cholamandalam investment & finance company ltd share price Management discussions


MACROECONOMIC OVERVIEW

The Indian economy is staging a broad-based recovery across sectors, from pandemic-induced contraction, international geo-political conflict and inflation and is well positioned to ascend to the pre-pandemic growth path. It has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies. The capital expenditure spends of Central Government and private corporates is one of the main growth drivers in the current year. This trend is expected to continue and the Indian economy is well placed to grow faster in the coming decade. It has started benefiting from the efficiency gains resulting from greater formalisation, higher financial inclusion, and use of digital technology. Infiation, which emerged as a big challenge post the geo-political conflict has averaged at 6.8% between April-January FY 23 as compared to 5.3% in the same period last year. Infiation is likely to be the key monitorable from RBIs monetary policy trajectory point of view going forward. To fend off the inflationary pressures, RBI during the year raised the key repo rate by a cumulative 250 basis points to take it to 6.5%. The central bank has indicated that it will remain vigilant, monitor every incoming information and data, and act appropriately to maintain price stability in the interest of strengthening medium-term growth.

As the economy steps into a new fiscal year, the road ahead does not look easy with risks mainly emanating from global environment. However, fundamentals of the Indian economy remain resilient on the back of a strong reforms impact from the PM Gati Shakti, National Logistics Policy and the PLI scheme to boost manufacturing output. The Governments continued heavy lifting on the capex front will also help drive in the private sector greenfield capex, which via its multiplier effect will help support domestic growth. RBI forecast for GDP growth for FY 24 is at 6.5% as against provisional estimate of GDP growth for FY 23 at 7.0%. India is likely to maintain its position as the fastest growing major economy.

INDUSTRY GROWTH PROSPECTS Automobile Industry

Commercial vehicles, passenger vehicles and two-wheelers registered double digit growth in FY 23 due to improvement in economic activity, revival of construction / mining activities and improvement in semiconductor supplies. FY 23 was the first full year without any COVID impact after a gap of 2 years which served well for the automobile industry. The domestic commercial vehicle industry grew by 34% in FY 23, supported by improvement in economic activity, replacement demand, pick-up in mining, infrastructure and construction activities resulting in healthy fleet demand and utilisation levels. Medium and heavy commercial vehicles (MHCVs) recorded a 50% growth, while light commercial vehicles (LCVs) grew by 35% and small commercial vehicles (SCVs) grew by 14%.

The commercial vehicle industry is expected to deliver double digit growth in FY 24 driven by freight demand, replacement demand, structural economic recovery and higher infra spends by the Government. However, increase in fuel prices and its impact on viability of fleet operators will remain a key challenge in FY 24. The domestic car and utility vehicle industry had witnessed an all-time high sale with 27% growth in FY 23 supported by strong underlying demand, easing of semiconductor supply and improvement in sale of utility vehicles due to shift in customer preferences. Steady demand is expected in FY 24 with double digit growth.

Two-wheeler segment witnessed a 17% growth in FY 23 with improved demand sentiments over the previous year. This segment is expected to grow by 9 to 10% in FY 24 with expectation of improved rural demand.

Tractor Industry:

The domestic tractor industry had witnessed an all-time high sale with 12% growth in FY 23 supported by strong demand during the festive season, favourable monsoon and farm cash flows remaining stable. However, we expect moderation in demand during FY 24 due to uncertainities relating to monsoon.

Construction Equipment Industry:

The domestic construction equipment industry witnessed a growth of 26% in FY 23 supported by improvement in the overall macroeconomic environment, a strong revival in construction activities and thrust on completion of infrastructure projects. Healthy volume pickup with the run up to elections augur well for this industry in FY 24.

Loan Against Property

Loan Against Property industry portfolio stands at Rs. 8 lakh crore as per CIBIL September 2022 market sizing report. Out of this, NBFCs & HFCs have the highest share, contributing to 44% of entire market size, followed by private banks.

In FY 23, Banks registered strong growth in the segment due to lower cost of funds and adequate liquidity support. CRISIL Research expects the LAP segment to grow by 9-11% in fiscal 2024 driven by improved economic conditions assisting in normalisation of business activities.

Housing Finance

The Indian Housing Finance market is estimated to be about

Rs. 26 lakh crore and grew at around 11 - 15% in FY 23. Credit growth in banks outpaced that of HFCs/NBFCs. In terms of ticket size, the sub Rs. 25 lakh segment contributed to 29% of the disbursements during last FY and this level is expected to be sustained. Analysts expect the housing sector to grow 11 - 16% in FY 24 and affordable housing to grow at 18-22% in the same period.

In terms of asset quality, GNPA is expected to further reduce in FY 24, supported by controlled fresh slippages.

Personal and Professional Loan Segment

Personal & Professional Loans is one of the fastest-growing segments in India with over Rs. 3.5 lakh crore originations. Despite this growth, there are a lot of individuals who do not have access to credit in India. In addition to this, the MSME segment is significantly under-penetrated in India with more than 60% of MSMEs not having access to formalized credit.

As per market research reports, disbursement growth in the personal loan space is expected to reach 18 - 20% in FY 24 due to a healthy credit demand. NBFCs market share in terms of value in the personal loan space is currently at 21% and is expected to increase to 22% in FY 24. The reports also state that the business loan segment will see a growth of 15 - 18% in FY 24 and NBFCs are expected to grow faster in this space at 18 - 20%. Post covid business normalization has led to an improvement in economic conditions and a pick-up in demand for credit. Digital lending in India is expected to hit $1.3 trillion by 2030. Digitalisation of existing processes would accelerate in both traditional and pure-digital businesses leading to faster disbursement & higher efficiencies. However, with the recent rise in popularity of pure digital loans, the RBI had introduced new regulatory guidelines for digital lenders in September 2022 to support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns. In the long run, this would ensure that only structured and compliant players remain in the business.

Small and Medium Enterprises (SME)

The progressive reforms introduced by the Government for SME sector resurgence have been fruitful, as reflected in the vigorous business activity and improved credit uptake by enterprises across all the segments. This increasing demand and adequate supply by NBFCs will provide timely access to credit opportunities to SMEs, thereby contributing to the sustained growth of the sector and the economy to meet the Governments USD 5 trillion economy objective.

Demand for credit from the SME sector is high and supply by the credit industry remains stable while delinquencies have declined. The rapid pace of innovations driven by the Government and the lending ecosystem has significantly enabled the SME sector to continue its high growth trajectory. These innovations have provided capabilities for triangulating the power of financial, income and trade information so that credit institutions can get a uni_ed view of the business entity, enabling improved risk differentiation for underwriting SME loans.

BUSINESS ANALYSIS VEHICLE FINANCE (VF)

The vehicle finance disbursements during the year were at an all-time high of Rs. 39,699 crores as against Rs. 25,439 crores in the previous year with an impressive growth of 56%. The VF division was able to grow significantly in the new commercial vehicle and new passenger vehicle segment over last year by 60% and 78% respectively which also resulted in a higher market share. The used vehicle disbursements also grew by 41% over the previous year. Assets Under Management (AUM) for the business grew by 27% to

Rs. 66,938 crores in FY 23 compared to Rs. 52,881 crores in FY 22. The PBT during the year was Rs. 2,272 crores as against Rs. 2,054 crores in the previous year with a growth of 11%. The VF division restricted gross stage 3 assets to 3.20% in FY 23 as against 3.90% in FY 22 through its intense focus on collections. Vehicle Finance business will look to improve the marginal yields across its segments considering the increase in borrowing rates and focus on driving higher disbursals in the high yield segments which will help in maintaining NIM. To bring in more focus at product and DPD levels across buckets, the business will have product wise collection infrastructure to keep delinquency in control thereby arresting the flow in the early delinquency buckets.

The companys vast branch network helps in acquiring new customers and creates proximity with customers helping in better collection efficiency and higher repeat business. The VF division would continue to foray into the top of the pyramid customer segment by providing competitive pricing through the co-lending route which in turn will help the company to increase customer base, market share and also retain existing customers.

The vehicle finance business will continue to expand and strengthen its existing relationships with customers, manufacturers, brokers, and dealers by utilizing new tools and platforms. Digital lending platforms are being developed for existing customers for Do It Yourself (DIY) loans with zero human intervention. Analytics based pre-approved loan offers are being generated for both new and existing customers which simpli_es the loan origination journey leading to enhanced customer experience. Gaadi Bazaar an in-house developed platform has enabled best price discovery for used vehicles through a seamless and transparent sale-purchase process, and creation of a customer, dealer/broker base which ensures higher stickiness.

The vehicle finance business with a robust collection mechanism, best-in-class credit underwriting, a strong risk assessment framework and an extensive penetration in the hinterland is expected to progress to the next level of growth in the coming years.

LOAN AGAINST PROPERTY (LAP)

India is set to reach $10 trillion economy by 2035. Indias rural economy is a major component in achieving this milestone. As a step towards reaching this goal, loan against property business is ensuring to take formal credit access to rural locations where bank credit is not easily accessible. As of FY 23, LAP business has 501 branches in rural locations, which is 85% of total LAP branches across India. In FY 23, LAP business has disbursed Rs. 3,775 crores in rural locations, amounting to 41% of total disbursements.

LAP is one the major sources of funding for MSME community in India. LAP business is an active contributor to MSME growth by way of lending to them for business expansion and working capital requirements. 97% of LAP disbursements in FY 23 is towards Self Employed Non-Professionals (SENP) community.

As an enabler for empowering women entrepreneurs in India, the Company has disbursed to more than 2,200 women customers amounting over Rs. 1,000 crores. This contributes to 14% of total disbursements in FY 23.

LAP business has achieved Rs. 9,299 crores of disbursements in FY 23, which is 68% higher than FY 22 disbursements. Pan-India geographical penetration into new markets, introduction of localized credit policy in line with market developments, increased contribution from rural branches have led to this growth. Assets Under Management (AUM) for the business grew by 29% to

Rs. 21,588 crores in FY 23 compared to Rs. 16,795 crores in FY 22, in-spite of the higher pre-closure and challenging macro-economic situation.

The business continues to focus on a systematic approach to build a healthy portfolio mix, with more than 80% of the portfolio being residential properties and an average loan ticket size of less than Rs. 50 lakhs. Portfolio Loan-to-Value (LTV) ratio at origination is consciously maintained at 50% levels which provides adequate security cover to the business. The business has further introduced new high yield product like Small and Emerging Group (SEG) and Micro LAP to increase the profitability.

The asset quality of this business has shown steady improvement with the net credit losses and stage 3 assets coming down significantly with consistent improvement in collection efficiency. Stage 3 assets of LAP business stands at 4.02% as of March 2023 compared to 6.60% as of March 2022.

HOME LOANS (HL)

As of March 31, 2023, the home loan business had 70,182 active accounts (53% growth Y-o-Y) with an AUM of Rs. 8,451 crores (51% growth Y-o-Y). 93% of the portfolio is from tier II, III, IV cities and towns. The disbursements grew 102% Y-o-Y from Rs. 1,896 crores in FY 22 to Rs. 3,830 crores in FY 23. The target group remains the lower middle-income group SENP customers. The average ticket size is Rs. 13.3 lakhs with an average LTV of 53%. 93% of the portfolio comprises business owners with semi-formal income and significant business vintage and 25% of customers are first time borrowers. The HL business leverages the companys strength in reaching out and underwriting lower and middle-income borrowers across the country, penetrating to villages and towns. The company offers loans for self-construction, purchase of resale fiats / independent houses, purchase of new - fiats / independent houses, balance transfer from other financiers, mortgage of existing house for business use and shop loans. The company enjoys a significant presence in tier II, III, IV towns and cities. The business has been strengthening the channel partner network to reach out to more customers. This year, the business expanded its footprint in Uttar Pradesh, Bihar, West Bengal, Odisha, Assam, Jharkhand and also expanded the branch network further in states previously operational. HL customers are serviced through 501 touchpoints across 19 states. Given that these customers are mostly first-time buyers, the sales officers guides and facilitates the customer through the entire borrowing process. The business has also developed a strong collections and legal recovery team across geographies to ensure that asset quality is maintained.

CONSUMER & SMALL ENTERPRISE LOAN (CSEL)

As of March 31, 2023, the consumer and small enterprise loan business had crossed 5 lakh active customers with an AUM of

Rs. 5,527 crores. The business has expanded across the country covering 25 states and 4 Union territories with over 175 branches. The division has entered strategic partnerships with 9 leading Fintech companies to drive greater financial inclusion especially among those customers who are economically active but not having adequate access to formal credit. During the year, the division entered into the direct to customer (D2C) digital lending space. Overall disbursements of the division crossed

Rs. 6,865 crores in FY 23 with contribution from all zones in the country. The division achieved a profit before tax (PBT) of

Rs. 62 crores by maintaining a tight control on asset quality that helped to maintain its stage 3 assets at 0.61%. The key strengths of the division such as its transparent end to end digital process, superlative customer experience journey, strong data driven underwriting & risk management capabilities combined with the trust of Chola brand makes it well placed to become a market leader in this segment.

SMALL AND MEDIUM ENTERPRISES LOAN (SME)

The small and medium enterprises finance disbursements during the year were at an all-time high of Rs. 6,388 crores as against

Rs. 1,926 crores in the previous year with a growth of 232%. The SME division was able to grow significantly by onboarding new OEMs, Anchor Tie-ups, Fintech partnerships and through branch expansion. The SME division continued its sharp focus on asset quality through a coordinated collection strategy, which helped in restricting gross stage 3 assets to 0.80%. Assets Under Management (AUM) for the business grew by 235% to Rs. 3,550 crores in FY 23 compared to Rs. 1,058 crores in FY 22.

SME Divisions target customers are the small and medium group segment customers. The average ticket size is Rs. 1.50 crores with an average LTV of 60%-65% which reflects adequacy of headroom in case of marketability of the underlying assets.

SME Division will continue to focus on equipment finance, term loans and supply chain finance and also launch new product lines in the form of health care financing, lease rental discounting, leasing finance, factoring and solar financing etc. SME Division enjoys a significant presence in tier I and tier II towns and cities. The business has been strengthening the sourcing partners network to reach out to more customers.

SECURED BUSINESS AND PERSONAL LOAN (SBPL)

As of March 31, 2023, the secured business and personal loan business had crossed 10,000 active accounts with an AUM of Rs. 444 crores. The average ticket size is around Rs. 4.42 lakhs with an average tenure of 69 months. The SBPL business, using the companys strong presence in tier II, III, IV & V cities, has penetrated well across all zones and made its presence in and across 10 states in FY 23. The business entered two new states viz., Bihar and Haryana in FY 23. The business has commenced disbursements over 170 branches. The loans offered are predominantly business loans against self-occupied residential property. The customer onboarding was made completely digital where the sales executives onboard the customer using handheld devices.

ASSET LIABILITY MANAGEMENT (ALM)

The start of FY 23 was the time when the economy was already showing signs of revival. Consumption and investment showed sustainable signs of picking up and the year saw RBI hiking the repo rate by 250 bps in FY 23. This led to the cost of funds going up significantly. The liquidity in the system which was in surplus of over

Rs. 7 lakh crores as at the beginning of the financial year, reduced steeply during the year to low surplus levels by the year end.

The company kept ALM in focus, tracking RBIs commentaries, observing the market dynamics and engaging in continuous dialogue with lenders to ensure a healthy ALM amidst the rising interest rates which prevailed during the financial year. The yield curve fiattened in the latter half of the year, rendering short term borrowings expensive. Banks shifted their pricing to MCLR basis, from market linked benchmarks. In the debt capital markets, spreads widened. The company capitalised on the appetite for priority sector assets and increased borrowings through the securitisation route, which came in at _ner rates. The company managed the mix of borrowings from these sources to optimise the cost of funds, given the outlook of rising rates.

RESOURCES & TREASURY

During the year, the company raised funds from banks/ financial Institutions and from money markets to support the growth of its businesses at competitive interest rates without compromising the right mix of long and short-term borrowings, thereby maintaining a healthy asset liability position. The borrowing profile as on 31 March 2023, is given below:

BANK BORROWING

In FY 23, the company mobilised Rs. 31,457 crores (net) of medium- term loans, ECB & FCNR and Rs. 715 crores (net) as working capital / cash credit / short term loan facilities from banks. The company continued getting support for its money market issuances from banks through subscription of Commercial Papers (CPs) and Non-convertible Debentures (NCDs). The company continued to enjoy the steadfast support of the lending banks and the strong relationship bond helped scaling up the borrowing for FY 23.

MARKET BORROWING

During FY 23, the company raised CP of Rs. 15,800 crores and repaid Rs. 14,250 crores. CP outstanding as at the end of the year was Rs. 4,317 crores. Medium and long-term secured NCDs to the tune of Rs. 7,457 crores were mobilised at competitive rates. At the end of FY 23, outstanding NCD stood at Rs. 14,767 crores.

The tier II borrowings raised during the year was Rs. 530 crores of perpetual debt and Rs. 490 crores of sub-debt. As at the end of FY 23, tier II borrowings stood at Rs. 4,376 crores.

MOVEMENT IN INTEREST COST

The company maintained its strategy of reducing interest cost, leveraging market opportunities without compromising ALM requirements. This was achieved by selecting an appropriate sourcing strategy in response to the play of supply-demand dynamics in the market. The company further endeavoured to broad-base the source of funds during the year. Towards this end, the mix of funds raised from securitisation doubled over FY 22 from 5% to 10%. Rs. 10,550 crores was raised through securitisation, capitalising on the market appetite for Priority Sector Assets. This was done at _ne rates resulting in lower interest cost.

In March 2023, the company filed a shelf prospectus for public issue of Non-Convertible Debentures amounting to Rs. 5,000 crores. Under this shelf prospectus, a maiden issue of Rs. 1,000 crores was launched in April 2023 and received a resounding response. As a percentage of average borrowings, interest cost stood at 7.0% in FY 23 as compared to 6.6% in FY 22.

CAPITAL ADEQUACY RATIO (CAR)

The companys capital adequacy ratio was at 17.13% as on 31 March, 2023 as against the statutory minimum capital adequacy of 15% prescribed by RBI. The Common Equity Tier 1 (CET1) capital was at 13.70% and tier I capital was at 14.78% as against the statutory minimum requirement of 9% and 10% respectively. Tier II capital was at 2.35% as on 31 March, 2023.

INVESTMENTS

The companys investments of Rs. 3,628 crores include investments in G-sec of Rs. 1541.34 crores, investments in treasury bill of Rs. 1536.27 crores, investments in subsidiaries, joint ventures, and associates of Rs. 550.41 crores.

FINANCIAL REVIEW

The companys aggregate disbursements grew by 87% from

Rs. 35,490 crores in FY 22 to Rs. 66,532 crores in FY 23. The AUM for the company grew by 36% (YoY) and the growth of on-balance sheet assets was 39%. The business AUM (including on book and assigned net of provisions) in FY 23 grew by 38% and stood at Rs. 1,06,498 crores as against Rs. 76,907 crores in FY 22.

HUMAN RESOURCES (HR)

The last couple of years has brought about diverse changes in the HR industry. Diversity in organizations, the global pandemic, and practice of working from home have changed the operational landscape of HR function. The pandemic has changed the way the companies work; while 2021 was a year of reinventing HR and solidifying its new role, 2023 was all about how HR can add value to an organisation. NBFCs have seen tremendous growth in the country. From few players, the sector has seen the emergence of new players accompanied by the demand for attracting and retaining talent.

Diversity and Inclusion Initiatives

The research reports states diversity and inclusion, especially in senior management, could provide actual business benefits, like improved productivity, profitability, and stability.

Innovative channels

Social media and video marketing channels are used for talent acquisition to reach the workforce apart from the traditional methods. During the year, the company launched an innovative and targeted hiring campaign on Facebook, LinkedIn, and other social media platforms for large-scale hiring in mass positions across the country. The company recognises that women form an integral part of todays workforce, especially in the financial services sector. A large chunk of this pool, however, is seen to "drop out" of the work force after a mid-management level, primarily to raise a family. There is a huge talent pool of women with tremendous talent who want to return to the workspace, which the company encourage. Further, returning employees form yet another pool of talent that is being recognised by Chola. The company also encourage referrals recruitment through employees, weightage on experience over academic qualification, etc. This helps to increase hiring process efficiency as well as lowers the training period and costs. FY 23 witnessed a 36% increase in headcount as compared to FY 22. These reimagination initiatives helped the company in bringing in diversity and exploring new channels of hirings.

Talent Management

People Strategy is a flagship project which the entire organization has collaborated with an objective to enhance productivity and retain talent. This project has resulted in enhancement of productivity, defining a structure of deployments for vehicle finance business (VF). The learnings from VF have been taken to home loans and loan against property business. Automatic Career Progression is one of the key interventions aimed at retention of talent. Under this scheme, employees are made clear on the skills that are to be acquired to progress to the next level. Performance parameters for assessment has been clearly defined and communicated.

Learning and Development (L & D)

L & D initiatives during the year through a mix of methodologies were implemented in the form of digital and vernacular language immersions, virtual programs, experiential and outbound interventions, individual and group coaching exercises etc.

The behavioural and leadership competence of the mid-level managers were honed with specific inputs on building high performance teams and aided with inputs to ensure that they can build and manage large teams to sustain desired performance levels.

Curating an Environment to Work In

Throughout the pandemic, the company remained supportive and focused on keeping up employee morale and motivation high. Mental fitness has become a big focus area now, talking about it with employees and encouraging them to seek help has become more critical. Chola continues to place safety and well-being of the employees as high priority. Campaigns for safety and health camps were organized throughout the year to educate and bring in awareness to employees.

TECHNOLOGY INITIATIVES

Technology plays an integral role as the company continues its digital transformation across our three-pronged business approach – traditional phygital, ecosystem partnerships, and direct to customers. In the current climate, a strong technology platform, an engaging digital experience for customers, and data-led product & service offering will be essential to win over customers. As India takes over as the most populous country in the world, the demand for capital across large enterprises, SMEs, and individuals will dictate the need for a resilient technology infrastructure providing scalable and accessible service to the customers across digital channels. As part of our quest to deliver seamless digital experience, enhancements to core systems as well as infusion of new technology solutions as well as data-led approach has helped create a platform for improving customer experience across the stages of onboarding, product offering, acquisition, and ongoing customer servicing. The company continues to make extensive use of Design Thinking and LEAN principles to deliver optimum user experience on top of an efficient digital platform.

The company has also embarked upon a new-age customer mobile App, Chola ONE - as a face of our CSEL business focused on personal and business loans. Based on an event-driven micro services architecture with numerous API integrations, the App allows users to complete a fully digital loan journey in a matter of minutes. The App also includes numerous payment options for the customers spanning UPI, QR code, payment gateway, and net-banking. The company will progressively enhance Chola One App to provide a seamless customer experience by making it the uni_ed platform for customers to access services related to any Chola product.

As part of its ongoing focus on the vehicle ecosystem, the company continues to enhance and promote its GaadiBazaar offering. GaadiBazaar platform provides a bouquet of services and products in the vehicle ecosystem spanning new, used, and repo vehicles while serving both retail customers as well vehicle brokers and dealers.

Over the course of the last financial year, significant enhancements on the digital front have been put in place for new businesses of CSEL, SBPL and SME. The increase in scale of co-lending, manufacturer integrations in the vehicle ecosystem space, and rise of digital lending applications is leading to large scale system-to-system based integration for lending. To be a digital partner of choice in such an environment, the company has significantly enhanced its integration platform and built an API-ready set of services for rapid and scalable integration with ecosystem partners across different lines of business. Tech integrations have been done at every step of the business processes from credit underwriting until the loan closure between the systems of Chola and its ecosystem partners delivering a seamless experience to customers while accelerating go to market launch for such partnerships.

Besides driving changes to external facing applications, the company is also rigorously driving automation across different parts of the business and supporting functions. The ability to use API for improved data validation and data quality, robotic process automation (RPA) for automating repetitive manual tasks, cognitive tools for minimizing manual intervention has helped drive greater efficiency in operations in tandem with ability to scale and reduction in human processing errors.

The company is carrying out a key transformation of its data infrastructure and building an integrated data repository to serve business & compliance reporting as well as analytical needs. The transformative nature of AI / ML and the rapid rise of newer technologies like GPT (Generative Pre-trained Transformer) will imply the need for a rich and high-quality data repository that these technologies can work upon.

As technology becomes the core fabric for business operations, the need for security in every aspect of solution – design, development, testing, deployment, and operations – is essential for resiliency. The company will continue its efforts around strong technology controls, secure development, structured technology & security operations for system availability, data sanctity, and appropriate & timely handling of security incidents.

RISK MANAGEMENT

Risk forms a critical element and in developing risk management policy, the company has the following key objectives –

• Improve business performance by informed and improved decision making and planning

• Add sustainability to all the activities of the organization

• Enhance risk awareness amongst all employees

• Have an early warning mechanism of spotting potential problems

• Prioritize the allocation of resources

• Promote a more innovative / conservative/ cautious culture with proper understanding of risks The following shall be the guiding principles of the credit risk management framework of the company –

• All business decisions will be made with thorough understanding & appropriate risk mitigants

• The risk mitigation measures adopted by the company will be embedded in the business processes of the company

• Risk tolerance levels will be regularly reviewed and decided upon depending on the change in companys strategy

• All risk management activity will be aligned to corporate objectives, organisational priorities and shall be designed to protect and enhance the reputation and standing of Chola

• Organizational strategic business planning exercises and other lending related procedures shall embed risk analysis for informed decisions

Core credit strengths in underwriting

• High level of industry experience

• Stable credit manpower

• Use of qualitative and digital skills

• Robust mechanism for portfolio & analytics

Risk management is applied and integrated at both corporate and operational levels within the organization.

RISK MANAGEMENT PROCESS

The risk management process of the company is driven by a strong organisational culture and sound operating procedures involving corporate values, attitudes, competencies, internal control culture, effective internal reporting and contingency planning.

The risk management process broadly comprises of the following steps:

• Risk identification

• Risk measurement

• Risk monitoring

• Risk reporting

• Risk control/ mitigation

CREDIT RISK

The companys credit risk management builds on the principles of –(1) appropriate risk diversification within the scope of the mission (2) thorough risk assessment at the credit appraisal stage (3) risk-based pricing and risk mitigation (4) continuous risk monitoring at the individual counterparty level as well as portfolio level (5) avoidance of undesirable risks to the extent possible Credit risk is defined as the potential loss arising from a borrower or counterparty failing to meet its obligations in accordance with the agreed terms. The company is exposed to credit risk in both its lending and treasury activities, as borrowers and treasury counterparties could default on their contractual obligations. Credit risk may also materialise in the form of rating downgrades, cross-default on payment obligations or during the transaction settlement process. Overall, credit risk is a function of the amount of credit exposure and the credit quality of the borrower or transaction.

The key parameters to access the credit risk are the Expected Credit Loss (ECL) and the Net Non-Performing Assets which are regulatory parameters.

OPERATIONAL RISK

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This definition includes legal risk but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements. Operational risks are those that arise out of inappropriate controls, human failure, technical errors, frauds, impairments, and force majeure.

The companys operational risk management focuses on proactive measures to ensure business continuity, the accuracy of information used internally and reported externally, a competent and well-informed staff and its adherence to established rules and procedures as well as on security arrangements to protect the physical and IT infrastructure of the Company.

The company focuses on the following core procedures to manage the operational risk faced by the company:

• Development of manuals, standard operating procedures and keeping such documents and provide appropriate training on procedures to staff to create the risk culture through-out the organisation

• Emphasis on process design that has a maker-checker mechanism and sound internal audit system

• Ensure appropriate complaints handling mechanism and emphasis on the whistle blower policy

• Internal audit of branches, frequency and coverage based on grading determined by key factors

• Process of fraud investigation and action on employees

• Independent disciplinary committee to take decisions on fraud related matters

RESULT OF OPERATIONS

The companys balance sheet size has steadily grown, compared to the previous year. A summarised version of the same is given below:

STATEMENT OF PROFIT & LOSS

Particulars Mar-22 Mar-23 Growth %
Disbursements 35,490 66,532 87%
Income 10,139 12,978 28%
Cost of Funds -4,299 -5,749 34%
Net Margin 5,840 7,229 24%
Operating Expenses -2,069 -2779 34%
Provisions and Losses -880 -850 -3%
Profit Before Tax (PBT) 2,891 3,600 25%
Current and Deferred Tax -744 -934 25%
Profit After Tax (PAT) 2,147 2,666 24%

BALANCE SHEET

Particulars Mar-22 Mar-23 Growth %
Assets
Business Assets 74,149 1,04,748 41%
Cash & Bank Balances 4,220 2,961 -30%
Other Assets 3,994 5,806 45%
TOTAL 82,363 1,13,515 38%
Liabilities
Networth 11,708 14,296 22%
Borrowings 65,740 87,373 33%
Securitisation 3,433 9,983 191%
Other Liabilities 1,482 1,863 26%
TOTAL 82,363 1,13,515 38%

KEY OPERATING MEASURES

Particulars Mar-22 Mar-23 Change*
Net Income Margin 7.9% 7.7% -0.19%
Operating Expenses to Assets -2.8% -3.0% -0.17%
Return on Total Assets - PAT 2.9% 2.8% -0.05%
Return on Equity - PAT 20.4% 20.7% 0.28%
Profit Before Tax to Income 28.5% 27.7% -0.78%
Total Assets under 82,904 1,12,782 36%
Management - Rs. in crores
Gross Stage 3 Assets 4.4% 3.0% -1.36%
Stage 3 (Net off ECL) Assets 2.6% 1.6% -1.01%
Provision Coverage 39.7% 46.0% 6.33%
Earnings Per Share - Basic in Rs. 26.2 32.6 24%
Book Value Per share 142.6 174.0 22%
Price to Book Ratio (no. of times) 5.0 4.4 -13%
Market Capitalisation - 58,915 62,607 6%
Rs. in crores
CAR 19.6% 17.1% -2.49%

Note: *With respect to values, it is growth between periods and with respect to ratios, it is movement between periods

CONSOLIDATED RESULTS

The consolidated profit after tax for the year under review was

Rs. 2,664.85 crores, as against Rs. 2,153.51 crores in FY 22.

On behalf of the board
Place : Chennai Vellayan Subbiah
Date : May 3, 2023 Chairman