Comfort Fincap Ltd Management Discussions

MACROECONOMIC OVERVIEW

The Financial Year 2023-24 presented a blend of both opportunities and challenges. Domestic activity showed resilience primarily due to robust domestic demand. This indicates that within the country, there was significant economic activity driven by consumer spending, investment, or other factors contributing to economic growth.

Geopolitical conflicts, widespread accumulation of debt, extreme weather events, and electoral processes in numerous regions contribute significantly to this uncertainty. These elements create a complex environment where economic conditions can shift unpredictably, impacting global markets and trade dynamics. Amidst these challenges, there are some positive developments. Inflation, which had surged in previous periods, has shown signs of easing and is expected to continue moderating. This moderation in inflation can provide some relief to consumers and businesses, potentially stabilizing economic conditions to a certain extent.

The overall global economic growth rate is projected to be around 3% for 2024. This reflects a cautious optimism amid the aforementioned challenges and indicates a modest pace of expansion across the world economy.

Despite global uncertainties and challenges such as geopolitical tensions and economic slowdowns in other regions, Indias economy has managed to withstand adverse global spill overs. This resilience underscores the effectiveness of domestic policies and economic management.

Overall, while domestic demand provided a strong foundation for economic activity during the financial year, the global geopolitical landscape introduced volatility and challenges that needed to be navigated. These factors have collectively supported the economy in navigating global uncertainties while maintaining a steady growth trajectory.

Chart A: Indias real GDP growth rate

A positive GDP growth rate indicates economic expansion, whereas a negative rate indicates economic contraction or recession.

In the context of India, the GDP growth rate reflects the variations in the production value of goods and services over time. These fluctuations span periods both before and after the COVID-19 pandemic, demonstrating Indias economic resilience and adaptability to global and domestic conditions.

INDIAN ECONOMY: FROM THE POINT OF VIEW OF NBFC

The NBFC sector in India has undergone significant fluctuations to achieve its current status. The sectors scale of operations and its diverse financial intermediation activities attest to its adaptability and agility in evolving business models. This transformation reflects its ability to meet the evolving needs of a growing economy and navigate the changing regulatory landscape.

The year 2023 stood out as a landmark period of regulatory actions, with the RBI introducing measures to curtail the growth of unsecured lending, raising risk weights, and imposing stricter guidelines on lending practices. These changes, notably the increase in risk weights for unsecured loans and heightened supervision, have necessitated a strategic recalibration within the sector. NBFCs have been compelled to reassess their capital allocation strategies, navigate the complexities of capital raising in a cautious investment climate, and adapt to the evolving interest rate scenario amid geopolitical uncertainties.

The Reserve Bank of India is set to implement new IT governance directives from April 1, 2024, covering both banks and Non-Banking Financial Companies (NBFCs). These directives aim to comprehensively enhance IT practices across the financial sector. They mandate that NBFCs, alongside banks, adopt robust IT service management frameworks to bolster operational resilience, maintain data integrity, and strengthen cybersecurity measures. By extending these directives to NBFCs, the RBI seeks to standardize IT governance, risk management, and assurance practices across a broader range of financial entities. This initiative addresses strategic IT alignment, effective risk and resource management, as well as the implementation of robust cryptographic controls and audit trails. Overall, the RBIs actions underscore the importance of safeguarding financial operations against IT and cyber risks in todays increasingly digital financial landscape.

In 2024, the NBFC sector is poised to encounter a mixture of challenges and prospects for expansion. The push toward digital evolution, the exploration of inventive funding avenues, and a strategic concentration on sectors pivotal to economic advancement will shape the sectors path forward.

The sectors resilience and vitality will hinge significantly on robust risk management and governance frameworks, as well as its capacity to adeptly respond to regulatory adjustments. These factors will play pivotal roles in molding a resilient and dynamic NBFC landscape.

FINANCIAL SERVICES INDUSTRY OVERVIEW AND DEVELOPMENTS

Indias diverse financial sector is experiencing rapid growth, characterized by the robust expansion of existing financial service providers and the entry of new entities into the market. The sector encompasses a variety of institutions, including commercial banks, insurance companies, Non-Banking Financial Companies (NBFCs), cooperatives, pension funds, mutual funds, and other smaller financial entities.

The Government has implemented several policies and schemes aimed at fostering the growth of the financial services sector. Additionally, it has been actively driving and supporting the digital transformation in banking and payment systems. These efforts aim to enhance efficiency, streamline processes, and indirectly stimulate credit demand from banks and NBFCs.

NON-BANKING FINANCIAL COMPANIES (NBFCS)

Over the past two decades, NBFCs have evolved into a crucial component of Indias financial landscape, with exposure spanning both banking and capital markets. They have increasingly served as a vital source of credit for low-income households and businesses that lack collateral or a robust credit history required for traditional bank loans. Leveraging extensive branch networks, digitalization, and innovative solutions, NBFCs have expanded their reach among MSMEs and consumers, particularly in financing vehicles, housing, and gold purchases. Embracing technology and digital tools, NBFCs have significantly reduced transaction costs, accelerated loan disbursal processes, and utilized alternative data and methodologies to enhance risk assessment and underwriting practices. Some NBFCs have even surpassed many banks in size and performance, emerging as top performers in the stock market.

From September 2022 to September 2023, the NBFC sector experienced a notable increase in credit growth, with gross advances by NBFCs rising by 20.8%. This marks a substantial acceleration compared to the 10.8% growth observed the previous year. The surge was primarily driven by significant expansions in personal loans, which saw a growth of 32.5%, and lending to the agriculture industry, which grew by 43.7%. Over the past four years, personal loans have shown a compound annual growth rate (CAGR) of 33%, surpassing the overall credit growth CAGR of approximately 15%.

However, recent adjustments in risk weights for specific categories of retail loans are expected to influence the trajectory of credit growth in the NBFC sector. These adjustments will likely impact both the overall sector and specific sectors and sub-sectors within it.

In terms of market share, both the personal and agriculture sectors saw improvements. By the end of September 2023, the personal loan categorys share had increased by 2.3% compared to the previous year. Similarly, the share of loans to the agriculture sector within the overall NBFC portfolio grew to 1.9% in September 2023, up from 1.7% a year earlier.

KEY REASONS FOR GROWTH

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

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

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

Technology advancements and growing fintech ecosystem for improved efficiency and enhanced experience: The use of technology is helping NBFCs customise credit assessment.

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

Government and central bank Initiatives: The Government of India also unveiled several initiatives aimed at addressing some of the structural issues stressing the small business lending segment. These include granting licenses to account aggregators, initiating the Pradhan Mantri Mudra Yojana (PMMY), launching UPI platforms, unveiling platforms such as TReDS, GeM and Open Network for Digital Commerce (ONDC) and implementing GST.

KEY THEMES WHICH ARE DRIVING TECHNOLOGY IN THE NBFC SECTOR

Emergence of super apps and partnerships: Super apps are increasingly becoming onestop shops to address customer needs from an end-to-end perspective. While super apps are prevalent in the banking industry or e-commerce perspective, NBFCs will have a crucial role in terms of embedding their products and servicing customers through app-enabled journeys. The key to success lies in delivering seamless experiences, instant decision-making and superior customer satisfaction.

Emergence of frictionless enabling platforms/protocols: RBIs frictionless platform for credit enablement and OCEN are game changers in the financial services industry. These platforms will ease integration efforts and provide rich data sources that can be leveraged across the loan lifecycle.

Adoption of digital-first and paperless journeys: NBFCs are pivoting to digital-first and mobile-first journeys to ensure operational ease, better controls and superior customer experience.

Increased adoption of analytics: Analytics has become crucial in the current business context with multiple use cases across the following:

• Sourcing — Pre-approved databases to ensure faster sanctions and attractive offers for customers

• Customer lifetime value — Analytics to maximise customer lifetime value and ensure product suite penetration is optimised as well as partnerships are created to provide comprehensive offerings to customers as well as enable cross-/ up-sell with a greater degree of success

• Credit decisioning — Credit decisioning has been revolutionised with financial and nonfinancial data sources, which has increased the accuracy of scorecards ^•

• Portfolio monitoring — Accurate portfolio monitoring and evolved EWS leading to better Collections