dhanuka commercial ltd management Management discussions

I. OUR BUSINESS

Moneyboxx Finance Limited (Moneyboxx or the Company) is a BSE-listed, Non-deposit taking, Non-systemically Important Non-Banking Finance Company (NBFC-ND-NSI) registered with the Reserve Bank of India. With the aim of driving financial inclusion and providing tech-enabled, cost-efficient, and transparent financing to underserved micro enterprises, it started lending operations by opening its first branch in Rajasthan in February 2019. It has since then successfully scalped up presence to 30 branches across five states as of March 2022: Rajasthan (10), Haryana (7), Madhya Pradesh (7), Punjab (5), and Uttar Pradesh (1). Further, as on the date of this Report, the Company has increased its branch network to 39 by adding 9 branches.

Transforming lives

Moneyboxx is transforming lives and driving financial inclusion by providing credit for income generation opportunities to borrowers in important and essential segments (livestock, kirana, retail traders, micromanufacturers) in Tier-III and beyond places. It has so far transformed lives of more than 13,000 borrowers with cumulative disbursements of over INR 200 crores up to March 2022, with about 35% of them being women entrepreneurs and 37% new-to-credit borrowers. AUM of the Company stood at INR 119 crores as of March 31, 2022. Further, AUM increased to INR 124 crores as on June 30, 2022.

The Company caters to credit needs of micro entrepreneurs by providing unsecured business loans from INR 50,000 to INR 3 Lakhs for tenure up to 36 months. It has also launched secured business loans from FY23 amounting to INR 2 lakhs to INR 7 lakhs for upto 5 years.

Addressing the missing-middle customers

Moneyboxx is addressing the unmet credit needs of the missing middle borrowers. Microfinance borrowers at the bottom of the pyramid, with average loan ticket size of less than INR 50,000, are adequately served by over 200 lenders (including MFIs and Banks). Secured loan of over INR 10 Lakh is also aggressively pursued by Banks and NBFCs. However, the Missing Middle segment (unsecured/secured business loans of INR 1 to 10 Lacs) is a severely underserved segment, presenting a huge market opportunity. As per IFC (World Bank) report, there was a credit gap of INR 8 trillion in this segment in 2017 which has further increased since then.

II. STATUS OF FINANCIAL INCLUSION IN INDIA

Financial inclusion is low in India and to address the problem of rising inequality and ensure equitable and inclusive growth, the policy makers in India - Government of India and the Reserve Bank of India (RBI) - have taken commendable steps in this direction.

National Strategy for Financial Inclusion, 2019-2024

Seven of the United Nations Sustainable Development Goals (SDG) of 2030 view financial inclusion as a key enabler for achieving sustainable development worldwide. To achieve these SDG objectives in a coordinated and time-bound manner, the RBI initiated the process of formulation of National Strategy for Financial Inclusion (NSFI) for the period 2019-2024 which was released on January 10, 2020. The NSFI lays down several milestones and action plans to make financial services available, accessible, and affordable to all citizens in a safe and transparent manner to support inclusive growth through a multi-stakeholder approach.

Various initiatives have been undertaken over the years in the journey of financial inclusion, such as introduction of Priority Sector Lending (PSL), launch of Lead Bank Scheme, promotion of Self-Help Groups (SHGs), Joint Liability Groups (JLGs), implementation of Business Correspondents (BC) model, among others with successive initiatives building on the success of prior programs. In the recent years, the Jan Dhan, Aadhaar and Mobile (JAM) eco system has brought about a major shift in the universe of financial inclusion.

Success of Pradhan Mantri Jan-Dhan Yojana (PMJDY)

Pradhan Mantri Jan-Dhan Yojana (PMJDY) was launched in August 2014 to ensure access to financial services, namely, banking account, remittance, credit, insurance, pension in an affordable manner. Significant progress has been made under PMJDY in the last seven years up to August 2021:

- 43.04 crore beneficiaries banked since inception, and deposit stood at INR146,231 crore

- 55% Jan-Dhan account holders are women and 67% are in rural and semi-urban areas

- Out of total 43.04 crore PMJDY accounts, 36.86 crore (86%) are operative

Pradhan Mantri MUDRA Yojana (PMMY) - Targeted Scheme for Micro Enterprises

The Government launched Pradhan Mantri MUDRA Yojana (PMMY) on April 8, 2015, a dedicated scheme for providing loans up to INR 10 lakh to the non-corporate, non-farm small/micro enterprises in India. It has three products, namely Shishu (loans up to INR 50,000), Kishore (loans from INR 50,000 to 5 Lakh) and Tarun (loans from INR 5 to 10 Lakh) to align funding needs in line with the stage of growth of the enterprise.

MUDRA is a refinancing institution for loans provided by banks, NBFCs, MFIs, and other lenders under the scheme. During FY22, about 5.38 crore loans worth INR 3.39 trillion with average sanction amount of about INR 63,000 was sanctioned under the scheme.

Access to banking improving, though availability of credit is still a challenge

With targeted initiatives such as PMJDY and MUDRA schemes, access to banking and credit has improved, however, there is still a huge unmet credit gap and availability of credit is uneven, especially in rural parts of India and at the lower income strata.

India is predominantly a rural country. As per the 2011 Census, 68.8% of countrys population and 72.4% of workforce resided in rural areas. Despite the rise of urbanisation, more than half of Indias population is projected to be rural by 2050. Thus, growth and development of rural economy and population are a key to overall growth and inclusive development of the country.

Rural economy constitutes 46 per cent of national income, however, it has less than 8% share in banking credit, highlighting the huge under penetration of credit in rural areas.

III. MARKET OPPORTUNITY

Small-ticket loan under INR 10 Lacs is a severely underserved segment

Microfinance borrowers at the bottom of the pyramid, with average loans of less than INR 50,000, are adequately served by over 200 MFI lenders. However, such a small amount of finance is inadequate for the borrower to acquire even one head of cattle/livestock or other income-generating asset to bring about a significant change in their income profile. Secured loan of over INR 10 Lacs is also aggressively pursued by Banks and NBFCs. However, the Missing Middle segment (INR 1-10 Lacs) borrower is severely underserved by lenders (banks and NBFCs) due to problems in assessment of income (absence of ITR/GST/Banking/ books of accounts), inadequate credit history, imperfect collateral, and minimal digital footprint.

Small loans up to INR 10 Lacs with credit outstanding of INR 1.02 trillion is a severely underserved segment compared to microfinance loans (average ticket less than f 50,000) market at INR 2.49 trillion, thus presenting a huge lending opportunity. Moreover, there is additional demand from borrowers graduating from group loans to individual loans.

Fintech is unable to serve this segment due to lack of adequate data and minimal digital footprint, and addressing this segment requires on ground presence for understanding the borrowers, their cashflows and effective underwriting & collection efficiency.

Given the huge unmet credit demand of micro enterprise estimated at around INR 8 trillion by IFC (World Bank) in 2017, which has further growth since then, and supportive policy framework, micro enterprise lending presents a huge opportunity.

IV. OUR DIFFERENTIATED PHYGITAL MODEL

Proven business model

Whilst the loan segment of INR 1 Lacs to 10 Lacs in Tier-III places and below is difficult to serve fully digitally due to inadequate business documents (absence of ITR/GST/books of account/banking), minimal digital footprint, inadequate credit history, low financial and technological awareness, Moneyboxx has been able to successfully design its systems and processes to map the customer journey end-to-end fully digitally including income and credit assessment based on deep industry understanding, analytics and automation, thus overcoming peculiar issues in lending to this segment.

The Company follows a phygital business model with on-ground presence for better understanding of customers while leveraging technology to the fullest extent in digitizing processes and applying IT in decision making, reporting and analytics.

Our Unique Approach

- Direct-to-customer: Reaching out to customers directly without third-party agents, hence focusing on relationshipbased business and not product-based approach

- Digital approach: Completely digital processes, right from onboarding to credit assessment to approval, disbursement, collection, reporting and analysis

- Strong underwriting capabilities: Robust credit underwriting backed by non-traditional & non-financial alternative data sources and sector specific inputs.

- Unique credit methodology: Customers enterprise is analyzed in-depth, and the borrower accounts are continuously monitored incorporating the changes in the credit evaluation tool accordingly. Unique methodology for a diverse set of micro enterprises focusing on the ones in manufacturing, trading, services & livestock segment

- Leveraging IT in decision-making: Combination of human knowledge & technology to acquire & understand customers in the underserved micro enterprises space

- Analytics: Crunching of data points at the backend for segmental understanding of businesses by applying various analytical techniques

Technology: Fully Digital processes and tech-enabled decision making

Moneyboxx is at the forefront of deploying technology and continues to make significant investments in IT infrastructure to leverage the power of technology in digitizing processes and analytics for better decision making. Technology has been deployed to support the implementation of partnerships for business generation and collections, operational efficiencies, and compliance with regulations.

The company has implemented a SaaS based fully integrated LMS platform which has AI-enabled decisionmaking algorithm and the platform is designed for easy implementation and fast deployment, which will also enable fast scaling up of operations. In addition to robust IT applications for Lending, HR, Accounting and BI & Analytics, the company has deployed SD-WAN technology for branch network providing centralized management of network.

Risk Management & Internal Controls

The Company has put in place an adequate internal control system to safeguard all its assets and ensure operational excellence. The Company also has an internal audit team to conduct an internal audit. The Audit Committee of the Board reviews the reports and wherever necessary, strengthening of internal control systems and corrective actions are initiated.

The Company has a system of regular training for the Branches from the Central Credit team and has a dedicated trainer for systems, operations, and compliance related training.

V. MAJOR REGULATORY DEVELOPMENTS

- RBI Notified Resolution Framework 2.0: In order to address the financial difficulties arising from the second wave of COVID-19 in the first quarter of 2021 -22 on small borrowers, the Reserve Bank had announced the Resolution Framework 2.0 dated May 5, 2021, subsequently revised on June 4, 2021, which permitted lending institutions to restructure personal loans as well as loans to individuals for business purposes, MSMEs, and other small businesses with aggregate exposure up to INR 50 crore, without a downgrade in the asset classification, subject to certain conditions.

- In order to ensure uniformity in the implementation of IRACP norms across all lending institutions, certain aspects of the extant regulatory guidelines were clarified and/or harmonized vide circular dated November 12, 2021, NBFCs were allowed time up to September 30, 2022, to put in place the necessary systems to implement the provision relating to upgrade of NPA accounts. The circular clarified on specification of due date/repayment date, operational aspect of classification of account as Special Mention Account (SMA) and NPA, definition of out of order, aligning 90 days delinquency norm for NPA classification in case of interest payments, upgradation of accounts classified as NPAs and income recognition policy for loans with moratorium on payment of interest.

- The directions on Securitisation of Standard Assets issued on September 24, 2021, focusing on traditional securitisation structures, have rationalised the regulatory framework. The requirements on minimum holding period and minimum retention requirement have been considerably simplified

- Revised Regulatory Framework for NBFCs - A Scale-based Approach was issued for public comments on January 22, 2021.The revised regulatory framework provides for a layered structure for NBFCs based upon their size, activity, and perceived riskiness, and will be applicable from October 1, 2022.

- Simplification of the Periodic Updation of KYC Process have been introduced to provide convenience to the customers to comply with the requirements of periodic update of KYC but will also enable NBFCs to update the KYC records on time

- A new definition was provided for MSMEs. Further, the retail and wholesale trade were included under the definition of MSMEs for the limited purpose of priority sector lending and were allowed to be registered on Udyam Portal.

- Considering the growing size of NBFCs and their substantial interconnectedness with other segments of the financial system, a Prompt corrective action("PCA") framework for NBFCs was introduced to further strengthen the supervisory tools applicable to NBFCs. The PCA framework for NBFCs shall come into effect from October 1,2022, based on the financial position of NBFCs on or after March 31, 2022

- A circular on Guidelines for Appointment of Statutory Auditors (SAs) for NBFCs was issued on April 27, 2021, with a view to improve the quality of financial reporting by NBFCs. These guidelines provide necessary instructions for appointment of Statutory Auditors, the number of auditors, their eligibility criteria, tenure and rotation, etc. while ensuring the independence of auditors. The guidelines are applicable from financial year 2021-22 and onwards. However, NBFCs were given the flexibility to adopt these guidelines from H2:2021 -22 so that there is no disruption.

Indian economy showed resilience in the last two years amidst pandemic related disruptions. Real GDP in 2021-22 surpassed pre-pandemic 2019-20 levels supported by accommodative monetary policy, fiscal support, and policy measures. GDP growth bounced back to 8.7% in FY22 after contracting at 6.6% in FY21, and RBI estimates 7.2% growth in FY23. Outbreak of Russia-Ukraine war, geo-political risks, high inflation and tightening monetary conditions pose shortterm challenges, however, long-term prospects of the Indian economy remain promising given its young demographics, high domestic savings rate supporting investment growth and stable consumption demand.

Bank credit growth recovering & NPA declining

Bank credit growth picked up to double-digit in FY22, tracking nominal GDP growth. After remaining subdued in the beginning of the FY22, a turnaround in credit growth was witnessed across major sectors in Q4FY22. The gross nonperforming assets (GNPA) ratio of all scheduled commercial banks (SCBs) moderated to its lowest level in six years, reaching 5.9% in March 22, aided by due efforts towards recoveries and technical write-offs.

Trends for NBFC

The RBI Financial Stability Report, June 2022, described capital position and asset quality as satisfactory for NBFCs at the aggregate level. The GNPA ratio of the NBFC sector (excluding core investment companies) improved from 6.1% in March 2021 to 5.8% in March 2022. The Report noted that the capital position of NBFCs remained robust with CRAR of 26.9% and their return on assets (RoA) recouped in March 2022 to 2.1%. Regarding industry growth outlook, India Ratings & Research projected an uptick in loan growth for NBFCs to 14% in FY23 following 7-8% loan growth in FY22.

VII. FY22 PERFORMANCE REVIEW

Moneyboxx Finance Limited	FY21	FY22	% YOY
Operations
Branches	22	30	36.4%
Active Customers	6,789	11,468	68.9%
Employees	219	313	42.9%
Business (INR crore)
Disbursements during the year	55.44	112.34	102.6%
Loan Book as of 31st March	61.88	119.05	92.4%
Moneyboxx Finance Limited	FY21	FY22	% YOY
Income & Profitability (INR crore)
Total Income	11.00	23.31	111.9%
Profit (Loss) Before Taxes	-3.89	-6.52
Profit (Loss) After Taxes	-2.97	-3.72
Fund Raise (INR crore)
Equity Tier-I Capital raised during the year	-	14.42
Tier-II Capital raised during the year	-	6.61
Debt raised during the year	41.50	92.31
Debt repaid during the year	-12.01	-45.82
Capital Position (INR crore)
Equity as of 31st March	24.15	34.51
Debt as of 31st March	45.01	90.99
Subordinated Debt as of 31st March	-	6.53

Business expansion: Further penetration in existing states

Moneyboxx started operations in February 2019 and within a span of 3 years, expanded its presence to 30 branches across five states by Mar22. Moneyboxx had 11 branches at the end of FY20 and doubled its branch network to 22 by FY21 by adding 11 new branches across Rajasthan, Haryana, Punjab, and Madhya Pradesh. The Company further added 8 branches in FY22 to strengthen its position in existing states and it entered Uttar Pradesh by opening a branch in Agra. It further targets to add over 15 branches in H1FY23. Moneyboxx has a scalable and tech-driven branch model with proven underwriting. The company managed growth during the last two years while maintain robust asset quality. Underserved market segment offers strong growth opportunities and Moneyboxx is well positioned to grow its AUM and expand presence having proven its operating model.

Strong growth in Disbursements & AUM

Disbursements in Q1 of FY21 was zero due to COVID lockdowns and business started picking up from Q2 onward with reopening of the economy. Disbursements during FY21 was INR 55.44 crore, growing strongly by 63.5% compared to FY20.

Disbursements in Q1 FY22 was very low and affected by a severe second COVID wave, however, business rebounded strongly from Q2 FY22 and branches reported higher productivity. Disbursements in FY22 grew by 102.6% to INR 112.34 crores compared to INR 55.44 crores in FY21. Robust underwriting standards and focus on borrowers in essential sectors (Livestock, Kirana & other essentials) has helped Moneyboxx build a robust loan book with low NPAs and very high collection efficiency even during pandemic.

Supported by strong disbursement growth and improving branch productivity, AUM grew by 92.4% to INR 119.05 crores as on March 31,2022, in comparison to INR 61.88 crores as on March 31,2021.

Expanding Income with Growing Scale & Improving Productivity

Total Income grew strongly by 111.9% to INR 23.31 crores in FY22 compared to INR 11.0 crores in FY21, in line with strong growth in business and AUM, and improving branch and staff productivity with rising scale of operations. The Company reported Net Loss of INR 3.72 crore in FY22 compared to Net Loss of INR 2.97 crore in FY21. The losses in the last two years were due to initial set-up phase and lower branch productivity and business growth due to pandemic. The Company has a scalable and profitable business model with strong unit economics and the management expects improvement in profitability with growing scale of operations and improving branch productivity.

Diversified Operations

Companys AUM is well diversified across geographies with focus on essential sectors, lending stability to portfolio quality. AUM is well-diversified across 5 states as of Mar22 with no single state accounting for more than 32% of its AUM.

Since the outbreak of pandemic, the Company focused on growing AUM with focus on essential sectors, as a result, livestock share of AUM increased from 51.5% as of Mar-20 to 69.0% as of Mar-22. With subsiding effects of pandemic, share of non-livestock segments such as Trading is expected to increase back to pre-pandemic level over time.

Livestock is an essential sector that is less vulnerable to macro risks and our robust underwriting standards and selection criteria for the segment have resulted in stable asset quality with low NPAs. Livestock portfolio of the Company is diversified across regions and most livestock borrowers of the Company have agricultural land and multiple income sources.

Robust asset quality

Moneyboxx has robust asset quality with very low NPAs and write-offs owing to its robust underwriting practices and high collection efficiency. Despite a severe second COVID wave, asset quality remains resilient with Gross NPA of 0.62% and Net NPA of 0.31% as on 31st March 2022. Loan write-offs remained contained at 1.07% of average AUM in FY22 (INR 96.45 Lacs) compared to 0.25% in FY21 (INR 11.24 Lacs) despite extraordinary circumstances created by the severe second wave of Covid.

Credit costs including write-offs and changes in ECL provisions was 1.48% of average AUM in FY22 (INR 133.6 Lakhs) compared to 0.25% in FY21 (INR 11.24 Lacs), again due to disruption caused by the second wave of Covid.

Asset Quality	31-Mar-21	31-Mar-22
Gross NPA	0.21%	0.62%
Net NPA	0.11%	0.31%
ECL Provisions (% of Loan Assets)	0.49%	0.57%
Loan write-offs as % of Avg. Loan Assets	0.25%	1.07%
Credit costs (Loan write-offs & Changes in ECL provisions as % of Avg. Loan Assets)	0.25%	1.48%

Strong Capitalization and Diversification of Funding Sources

Capital Position	31-Mar-21	31-Mar-22
Equity (INR crore)	24.15	34.51
Debt (INR crore)	45.01	90.99
Subordinated Debt (INR crore)	-	6.53
Leverage Ratio (TOL / Owned Funds)	2.10	3.43
Tier-I Capital (% of Loan Assets)	37.66%	25.95%
Tier-II Capital (% of Loan Assets)	0.38%	4.64%
Total Capital (% of Loan Assets)	38.05%	30.59%

Capital adequacy was strong with Capital at 30.59% of loan assets and Leverage ratio (TOL/Owned Funds) was comfortable at 3.43 times as of 31.03.2022. The Company has raised adequate equity capital in the last two years to funds its operations and meet growth plans.

Equity Capital of the Company increased from INR 19.03 crores as on 31.03.2019 to INR 34.51 crore as on 31.03.2022 supported by equity capital infusion of INR 11.65 crore in Feb 2020 and INR 14.42 crore in Dec

2021. During FY22, the Company also raised Tier-II Capital via issue of non-convertible, subordinated debentures of INR 6.61 crore. Further, the Company further raised INR 20.77 crore equity capital in June

2022, taking the total equity fund raise to INR 46.83 crore in the last three rounds of funding.

Drawing comfort from the Companys management team, execution capability and strong underwriting capabilities, it raised cumulative debt of INR 151.31 crores in term loans and PTCs up to March 2022. Company was supported by 18 lenders as of 31.03.2022 including two banks and a global impact fund compared to 14 lenders as of 31.03.2021. Access to low-cost funding improved with addition of banks in FY22.

Liquidity & Asset-liability Management

The Company has a prudent approach towards liquidity management and had comfortable liquidity position. In terms of asset-liability position by time buckets, it had positive cumulative mismatch across time buckets. The company borrows funds on both fixed and floating rate basis and lends on fixed rate basis with periodic review of its lending rate considering trends in the market interest rate.

HUMAN RESOURCE DEVELOPMENT

The Company believes that Human Capital is one of the most important resources and the employees as an important stakeholder key to the success of the organization. Over the past year, focus of the Human Capital (HC) teams has been on hiring the right talent mix in line with Companys business needs. Companys headcount grew from 219 as on Mar21 to 313 as on Mar22. The HR department successfully added Learning & Organization Development and will be adding Workforce Relations to its existing verticals: Talent Acquisition, HC Operations, Rewards & Policies, HC Business Partner, Internal Communications and Talent Management. Workforce Relations charter is to build and drive a culture that upholds the principles and values of the organization and to ensure adherence to MFLs code of conduct