Cholamandalam Investment & Finance Company Ltd Management Discussions.

Management Discussion and Analysis

MACROECONOMIC OVERVIEW

The financial year 2019-20 began with the Lok Sabha elections in April - May and the newly formed government took a strong stance on economic development, with the aspiration to reach a $5 trillion economy by 2024. The Economic Survey published in July 2019 with the theme of wealth creation, pro-business policies and corporate tax rate cuts of September 2019 were in line with the aspirations. At the end of August 2019, the ministry of finance announced that 10 Public Sector Banks were to be merged into 4. Meanwhile, RBI systematically reduced the repo policy rates over the course of the year, from 6.25% at the end of FY 19 to 4.40% at the end of FY 20.

Despite these interventions, FY 20 showed a slowdown in growth from the previous year. Implied real GDP growth was estimated at 5%, down from FY 19 figure of 6.1%. 2019-20 was also negative for the automobile industry, with sales down in passenger vehicle by 16%, commercial vehicles by 29% and two wheelers by 18%. Similarly, Global economic activity was also consistently slow paced and followed a downward trajectory: year over year real GDP growth was recorded at 2.9% as of Q3 2019 compared to 3.6% in the previous year.

The outbreak of the COVID-19 pandemic in January, 2020 brought the global economy to almost a standstill, with a high possibility of slipping into a recession. Several industries starting with travel, tourism and hospitality were immediately hit, with manufacturing and services following soon afterwards. Crude oil prices plummeted, and from January, 2020 panic sell-off resulted in wealth destruction in equity markets across advanced and emerging economies alike.

In India, the government announced a nationwide lockdown from March 24, 2020 in an effort to contain the spread of the disease, which led to unprecedented economic shock. The lockdown has resulted in a liquidity crunch, followed by a labor shortage. RBI announced three months moratorium for loans and extended it by another three months from March 2020 till August 2020 to alleviate some of the financial burden on the public.

Outlook for the current financial year continues to remain uncertain, with the COVID-19 situation evolving each day. Apart from agriculture and related activities, most other sectors of the economy have been adversely impacted by the pandemic and are expected to show de-growth. Indias GDP growth for FY 21 is now projected to reduce significantly as compared to pre-COVID projections of around 5%. If COVID-19 is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India. The fall of international crude prices could, however, provide some relief in the form of trade gains. In addition, the government and RBI have been taking steps to mitigate the economic impact of the pandemic through stimulus packages, cuts to repo and reverse repo rates, liquidity infusion through Targeted Long Term Repo Operations (TLTROs), and loosened the liquidity criteria for banks and NBFCs.

INDUSTRY GROWTH PROSPECTS

AUTO INDUSTRY

The domestic commercial vehicle industry was faced with the impact of multiple headwinds in FY 20 like reduced freight demand due to the revised axle load norms, lesser market load availability due to lower GDP growth, dampened BS VI pre buying in Q4 and the COVID-19 impact which led to full lockdown from 24 March, 2020. The commercial vehicle industry closed FY 20 with a 29% degrowth which is the steepest degrowth in more than 15 years with medium and heavy commercial vehicle (MHCVs) contributing to 47% degrowth followed by light commercial vehicle (LCVs) at 21% degrowth and buses with 7% degrowth. Domestic commercial vehicle sales is expected to fall by 20% - 25% in FY 21 considering the macroeconomic challenges posed by the pandemic outbreak. The extent of recovery in construction, manufacturing, industrial output and consumption demand are key factors to watch out for a quicker recovery in FY 21. MHCV (Truck) sales are expected to close FY 21 with further decline of 12-14%. Despite the expectation of uptick in rural demand due to good rabi output, the outbreak of COVID-19 has led to restricted movement of goods and lesser demand for consumption goods. Due to these factors, the LCV (Truck) segment is expected to contract further by 7-9% during FY 21. The passenger carrier segment (buses) would also continue to face challenges due to curbs in operation of schools, colleges and offices due to the pandemic, leading to a 8-10% contraction during FY 21. Any prolonged disruptions and delay in recovery of macro-economic factors will further dampen the recovery in FY 21. However, used commercial vehicle sales is likely to be less impacted in FY 21 considering lower market prices, BS VI transitioning and extended time gap in regularization of the new vehicle supply chain.

Domestic car and utility vehicle industry has witnessed two consecutive years of decline first time in a decade with a degrowth of 18% in FY 20 which were majorly due to muted consumer sentiments and higher cost of ownership by way of increased fuel prices, higher insurance outflow and higher interest rates. Car and utility vehicles might see significant drop in HI of FY 21 considering reduced discretionary purchases due to the COVID-19 which has impacted individual income growth. However, repulsion to public transport is expected to drive some demand in the small passenger vehicle space post ease of lockdown but the overall outlook for car and utility vehicle is trending towards a degrowth of 20-24% in FY 21.

Tractor industry had a de-growth of 10% in FY 20 due to weak farm sentiments in the first half of the year along with erratic rainfall and onslaught of COVID-19 during March, 2020. A faster recovery of the rural sector which has been mostly insulated from the impact of COVID-19 together with a good rabi harvest, normal monsoon, government support through farm subsidies and direct income support to farmers will aid the tractor demand in H2 FY 21. Clearing supply chain bottlenecks and availability of labor for Original Equipment Manufacturers (OEMs) is key to ensure supply post lockdown. Tractor sales is expected to degrow in FY 21 by 5-10% based on current trends. Governments thrust towards doubling farm income is expected to drive long term growth in this segment.

Two-wheeler industry had a degrowth of 18% in FY 20 due to weak consumer sentiment, subdued rural demand and increase in cost of ownership. The industry is staring at another year of degrowth due to the impact of COVID-19 which has impacted income of individuals leading to lesser discretionary spends. However, expectation of better Kharif prospects and normal rainfall shall help the demand from rural areas which is expected to be higher when compared to urban areas.

HOME EQUITY

The COVID-19 pandemic and the resultant lockdown is likely to impact MSME credit growth majorly during first half of FY 21. However, the initiatives taken by Government and RBI towards allowing for moratorium on payment of instalments, priority sector lending, credit guarantee scheme and clearance of past payable dues to MSMEs are expected to help the sector recover. Despite these measures, the COVID related impact is expected to affect the business continuity of a significant share of MSMEs in the country.

As far as the lending institutions to the MSMEs are concerned, assets with lower ticket sizes and loans against Self-Occupied Residential Properties (SORP) are expected to have lesser stress on their portfolio. Cashflow impact is likely to remain in the short term even after the lockdown eases, due to supply chain disruptions and counterparty debtor risk across the value chain. Asset quality concerns are expected to pose challenge over the next one year. Property prices may face downward revision in the short term, however lenders with optimal Loan-to-Value (LTV) ratio in their portfolio are expected to wear out this challenge sooner than others.

HOME LOANS

The Indian Housing Finance market is estimated about Rs. 21 lakh crore and grew at around 10-14% in FY 20. Rs. 3 lakh crore of the housing finance market comprises Low Cost Housing Finance. 70% of the Low Cost Housing market is located in Tier II, III, IV cities. The growth in the affordable housing finance segment continued to out-pace the housing sector and is estimated between 15-20%. The disbursements for the year were also impacted by the COVID-19 related lockdown in March 2020.

The asset quality in the sector deteriorated largely due to stress in the construction finance portfolio which faced liquidity issues, delays in completion of projects, stress on incomes due to economic slowdown and COVID epidemic. Financiers with lower exposure to construction finance and under-construction risk with sufficient liquidity are better placed to navigate the current market and emerge stronger. Analysts expect the affordable housing demand to continue to outpace the overall housing sector in FY 21.

Regulatory and Fiscal Environment remains conducive for the demand in affordable housing segment. The national mission of Housing for All by 2022, the PMAY (Pradhan Mantri Awas Yojana) - CLSS (Credit Linked Subsidy Scheme), implementation of Real Estate Regulatory Authority (RERA), higher tax benefits for affordable housing were in line with the aspirations of the government to support this segment.

BUSINESS ANALYSIS

VEHICLE FINANCE

The Vehicle Finance (VF) disbursements during the year were Rs. 23,387 crores as against Rs. 24,983 crores in the previous year with a marginal de-growth of 6% which was directly attributable to the drop in Industry volumes especially commercial vehicles. The VF division was able to grow in segments like car, MUV (Multi Utility Vehicle), tractor, two wheeler and used vehicles business over last year. The PBT during the year was Rs. 945 crores as against Rs. 1,269 crores in the previous year. The drop in PBT is on account of additional provisions made for bracing the COVID-19 impact and its aftermath. The VF division continued its focus on maintaining asset quality through an aggressive collection strategy, which helped in restricting gross stage 3 assets to 2.91% inspite of being a very challenging year due to a stressed macro-economic environment which had impacted customer cash flows coupled with the COVID-19 impact in the month of March, 2020.

The VF division has more than 80% of branches in the rural areas, towns and semi urban areas which gives a clear advantage to capitalise the rebound in rural demand post lockdown in terms of tractor, two-wheeler business. Any uptick in the demand for small commercial vehicle, three-wheeler and light commercial vehicle will help the business in garnering greater market share due to its presence in rural areas. The business car and MUV ticket sizes are smaller and any first shoots of demand in the small passenger vehicle segment will be to its advantage in terms of financing. Chola is one of the largest player in the used vehicle financing business with a disbursement mix of almost 30% in this segment which will enable the business to cater to this segment effectively and generate disbursement volumes where customer preferences might shift to used vehicles for benefits of price and supply.

The business has enhanced support for digital connectivity and focus on productivity while working remotely, a host of cybersecurity initiatives have been implemented to ensure uninterrupted operations during COVID-19 lockdown. The business continues to capitalize on its people, process and technological capabilities to maximize returns on assets (ROA). Industry leading domain and strategy consulting firms have been engaged to create a highly productive workforce leveraging digital credit underwriting, cost effective collections processes, and digital backend operations. The company has designed a multi-pronged long-term strategy to minimize the cost of operations, credit losses and maximize ROA and customer experience. Operating model enhancements have been prioritized and are being implemented for re-imagination of existing processes, to augment sales, drive operating efficiencies, reduce costs, and balance credit risk through better pricing. The business will continue to expand and strengthen its existing relationships with customers, manufacturers, brokers and dealers, utilizing new tools and platforms such as Gaadi Bazaar with the objective of best price discovery for used vehicles through a seamless sale-purchase process, create and grow a customer, dealer/broker base by ensuring higher stickiness.

The business has implemented a bunch of steps to shift more customers towards alternate modes of collections through digital payment links, collection through local Kirana stores, creating customer awareness for making online payments through RTGS, NEFT transfers, PayTM etc. This will help the company in the new normal way of business where there might be restricted mobility in most places on account of the pandemic.

The business has a branch network of 1,091 branches which will support in growing market share across product segments through enhanced dealer coverage. These branches will also help in acquiring new customers and creates a closer proximity with customers helping in collection efficiency improvement and increasing repeat business. The business has a robust collection mechanism in place aided with a strong credit risk assessment framework which will help in steering through the strong currents of the COVID-19 pandemic in the fiscal of FY 21.

HOME EQUITY

The business continues to focus on a systematic approach to build a healthy portfolio mix, with more than 80% of the portfolio as SORP and an average loan ticket size of less than Rs. 50 lakhs. Portfolio LTV ratio at origination is consciously maintained around 50% levels which provides adequate security cover to the business. Amidst challenging macro-economic situation, AUM for Home Equity business managed to grow by 11% to Rs. 12,960 crores in FY 20 compared to Rs. 11,626 crores in FY 19. Disbursements recorded year-on-year (Y-o-Y) growth of 10% for YTD Q3 FY 20. However, with the onset of COVID-19 pandemic and lockdown during Q4 FY 20, the business faced 5% decline in disbursements to reach Rs. 3,662 crores for full year FY 20 compared to Rs. 3,837 crores in FY 19.

Focus has been on digitizing the loan journey in order to improve overall customer experience and to cut down loan processing turnaround time. In line with the objective, the business has reimagined its entire loan processing journey, starting from customer onboarding, KYC verification, credit analysis till disbursement. This reimagination has resulted in the development and implementation of a new loan origination system which is expected to help digitize the loan journey and support the business to make better and faster underwriting decisions. The business has developed an early warning system to predict defaults, which would strengthen collection efforts and make data driven decisions, along with a fully functional call center dedicated to collections. Online payment modes for collections have been enhanced to provide customers support with multiple payment options.

With an aim to improve process efficiency, the business has initiated a productivity drive during the year for multiple workstreams across frontline sales and credit functions. The business is also in the process of strengthening training capabilities to upskill sales teams, and in parallel have structured performance improvement programs to improve the productivity of field teams. The business has also strengthened its alternate channels platform to expand the sourcing spectrum. A dedicated call center has been set up to increase engagement with the alternate channel partners and their sourced leads.

In order to improve the accessibility to customers, the business has expanded its branch network pan India, with focus on Tier II, III and IV cities. Majority of these branches are co-located/ shared with other business verticals, which will help in optimising for the branch operating costs.

HOME LOANS

As of March 31,2020, the Home Loans (HL) business had 24,000 live accounts (68% growth Y-o-Y) with an AUM of Rs. 3,125 crores (63% growth Y-o-Y). 90% of this portfolio is Tier II, III, IV cities and towns. The disbursements grew 30% Y-o-Y in FY 20 from Rs. 1,157 crores in FY 19 to Rs. 1,505 crores in FY 20.

99% of the portfolio comprises HL and is focused to be end-use driven. The target group remains the Middle-Income Group (MIG) customer. The average ticket size is Rs. 15 lakhs with an average LTV of 60% which reflects the quality of houses and marketability. 95% of the portfolio comprises business owners with semi-formal income and significant business vintage buying their first home. 30% of customers are first time borrowers. The HL business has built on Cholas inherent strength in lending to the lower middle income (LMI) segment with a customized eligibility program for business owners and salaried customers.

Chola offers loans for self-construction, purchase of resale flats/ independent houses, purchase of new flats/independent houses, balance transfer from other financiers, top-up loans for existing customers. Self-construction remains a strong focus of the company with significant proportion of the portfolio and fresh disbursements sourced from this segment. The business has no construction finance exposure. The business does not have material under-construction exposure to developer supplied houses.

Chola enjoys a significant presence in the Tier II, III, IV towns and cities. The business has a 5,000+ connector network that facilitates passing on leads and a 500+ direct sales team (feet on street) members to source and offer doorstep delivery to the customer. Given that these customers are mostly first-time buyers the direct sales team guides and facilitates the customer through the entire purchase process.

PMAY - CLSS

Chola is a recognized primary lending institution (PLI) of HUDCO and has actively participated in facilitating customers to avail the CLSS subsidy. The business actively reaches out to customers and explain the benefits of the scheme. The form is auto-generated through the digital on-boarding system to avoid minimal chances of rejection. HUDCOs recognition of the business outstanding contribution in this regard in May, 2018 has encouraged the business to strive for greater heights.

DIGITAL JOURNEY

HL business is built on a solid foundation of a future-proof digital stack. The customer journey from lead aggregation, on-boarding, online KYC validation, bank statement analysis and credit scoring models have been automated. The business continues to integrate latest developments in the fintech space through Application Program Interfaces (APIs) to make the system more robust, customer friendly and efficient. Given the environment post COVID-19, the business is working on delivering better direct to customer experience and self-service platforms that would enable a smooth contact-less, safe experience for customers and employees.

ASSET LIABILITY MANAGEMENT

FY 20 was a year punctuated with volatile money market conditions. Inspite of the tight liquidity position, the company was successful in ensuring optimum Asset Liability Management (ALM) with reasonable cost of funds. The company had maintained a high level of liquid assets ensuring that there are no negative mismatches in any of the time buckets in its structural liquidity statement and ensured the company was insulated from the vagaries of the money market.

The company continued to place reliance on long term bank borrowings, reducing its exposure to market borrowings, as the tight liquidity conditions prevailing in the money market was not conducive for borrowings through non-convertible debentures (NCDs). The company was successful in getting higher volumes of bank term loans at competitive rates and maintained a healthy ALM position throughout this period.

During the year, the company raised a large tranche of ECB loan at competitive rates, on a fully hedged basis. Also the company made a maiden issue of 10 year masala bonds raising unsecured Tier II subordinated bonds in INR terms at competitive rates.

The company also leveraged the demand for priority sector assets and increased its securitization and direct assignment deals considerably, which also contributed to having a completely matched inflow and outflow of funds apart from the significant lower interest rates.

The equity capital infusion, raising of ECB loans and 10 year masala bonds, sale of assets by way of securitization/direct assignment, and large scale medium term bank borrowings contributed to a healthy ALM through the year and for the near future.

RESOURCES & TREASURY

During the year, the company raised funds from multilateral institutions/ banks 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 and thereby maintaining a healthy asset liability position. The borrowing profile as on 31 March, 2020, is given below:

BANK BORROWING

In FY 20, the company mobilised Rs. 15,600 crores of medium-term loans and Rs. 1,450 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 NCDs. During Q1, the company successfully raised US$ 272 million by way of ECB loans, at competitive rates on fully hedged basis. This was syndicated by International Finance Corporation (IFC), which saw participation from various banks apart from IFC. The strength of the companys banking relationship ensured that the best available opportunities to borrow from banks flowed steadily and this helped to maintain liquidity and manage borrowing costs, inspite of recurring negative news around NBFC/HFC sector during FY 20.

MARKET BORROWING

During FY 20, the company raised Rs. 18,510 crores* and repaid Rs. 16,885 crores* of CPs. CP outstanding as at the end of the year was Rs. 1,625 crores. Medium and long-term secured NCDs to the tune of Rs. 895 crores were mobilised at competitive rates. At the end of FY 20, outstanding NCD stood at Rs. 5,359 crores.

New investor profiles were added to ensure no undue concentration in any single/group of investors.

During the year, the company raised its maiden unlisted, unrated, 10-year, Tier II rupee denominated bonds (commonly known as masala bonds) in the offshore market with CDC Group PLC for a total of Rs. 400 crores.

Including the above, the Tier II borrowings during the year constituted Rs. 450 crores and as at the end of FY 20, stood at Rs. 4,263 crores.

(*gross borrowings)

MOVEMENT IN INTEREST COST

The companys funding strategy is to minimize interest cost as a percentage of average borrowings, without compromising on the ALM requirements. Despite incremental long-term bank borrowings being used to substitute long term market borrowings, the borrowing costs were maintained at FY 19 levels. The cost of funds was higher in the initial months of FY 20, but progressive rate resets of bank borrowings helped it to be lowered significantly in Q4. The benefit of this lower rate is expected to accrue in FY 21 to a large extent.

CAPITAL ADEQUACY RATIO (CAR)

As at the end of FY 20, the capital adequacy ratio stood at 20.7% (Tier I: 15.3% and Tier II: 5.4%).

INVESTMENTS

The companys investments of Rs. 72.92 crores include investments in subsidiaries of Rs. 72.90 crores and investments in equity shares of Rs. 0.02 crores (net of provisions).

FINANCIAL REVIEW

The companys aggregate disbursements declined by 4% from Rs. 30,451 crores in FY 19 to Rs. 29,091 crores in FY 20. The AUM for the company grew by 16% (YoY) and the growth of on-balance sheet assets was 11%. The business AUM (including on book and assigned net of provisions) in FY 20 grew by 12% stood at Rs. 60,549 crores as against Rs. 54,279 crores recorded in FY 19.

Asset quality as on March, 2020 stage 3 assets had stood at 3.8% with adequate provision coverage 41.5% ECL provision, as against 2.7% of last FY with provision coverage of 38%. Stage 3 provisions for March, 2020 include additional provisions towards macro factors for Rs. 225 crores.

Profit after tax (PAT) for the year ended March, 2020 were at Rs. 1,052 crores after creation of one time provision of Rs. 504 crores (net of tax - Rs. 335 crores) towards COVID-19 contingencies and the macro factors (one time provision). On a comparable basis, PAT for the year ended March, 2020 were at Rs. 1,387 crores before considering one time provision, as against PAT of Rs. 1,186 crores last year, registering a growth of 17%.

Comparable PBT-ROTA for FY 20 before adjusting one-time COVID and macro provisions was at 3.5% for the year as against 3.7% in FY 19.

HUMAN RESOURCES (HR)

In order to enable Business, achieve the plan for the year, the key focus areas for the HR function during the past year were:

1) Resourcing & Talent planning strategies

2) Retaining critical talent

3) Building capabilities across the organization

4) Enhancing employee experience through collaborative digitized tools

5) Employee Health & Safety

Resourcing & Talent Planning:

FY 20 recorded a 13% growth in Overall headcount of Chola. 1,966 resources were hired in FY 20. 1,418 in management grade and 548 in supervisory grade. Employee referral, referral through market, walk-ins were the top 3 pools of sourcing. Online psychometric assessment to evaluate candidate capabilities were mainstreamed across hiring requirements in the year gone by.

The company has continued with its program for management trainees in FY 20. The trainees underwent a focused induction program, followed by a year-long orientation plan. As a part of the orientation plan, trainees underwent on-the-job training, classroom training and mentoring sessions by leadership.

A structured Performance Improvement Plan (PIP) was institutionalized in the year gone by. Plan was devised at employee level to augment their productivity, coaching clinics focused to address gaps are organized, additional products and channels were allocated and periodic performance evaluation and feedback counselling is provided by the assigned mentor.

Retaining critical talent under "Project - Udaan":

The program offers employees an opportunity to fast track their career. Any front-line field employee who has been in the system for a year and has consistently performed above the average productivity benchmark for a period of 6 months shall qualify under Udaan Program. The initiative is aimed at creating a strong talent pipeline and help retain high performers.

Building capabilities across the organization:

Technology solutions paved the way for major shift in the delivery of the programs and reaching out to wider audience. Alt Learning was piloted and launched in November 2019. Leveraging the availability of digitized content for all product and process training, this platform gained traction quickly.

With primary focus on providing learning solutions to business, some of the new learning initiatives launched for the year gone by included gamification-based learning, behavioral training programs, experiential training interventions, focused workshops and ISO and lead auditor programs.

Enhancing employee experience through collaborative digitized tools:

With the objective of creating an agile organization and to enhance employee experience by providing collaborative tools, a new Human Resource Management System (HRMS) suite Chola Connect was launched in partnership with People Strong. A robust mechanism was put in place to run the modules, test and finalize the workflows.

There was a renewed focus in FY 20 on strengthening the employee feedback mechanism through technological interventions. Employee opinion polls were widely used to gauge the pulse of employees and modify the offering based on the feedback. Open house interaction with leadership team at zone level and with top management team at HO level were conducted. An online platform to reward and recognise employees was launched.

Employee Health & Safety

Employee Health & Safety continues to be prime focus in Chola. Some of the interventions that were rolled out during FY 20 include initiatives to reduce road accidents - recognized accident free regions, categorized regions based on the number of accidents and initiated corrective steps in regions with high accident ratios, created a health & safety module as part of the standard employee induction, launched an exclusive employee wellness program to support health and wellbeing of employees, created safety head hub within the HR organization.

Awards Received:

• Awarded as winner in the Employee Relations & Employee Engagement category (Large Service Industry) at the CII National HR Circle Competition.

• Chola won the second place for Digitization in L&D- HR at the CII National HR Circle Competition 2019.

TECHNOLOGY INITIATIVES

The strategic focus for the digital technology team is to drive the transformation of Chola to an agile and data-driven financial services organization.

Continuing on the effort that started with the revamp of the technology platform for the HL business, the current period extended and completed the digital transformation for the HE business. The objective to minimize/eliminate manual touchpoints was a clear objective along with better user experience, improved accuracy/quality of data being captured, and ultimately greater customer satisfaction. This has been developed in partnership with technology partners and Application Programme Interface (API) service providers who help with person - identity/KYC, contact detail validation etc., financial - financial statement analysis and validation etc., and transactional - bank accounts, wallets etc. aspects of the customer journey digitization.

The customers have options to interact with the company through multiple technology-enabled channels irrespective of their stage of lifecycle with the organization. Bot-enabled platform enables them to share a lead, submit a quick loan application, raise a service request, or even request for a loan moratorium. Along with augmentation of the loan originations and loan management applications, these channels are also integrated with the lead management and customer service platform to ensure appropriate follow-up and resolution of the requests. The company has also extended its lead management solution as a layer of integration with its partners like vehicle manufacturers for seamless lead sharing, in-principle approval, and lead progress update. This initiative makes it a seamless experience for customers on the back of a strong system to system integration. As an on-going effort, the company continually reviews the human activity across operations and deploys automation tools to increase the digitization index. This is reflected in the outcome across a few critical initiatives including, digital integration with external partners, automation of payout calculation & reconciliation and rule-based generation of compliance reports.

A key aspect oftransitioning to a data-driven enterprise is the companys Digital Data Center (DDC) initiative. The DDC has been built to be a scalable platform to handle vast volumes of data from conventional transactional systems as well as non-conventional sources. The DDC also provides stakeholders a clear view of key business metrics across input and output parameters, operational measures of the business processes, and quicker ability to identify trends for corresponding action based on alerts and forecasts. A larger goal of the initiative is to drive democratisation of data within the organization by enabling teams with requisite access to build their own models, analysis, and reports. The new HRMS system along with newly deployed audit and risk management solutions digitally enable audit and risk functions to be integrated with the data repository in the DDC. This helps the DDC to provide a complete view of the enterprise across business products and other support functions.

The company continually reviews and augments its controls related to different aspects of technology risk - data, applications, infrastructure, network, and people. Along with the Learning & Development team, the company also focus on augmenting skills and capability of the technology team in a new world where cyber-security, data & analytics, cloud & cloud-native solutions, and enterprise technology strategy are key levers to drive transformation, in tandem with an agile culture.

RISK MANAGEMENT

In its pursuit of creating value for stakeholders through sustainable business growth Chola has put in place a robust risk management framework to promote a proactive approach in reporting, evaluating and resolving risks associated with the business. Given the nature of the business the company is engaged in, the risk framework recognizes that there is uncertainty in creating and sustaining such value as well as in identifying opportunities. Risk management is therefore made an integral part of the companys operations.

Risk Management Framework:

Companys risk management framework is based on

(a) Clear understanding and identification of various risks

(b) Disciplined risk assessment by evaluating the probability and impact of each risk

(c) Measurement and monitoring of risks by establishing key risk indicators with thresholds for all critical risks and

(d) Adequate review mechanism to monitor and control risks.

Companys risk management division works as a value center by constantly engaging with the business providing reports based on key analysis and insights. The key risks faced by the company are credit risk, liquidity risk, interest rate risk, operational risk, reputational and regulatory risk, which are broadly classified as credit risk, market risk and operational risk. The company has a well-established risk reporting and monitoring framework. The inhouse developed risk monitoring tool, Chola composite risk index, measures the movement of top critical risks. This provides the level and direction of the risks, which are arrived at based on the two level risk thresholds for the identified key risk indicators and are aligned to the overall companys risk appetite framework approved by the board. The companys risk management initiatives and risk MIS are reviewed monthly by the top management. This process enables the company to reassess the top critical risks in a changing environment that need to be focused on.

Risk Governance structure:

The companys overall risk governance is handled by three lines of defense to ensure the effectiveness of an organizations risk management framework including monitoring and assurance functions within the organization.

a) Under the first line of defence, risk champions are identified in each functional and business unit to take ownership, responsibility and accountability for directly assessing, controlling and mitigating risks.

b) The risk management team under the guidance of the risk management committee acts as the second line of defense. The risk management division has established a comprehensive risk management framework across the business and provides appropriate reports on risk exposures and analysis in its pursuit of creating awareness across the company about risk management. The RMC of the board meets minimum of four times a year and reviews the risk management policy, implementation of risk management framework, monitoring of critical risks, and review of various other initiatives with a structured annual plan.

c) Third line of defense constitutes internal auditors, internal external auditors and statutory auditors provide assurance to the audit committee and senior management on the effectiveness of internal governance and risk processes.

CREDIT RISK

Credit risk arises when a borrower is unable to meet his financial obligations to the lender. This could be either because of wrong assessment of the borrowers payment capabilities or due to uncertainties in his future earning potential. The effective management of credit risk requires the establishment of appropriate credit risk policies and processes. The company has comprehensive and well-defined credit policies across various businesses, products and segments, which encompass credit approval process for all businesses along with guidelines for mitigating the risks associated with them. The appraisal process includes detailed risk assessment of the borrowers, physical verifications and field visits. The company has a robust post sanction monitoring process to identify credit portfolio trends and early warning signals. This enables it to implement necessary changes to the credit policy, whenever the need arises. Also, being in asset financing business, most of the companys lending is covered by adequate collaterals from the borrowers. The company has a robust online application underwriting model to assess the credit worthiness of the borrower for underwriting decisions for its vehicle finance, home equity and home loan business. The company also has a well-developed model for the vehicle finance portfolio, to help business teams plan volume with adequate pricing of risk for different segments of the portfolio.

MARKET RISK

Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates and other asset prices. The companys exposure to market risk is a function of asset liability management and interest rate sensitivity assessment. The company is exposed to interest rate risk and liquidity risk, if the same is not managed properly. The company continuously monitors these risks and manages them through appropriate risk limits. The Asset Liability Management Committee (ALCO) reviews market-related trends and risks and adopts various strategies related to assets and liabilities, in line with the companys risk management framework. ALCO activities are in turn monitored and reviewed by a board subcommittee. In addition, the company has put in an ALM support group which meets frequently to review the liquidity position of the company.

OPERATIONAL RISK

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. The operational risks of the company are managed through comprehensive internal control systems and procedures and key back up processes. In order to further strengthen the control framework and effectiveness, the company has established risk control self-assessment at branches to identify process lapses by way of exception reporting. This enables the management to evaluate key areas of operational risks and the process to adequately mitigate them on an ongoing basis. The company also undertakes risk based audits on a regular basis across all business units/functions. While examining the effectiveness of control framework through self-assessment, the risk-based audit would assure effective implementation of self-certification and internal financial controls adherence, thereby, reducing enterprise exposure. The company has put in place a robust Disaster Recovery (DR) plan, which is periodically tested. Business Continuity Plan (BCP) is further put in place to ensure seamless continuity of operations including services to customers, when confronted with adverse events such as natural disasters, technological failures, human errors, terrorism, etc. Periodic testing is carried out to address gaps in the framework, if any. DR and BCP audits are conducted on a periodical basis to provide assurance regarding the effectiveness of the companys readiness. The company is continuously engaged in creating risk awareness and culture across the organisation through training on risk management tools and communication through risk e-newsletters.

INTERNAL CONTROL SYSTEMS

An internal control framework, including internal financial controls, encompassing clear delegation of authority and standard operating procedures, are available across all businesses and functions. Clear segregation of duties exists between various functions. Key operational processes (finance and operations) are centralised at head office for better control. The company has instituted a strong IT security system to ensure information security. All policies are reviewed and approved by the board on a periodic basis.

The company adopts a co-sourced model of internal audit. M/s. Deloitte Haskins & Sells LLP - internal auditors provide an independent perspective on internal control systems. Further, the in-house internal audit department executes a rigorous audit calendar spanning multiple business processes. The audit teams conduct an independent review of the design and operating effectiveness of internal financial controls established by the management and recommends improvements. Critical audit observations are shared with the audit committee on a quarterly basis to effectively monitor controls and implement recommendations.

On compliance, a methodical system of monthly self-assessment exists in all functions. A robust mechanism is in place to control, detect and prevent fraud. The investigations are reviewed by a disciplinary committee comprising senior management members and chaired by the managing director.

The internal financial control systems are constantly monitored both by an in-house team as well as the external internal auditors. The risk and control matrices are reviewed by the internal audit team on a quarterly basis, control measures are tested and results are communicated to the audit committee. These measures have helped in ensuring the adequacy and operating effectiveness of internal financial controls.

The statutory auditors of the company have also certified on the existence and operating effectiveness of the internal financial controls relating to financial reporting as of March, 2020.

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:

Rs. in crores
Particulars March 2020 March 2019 Growth %
Assets
Business Assets 55,403 52,622 5%
Cash & Bank Balances 6,959 3,675 89%
Other Assets 1,631 1,129 44%
TOTAL 63,993 57,426 11%
Liabilities
Net worth 8,172 6,176 32%
Borrowings 50,374 45,074 1 2%
Securitisation 4,631 5,493 (16%)
Other Liabilities 816 683 19%
TOTAL 63,993 57,426 11%

STATEMENT OF PROFIT & LOSS

Rs. in crores
Particulars March 2020 March 2019 Growth %
Disbursements 29,091.17 30,450.95 (4%)
Income 8,652.89 6,992.64 24%
Cost of Funds (4,592.23) (3,588.74) (28%)
Net Margin 4,060.66 3,403.90 19%
Operating Expenses (1,577.60) (1,269.55) (24%)
Provisions and Losses (897.33) (311.20) (188%)
Profit Before Tax (PBT) 1,585.73 1,823.15 (13%)
Current and Deferred Tax (533.36) (637.00) 16%
Profit After Tax (PAT) 1,052.37 1186.15 (11%)

KEY PARTNERSHIPS AND TIE-UPS

Particulars Institution
Life Insurance business HDFC Standard Life Insurance Company Limited
General Insurance business Cholamandalam MS General Insurance Company Limited
Manufacturer Tie ups Tata Motors Limited
Mahindra & Mahindra Limited
Ashok Leyland Limited
SML Isuzu Limited
Force Motors Limited
Daimler India Commercial Vehicles
Eicher Polaris
John Deere India
Mahindra Gujarat Tractors Limited
Sany India
Hyundai Construction Equipment India
Escorts Construction Equipment
Action Construction Equipment
Terex India

KEY RATIOS

Particulars March 2020 March 2019
Return on Equity - PAT 15.2% 20.9%
Return on Total Assets - PAT 1.8% 2.4%
Total Assets under Management ( Rs. in crores) 66,943 57,861
Earnings Per Share - Basic in Rs. 13.37 15.17
Market Price - as of 31 March (in Rs.) 152.95 289.60
Market Capitalisation - as of 31 March ( Rs. in crores) 12,535 22,769
CAR 20.7 1 7.4
Operating Expenses to Assets 2.6 2.6
Profit Before Tax to Income 18.9 26.4

CONSOLIDATED RESULTS

The consolidated profit after tax for the year under review was Rs. 1,053.72 crores in FY 20, as against Rs. 1,196.59 crores in FY 19.

On behalf of the board
Place : Chennai M.M. Murugappan
Date : June 3, 2020 Chairman