2019 which is higher than wold.

Various schemes by Government which focused on last-mile delivery of basic services to the poor like Adhar based subsidies, Pradhan Mantri Jhan Dhan Yojna (PMJDY), Direct Benefit Transfers, MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme), NSAP (National Social

Assistance Program), PMAY-G (Pradhan Mantri Awas Yojna- Gramin) etc. has helped in growth in GDP. Presently close to Rs. 1 lakh crore is deposited in more than 35 crore bank accounts opened under PMJDY.

(Source - Economic survey)

The Make in India Campaign launched by the Government of India in September 2014 permitted 100% FDI in 25 sectors of the economy except space, defence and media industry of India. The movement further led to local state movements like "Make in Odisha", "Happening Haryana" and "Magnetic Maharashtra". With this campaign the government aimed to raise the contribution of manufacturing sector to 25% of GDP.

Indian Economy outlook

The International Monetary Fund (IMF) has cut its annual growth forecast for India, as it expects weaker domestic demand to limit an economic recovery.The economy is now expected to expand 7% in the year ending 31 March 2020. Gross domestic product growth in India in the March quarter slowed more than expected to 5.8% from 6.6% in the December quarter. This was the slowest quarterly GDP growth in five years. Annual GDP growth slowed to 6.8% in the year ended 31 March from 7.2% in the previous year.

The Asian Development Bank (ADB) has revised inflation outlook for India downwards by 0.2 percentage points to 4.1 per cent in FY2019 and 4.4 per cent in FY20. The development bank reduced the inflation forecast for India in the supplement to Asian Development Outlook (ADO) considering a strengthening rupee and a lower GDP growth forecast.Inflation projections for developing Asia are revised up a notch from 2.5% to 2.6% in both 2019 and 2020, reflecting higher oil prices and several domestic factors. The inflation forecast of South Asian countries for year 2020 is given below

Ease of doing business

India has recorded a jump of 23 positions against its rank of 100 in 2017 to be placed now at 77thrank among 190 countries assessed by the World Bank. The jump of 30 ranks in the ease of doing business is a rare feat for a large and diversified country. The country has increased its ranking from 142 in year 2015 to 77 in year 2019.

India has improved its rank in 6 out of 10 indicators and has moved closer to international best practices. The digital India campaign run by the Government has contributed towards this achievement.

The important features of Indias performance this year are:

• The World Bank has recognized India as one of the top improvers for the year.

• This is the second consecutive year for which India has been recognized as one of the top improvers.

• India is the first BRICS and South Asian country to be recognized as top improvers in consecutive years.

• India has recorded the highest improvement in two years by any large country since 2011 in the Doing business assessment by improving its rank by 53 positions.

• As a result of continued performance, India is now placed at first position among South Asian countries as against 6th in 2014.

Indian Financial Sector

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The banking regulator has allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector. However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by both government and private sector, India is undoubtedly one of the worlds most vibrant capital markets. In 2017,a new portal named Udyami Mitra has been launched by the Small Industries Development Bank of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium Enterprises (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Credit growth of scheduled commercial banks (SCBs) improved (13.1 per cent y-o-y) in September 2018, driven largely by private sector banks (PVBs) (22.5 per cent y-o-y). The asset quality of SCBs is showing signs of improvement with GNPA ratio declining from 11.5 per cent in March 2018 to 10.8 per cent in September 2018 and annualised slippage ratio coming down from 7.6 per cent to 4.1 per cent in the same period. The stressed advances ratio is gradually converging to the GNPA ratio following the withdrawal of various restructuring schemes. However, sectorwise analysis shows higher stress in mining, food processing and construction sectors.

The portfolio of Micro, Small and Medium Enterprises (MSMEs) shows that the performance of PSBs in the MSME segment trails that of other intermediaries (private banks and non-banking financial companies (NBFC)), both in terms of inherent as well as realised credit risk. In terms of quality, incremental credit portfolio of PCA-PSBs shows a declining conversion rate to non-performing assets (NPA) in FY 2017-18 compared to FY 2016-17, although the rate still remains significantly large vis--vis other financial intermediaries.

NBFC Sector

There were more than 11000 non-banking financial companies (NBFCs) registered with the Reserve Bank of which 88 were deposit accepting (NBFCs-D) and 218 systemically important non-deposit accepting NBFCs (NBFCs-ND-SI). All NBFC-D and NBFCs-ND-SI are subject to prudential regulations such as capital adequacy requirements and provisioning norms along with reporting requirements.

NBFC sector analysis

Even as their importance in credit intermediation is growing, recent developments in the domestic financial markets have brought the focus on the NBFC sector (including housing finance companies or HFCs) especially with regard to their exposures, quality of assets and asset-liability mismatches (ALM). The liquidity stress in NBFCs reflected in the third quarter of the last financial year (September - December 2018) was due to an increase in funding costs as also difficulties in market access in some cases. Despite the dip in confidence, better performing NBFCs with strong fundamentals were able to manage their liquidity even though their funding costs moved with market sentiments and risk perceptions.

NBFCs depend largely on public funds which account for 70 per cent of the total liabilities of the sector. Bank borrowings, debentures and commercial papers are the major sources of funding for NBFCs. Bank borrowings have shown an increasing trend as the share of bank borrowings to total borrowings have increased from 21.2 percent in March 2017 to 23.6 percent in March 2018 and further to 29.2 percent in March 2019. During the same period, dependence on debentures declined from 50.2 percent in March 2017 to 41.5 percent in March 2019. This indicates that banks are compensating for the reduced market access for NBFCs in the wake of stress in the sector. The top 10 NBFCs accounted for more than 50 per cent of total bank exposure to the sector while the top 30 NBFCs (including government owned NBFCs) accounted for more than 80 per cent of the total exposure.

Major components of sources of fund of NBFCs (share % to total interest bearing liabilities) (Source- Reserve Bank of India)

The consolidated balance sheet size of the NBFC sector grew by 20.6 per cent to Rs. 28.8 trillion during 2018-19 as against an increase of 17.9 per cent to Rs. 24.5 trillion during 2017-18.

The NBFC sectors net profits increased by 15.3 per cent in 2018-19 as compared to 27.5 per cent in 2017-18. RoA was 1.7 per cent in 2018-19.

Gross NPAs of the NBFC sector as a percentage of total advances increased from 5.8 per cent in 2017-18 to 6.6 per cent in 2018-19. However, the net NPA ratio declined marginally from 3.8 per cent in 2017-18 to 3.7 per cent in 2018-19. As on March 2019, the CRAR of the NBFC sector moderated at 19.3 per cent from 22.8 per cent in March 2018.

Recent developments

NBFCs have been facing the liquidity issues since the last few months. The market is no longer bullish about Non-Banking Financial Companies (NBFCs). Instead, their stocks are being hammered. Some blue chip NBFC stocks have seen the heat of teh market and the stocks prices have fallen drastically. The reason behind the decrease in the value of stock price of NBFC was:

• Some NBFCs borrowed money short term and have been lending it out long term. So there was asset liability mismatch. Till the time, the companies were successful in roll over there papers, the liquidity was not a problem. However when the roll over of the short term loans stopped, there was a major mismatch in Asset Liability management. Failure by some NBFCs to meet their commitments on due date, created panic in the market.

• The Non-Banking Financial Companies (NBFCs) were also heavily relied on funds available from debt mutual funds. As the problem of Mismatch of asset liability surfaced, both retail and institutional investors have reduced the quantum of investments in mutual funds. As a result, the supply of funds from there has died down as well. This has added to the woes of the Non-Banking Financial Companies (NBFCs).

• Some major NBFCs have lent heavily to the housing project developers directly or indirectly through Housing Finance Companies. The housing sector has busted and developers are not able to complete their projects.

RBIs Bailout

The Reserve Bank of India (RBI) has taken some steps to prevent the conversion of this Non-Banking Financial Companies (NBFCs) crisis into a full-fledged financial crisis. The RBI has changed its rules in order to make it easier for Non-Banking Financial Companies (NBFCs) to obtain capital. Banks were earlier restricted in the number of loans they could make to NBFCs. Banks were earlier allowed to lend a maximum of 10% of their loans to NBFCs. This limit has been temporarily raised to 15% for a few months. The immediate effect of this step has been to release close to $10 billion worth of liquidity to the cash-starved NBFC sector. RBIs decision will help Non-Banking Financial Companies (NBFCs) to raise cash in the short term and roll over their debts. The fear of defaults will be quelled for the time being.

Company outlook

The company being in the business of Micro credit to MSME has been effected by the demonetization and after effects like GST. However the company has been able to float through the crisis and has not entered into new territories and thus decided to avail the opportunities in its current operating territories. The company continues to operate in 10 states through 251 branches in Delhi, Uttar Pradesh, Uttrakhand, Madhya Pradesh, Punjab, Rajasthan, Odisha, Bihar, Chatisgarh and Jharkhand. The company is not disbursing in the states of UP, Delhi and Uttrakhand which was impacted by demonetization. The loan portfolio of the company is evenly distributed, thus mitigating the locational risk to portfolio concentration in single location.

The company has introduced two new products as Capital

Magic Loans and Micro Business Loans.

Capital Magic Loan is a multi-utility unsecured loan offered by Capital Trust through its mobile application Capital Magic. Micro business loan is a individual loan with higher ticket size that capital magic loan given for the business purposes only.

Key strengths

The company operates with the following key strengths:

1. Robust Technology: Capital Trust Ltd. has developed an online service called Capital Sales that enhances efforts of financial inclusion by placing transparency, accessibility and technology at the heart of in this endeavour. The technology is mainly based on:

Digitisation - With Aadhaar card as the starting point, the company sources the clients by reading the QR codes which instantly sends information to the credit bureau for checking the clients credit history.

Automation - The services of an Android operating system are extended to clients that help them keep track of their loan progress, provide access to credit records, store KYC information and, in time, will let clients repay installments from their application with links to their bank accounts.

Newer customer and staff channels – Customers now get recorded calls for their due amount, arrears and newer eligible loans using OBD calls, SMS etc. Staff has been enabled with real-time information of customers demand sheet, arrears etc.

New fintech product: Capital Magic is a mix of Fintech and regular product where the company provides loan to clients within same day.

2. Focus of the company is on the ‘Missing Middle – The companys continues to focus on missing middle, the economic segment that is excluded from the formal banking system as well the growing microfinance industry.

3. Large Geographic Presence: The Company is working on hub and spoke model. For every district branch, there are four block level branches. Thus the company is close to the customers. Even though the company has now started digital product, the company has not stopped regular connect with the client. The company mainly operates in Hindi belt areas so there is no language barrier.

4. Experienced Human Capital: The company has strong human capital of more than 1500 people, who are full of knowledge and experience.

The company has built a team of professionals, who have diversified experience and knowledge in their domain area. The company has independent business, credit and compliance teams. Some of the people in company have been with the company for than 20 years showing great employment retention rate.

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

6. Large no. of lenders: The Company has more than 27 lenders, who have supported the company to reach to present level. The funders have supported the company even in the period when NBFC sector was in turmoil.

7. Liquidity of shares: The shares of the company being listed on NSE and BSE, therefore the investment by investors in the company is liquid, which can be encashed anytime. The liquidity also offers company the opportunity to tie up with institutional investors and PE funds which generally look for listed entities for investment.

8. Strong capital base: The net worth of the company is more than Rs. 220 Crores and even after huge write offs, the company has been able to increase its networth marginally. The company is highly capitalized as the Capital Adequacy Ratio is 32%. The company can leverage this ratio to raise funds.

9. Bouquet of Products: The Company has varied products satisfying the needs of different set of customers. The Companys Subsidiary provides Micro finance loans ranging between Rs. 15,000 - 45000 loans and the company provides loans up to Rs. 10,00,000 in micro business, magic loan and secured enterprise products.

10. Strong Systems and Processes: The Company has been in existence for more than 33 years. Over the years, the company has developed systems and processes which have been timely tested and implemented. The Companys audit team is capable enough to test the systems and enforce their implementation.

11. Renowned Board: The Board of the Company comprises of Renowned Professionals who provide proper guidance to the company. The Board is an optimum combination of Independent and Executive Directors.

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 preemptive action and hence the need to identify the risks and put in place various mitigation mechanisms.

Capital Trust has identified the following potential risks that could have an adverse impact on the company:

1. Credit Risk

2. Operational Risk

3. Liquidity Risk

4. Portfolio Concentration Risk

5. Compliance Risk

6. Reputation Risk

7. Strategic Risk

8. Contagion Risk

Credit Risk

Credit Risk for Capital Trust Limited is the risk of loss of interest income and the Companys inability to recover of 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.

• A volatile political presence in a region of exposure

• Exposure to activities with a high probability of variation in earnings

• Default due to over-indebtedness or business failure

Credit Risk also includes Credit Concentration Risk, arising out of concentrated exposure to a particular geographical location/territory or to an activity in which a large group of borrowers are engaged in, vulnerable to external events.

Mitigation

1.1. Location Selection

Before establishing any branch, a detailed survey is conducted which takes into account the factors like credit culture, economic activity and political stability of the area. This mitigates the risk of operating in negative areas.

1.2. 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 credit-worthiness and also ensure that they are not overburdened. This mitigates the risk of customer defaults.

1.3. Multi-Step Customer Verification

Capital Trust 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. This mitigates the risk of ghost borrowing and ring leader issues. Risk along with internal audit will be monitoring that customer verification process is followed properly else action to be recommended which should be accepted by business.

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.

• Lapses in compliance with established norms; regulatory as well as internal guidelines

• Misplaced/lost documents, collusion and fraud

• Breakdown or non-availability of core business applications.

Internal Audit team checks the various aspects of operational risk by auditing the various SOPs/Processes.

Skill gap and sudden attrition of key personnel in the organization, is also an operational risk, which needs to be countered and addressed by the application of appropriate HR strategies.

Mitigation

2.1. Process Compliance

Capital Trust 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.

• Ensure all branch activities are carried out as per norms/procedures as mentioned in the operational manual.

• Identify any process lapses/deviations and provide guidance to branches/employees to ensure compliance.

This ensures that risks arising out of process lapses are mitigated. Risk should ensure that above mentioned guidelines is being followed up.

2.2. Employee Rotation Policy:

Capital Trust Limited has a policy to ensure that no field employee is posted in the same location for over two years as an effort to mitigate any chances of collusion or fraud. All field employees are either transferred to another branch or rotated to another role in a programmed manner so as to mitigate the chances of collusion with other employees or customers. The policy ensures that the employees have the predictability of their movements without putting them into undue hardships.

2.3. Document Storage and Retrieval:

Capital Trust recognizes the need for proper storage of documents as also their retrieval for audit and statutory requirements. We have put in place Physical Storage and Scanned Copies.

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

Capital Trust 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 Trust has steadily diversified its presence from 3-4 states to 10 states.

Compliance Risk

Capital Trust 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 Capital Trusts reputation.

Mitigation

The company has implemented a Compliance Management through its Compliance Committee with in-built workflows 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. Presence in a regulated and socially sensitive industry can result in significant impact on Capital Trusts reputation and brand equity as perceived by multiple entities like the RBI, Central/State/Local authorities, banking industry and last but not least, Capital Trusts customers.

Mitigation

Considering the vulnerability of our customer segment and the potential for negative political activism to affect the reputation of the company, 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.

Contagion Risk

Contagion risk as an enlarged version of systemic risk, refers to the probability of credit default among a large group of borrowers in a particular geographical Territory or State, arising out of external factors or political overtones, spreading to culturally-aligned neighboring Territory or State, resulting in moral hazard, thereby escalating the risk of possible default. Further in the context of micro credit, it could result mostly from ghost-borrowing and ring-leader scenarios.

Mitigation

This is being addressed by customer connect program wherein we pro-actively reach out to customers in each center to validate that the customers have genuinely applied for the loan and there has been no incidence of commission, following a relationship based mode of engagement so the customer feels a sense of loyalty to the company and is therefore less likely to be part of a mass default by others and implementing an analytics solution to study the credit bureau data and look for warning signs of increased defaults – upto the pin-code level.

Operational Review

The company continues to operate in 10 states through 251 branches. The company has not entered into any new territory during the year. The portfolio has now diversified and concentration in UP has now come down to 22.74% . The maximum concentration in any state is not more than 25% indicating that the concentration risk has been reduced by the company.

State

Mar-18

Mar-19

BIH 4.60% 9.80%
CTG 0.03% 1.15%
JHA 0.39% 2.45%
MP 10.39% 12.37%
ODS 2.61% 9.95%
PUN 23.73% 20.85%
RAJ 14.48% 14.65%
DEL 1.69% 0.96%
UK 7.84% 5.09%
UP 34.24% 22.74%
Total

100%

100%

The cumulative collection percentage of the company is more than 100 per which implies that the company is able to recover the money which has been written off. The NPA of the company is has been higher due to the following reasons At that time of demonetization, Capital Trust had 74% of its portfolio in Western Uttar Pradesh. Unfortunately for the company, Uttar Pradesh (and Western Uttar Pradesh to a larger extent) was worst impacted by demonitization and its after effects. Some of the reasons for this were as follows:

• Cash Crunch: Uttar Pradesh has 10 times the population of Delhi but only twice the number of ATMs. Owing to this, a large part of Capital Trusts clientele was not able to procure new notes after the verdict and with less cash in the system, their businesses were affected. As their businesses were affected, it was hard for the clients to pay for food on the table, let alone repay any installments. As client businesses were affected and many of them did not have access to new currency, Capital Trust was not able to receive installments for the months of November, December, January and February. When the currency was surplus in the market, the clients started paying but were able to pay one instalment at a time. So technically, our clients were paying their instalments but there was lag of 3-4 instalments so the NPA percentage was high.

• UP Elections and rumors: UP elections started on 11 February and went on till 8 March 2017. Prior to and during this period, many local politicians sprung up and told the individuals in their constituency not to repay any loans as they would be waived off if they would secure a win in the forthcoming elections. This is the same time where there were rumors spreading of the BJP farm loan waiver and no one was sure about what all would potentially be waived off with the new ruling. As many politicians made the most of this uncertainty and told people not to repay, Capital Trusts collections got affected February onwards.

• Farm Loan Waiver: Soon after the ruling party came into power on March 11, 2017, they decided to waive farm loans worth Rs. 37,000 Crores. A large number of Capital Trust clients were made to believe that the farm loan waiver would be followed by a waiver of all forms of loan and hence, a substantial amount of them did not pay. On the ground level, the clients were not educated enough to distinguish the difference between a farm loan waiver and a waiver of all small loans.

• Cow slaughter ban: As soon as the company was able to convince its clients that the farm loan waiver was not applicable to them and they should regularly pay their installments, the government decided to ban all cow slaughter and shut all unregistered slaughter houses. 40% of Capital Trusts portfolio is associated with dairy and livestock. Thus, even though the slaughter house ban didnt directly affect the clients, indirectly a large number of clients were impacted and were not able to make 100% repayment.

Owing to the above factors, even though the collections in Punjab, Madhya Pradesh, Rajasthan were back to pre-demonitization levels by January 2017, the collections in UP, Uttarakhand and Delhi were compromised. As a significant number of clients have resumed payments, the lag of instalments between November 2016 and March 2017 is what shows heightened 90+ values.

LESSONS LEARNED AND ACTION TAKEN

The company has learned the lessons from demonitisation and

taken the following steps:

Geographical Diversification & Introduction of Risk Metrics

a. Diversification of business into 10 states.

b. Formulation of risk metrics that cap maximum exposure to states and sectors.

c. Automatic stoppage of disbursement in branches where numbers breach metrics.

Evolution of IT and Smart Credit

a. Development of IT package providing automated credit decisions.

b. Credit on the basis of various algorithms.

c. Auto generation of branch cashbooks to eliminate manual intervention.

Shift to Cashless Repayment

With all loans already being disbursed through RTGS / NEFT, successful implementation of cashless repayment for all disbursements from May 2019.

Legal Intervention

a. Initiation of Section 138 of Negotiable Instruments

Act willful defaulters

b. Invocation of arbitration clause of the agreement

c. Participation in Lok Adalats for recovery of amount due

INVESTMENT IN SUBSIDIARIES

The company continues to have two subsidiaries in the name of Capital Trust Microfinance Private Limited and Capital Trust Housing Finance Private Limited. There has not been any fresh investment in these companies during the year.

INTERNAL CONTROL SYSTEM

The Company has well documented internal financial controls with risk control matrix for all the critical areas of business and processes. Internal Financial Controls ensure that business is conducted on the set principles efficiently and the company adhere to policies, safeguarding its assets, prevention of errors, accuracy and completeness of the accounting records and the timely preparation of reliable financial information. The internal financial controls of the company are adequate and commensurate with the size of the business.

The Internal Auditors monitor the efficiency and efficacy of the internal control systems in the company, compliance with operating systems/accounting procedures and policies framed by the company. The department is also responsible to review and monitor the risk framework within the company. The department also undertakes audit of its branches covering all aspects of branch operations and credit audit. The department also provides independent assurance on the effectiveness of implementation of risk management framework, including the overall adequacy of the internal control system and the risk control function and compliance with internal policies and procedures.

The Company has adequate systems and procedures to provide assurance of recording transactions in all material respects. During the year, the Internal Auditors reviewed the operating effectiveness of the internal financial controls by undertaking an effectiveness testing of controls covered under the Risk Control Matrices for major processes.

The Internal Audit Department of Capital Trust upholds its departmental Vision of fostering a control environment of the organization, adding value to the organization by continuously improving operational efficiency and safeguarding the interests of the organization. The function will do so by recruiting and retaining the best talent from both internal and external sources in order to raise the profile of the Internal Audit Department within the organization.

The Mission of the Internal Audit Department of Capital Trust is to enable the organization in:

• Focusing on key business activities through motivated, skilled and experienced staff who are responsive to the customers needs;

• Engaging with different entities to facilitate positive changes to existing processes, practices and systems;

• Adopting continuous improvement initiatives and implementing best practices in developing its plan, policies and methods;

• Creating a dynamic working environment which encourages innovation and maximizes the use of new technology;

• Ensuring that its performance is monitored, measured and reported in satisfying the expectations of the different stakeholders.

The internal audit adopts a risk based audit approach and conducts regular audits of all the branches/offices of the Company and evaluates on a continuous basis, the adequacy and effectiveness of the internal control mechanism, adherence to the policies and procedures of the Company as well as the regulatory and legal requirements. The company has well drafted policies and procedure in the form of manuals.

These policies and procedures are well established and followed meticulously. The company adheres to audit process which encompasses risk identification, risk assessment, risk address and reviewing & reporting risk. The Company has established risk management and audit framework to identify, assess, monitor and manage credit, market, liquidity and operational risks. This is extremely important as many of our borrowers do not have any assets and also do not have adequate literacy skills. The company has three levels of the audit which include surprise branch audit, Pre disbursement audit for client identification and checking of credit worthiness of the clients and post disbursal audit. Under the post disbursal audit, the loan utilization is checked. The internal audit department also tracks the attendance of client in the centre meeting.

The audit recommendations are actively followed up and implemented. As part of the effort to evaluate the effectiveness of the internal control systems, our Companys internal audit department reviews all the control measures on a periodic basis and recommends improvements, wherever appropriate. In addition to inhouse internal audit department, the company has engaged independent internal auditor who submits its report to the audit committee.

Information Technology

The company has leveraged technology to effectively reach out to micro-borrowers to fulfil their requirements for income generating loans in a transparent manner. The With Aadhaar card as the starting point, our software validates identity and credit history instantly. Zxing, an open-source, multi-format barcode image processing library, scans QRs codes on the Aadhaar Card which instantly sends information to the credit bureau for checking the clients credit history, determining whether the person is eligible for a loan. Through the mobile application, a soft approval for a loan can be given to a client within seconds.

The company uses the Technology to its maximum and helped the company in attaining:

• One of the first NBFCs to start cashless disbursement of all loans since 2015.

• Started process of cashless repayment for all loans (expect Microfinance) in 2019.

• Automated closing of company and all branch books at 6PM daily through collation of issued Digital Receipts (SMSs sent to client on collection of any repayment).

• Client application with access to all details regarding the loan to promote transparency and authenticity.

• All staff have access to Capital Sales, the company application, that provides real-time information in even the most remote locations.

• All warehousing of information on cloud.

• Smart credit enabling client on-boarding and in-principle approval from scanning of clients Aadhar card at his doorstep.

• No manual entry allowed for any clients

The issuance of digital receipts for the repayments made by the clients, has helped the company is transparency and authenticity in transaction with the clients and reduction of frauds.

SEGMENT – WISE OR PRODUCT – WISE PERFORMANCE

The company has only one segment of business i.e "financing" so there is no segment wise or product wise performance available.

HUMAN RESOURCES

Capital Trust Limited is operating in ten states within India and has more than 1528 employees. The company is market-driven, and technology-based, serving customers in ten states in northern, central and eastern part of India with financial products, and services. The company aims to be the first choice of customers, employees and shareholders.

Capital Trust 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. Selection of business partners is also guided by like principles.

The business of the company is directly affected by the

wellbeing of all sections of the society where we operate in. 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 at right place is the major strength of Capital Trust. We believe that the employees working with Capital Trust are realizing their dreams and in return the company achieves it goal.

Capital Trust 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 30 years with us. The company believes in long term relations with employees and the company has good retention rate.

All the employees of the company are equipped with smart phones. The employees mark their attendance through their mobile, apply for leaves, tours and tour claims through mobile app only. This has smoothened the processes and reduced the time to settle the claims. This is also environmental friendly as a lot of paper is being saved in printing.

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

CAUTIONARY STATEMENT

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 fulfillment 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 macroeconomic 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.