Moneyboxx Finance Ltd Management Discussions.

MANAGEMENT DISCUSSION

Moneyboxx Finance Limited (‘MFL, ‘Moneyboxx or ‘the Company) is a Non-Deposit-taking Non-Banking Financial Company (NBFC-ND) registered with the Reserve Bank of India (RBI). It is a subsidiary of Moneyboxx Capital Private Limited and is engaged in the business of lending. MFL focuses on lending to Micro businesses in urban and rural India.

MACROECONOMIC OVERMEW

Financial year 2018-19 (FY2019) began with an expectation of higher growth as the economy seemed to have overcome the teething troubles of the nation-wide roll out of the Goods and Services Tax (GST). However, a rise in the current account deficit (CAD), concerns relating to rising non-performing assets (NPAs) and decline in liquidity coupled with hardening interest rates contributed to uncertainties around a higher GDP growth rate.

The second advance estimates of national income for FY2019 released by the Central Statistics Office (CSO) on 28 February 2019 showed that the economy could not continue the expected growth momentum. GDP growth in the third quarter of FY2019 reduced to 6.6% after clocking 8% and 7% growth in the first and second quarter of FY2019 respectively. The CSO estimates GDP growth in FY2019 at 7% compared to 7.2% in FY20I8.

Gross fixed capital formation (GFCF) provided a pleasant surprise, with the share of GFCF to GDP growing to 32.3% in FY20I9 (second advance estimates) versus 31.4% in FY2018 (first revised estimates). However, it is perhaps too early to expect this recent uptick in the share of GFCF to GDP to provide a definite impetus to growth.

Table 1 gives the data on real GDP and gross value added (GVA) growth over the last four financial years.

FY 2016 FY 2017 FY 2018 FY 2019E
Real GDP Growth 8.2% 7.1% 7.2% 7.0%
Real GVA Growth 8.1% 7.1% 6.9% 6.8%

Source: Government of India, CSO. (E) denotes estimate

On the back of a widening trade deficit, the CAD increased to 2.6% ofGDP during April-December 2018 — Up from 1.8% in April-December 2017. There was a net outflow of USD 17.5 billion of foreign currency reserves in April-December 2018 versus a net inflow of USD 30.3 billion over the same period a year earlier.

The good news was inflation. During the second half of FY2019, the consumer price index (CPI) steadfastly remained below the RBIs medium-term target of 4%, reaching a 19-month low of 1.9% in January 2019. It picked up marginally in February to 2.6%, albeit supported by a weak base and uptick in prices of some food categories. The RBI has projected headline inflation to remain soft in the near term: 2.4% in Q4 FY2019. 2.9% to 3% in HI FY2020, and 3.5% to 3.8% in H2 FY2020. It did, however, acknowledge the monsoon risk from El Nino conditions and highlighted uncertainties in oil price movement

Clearly, at this point, the RBI does not sec inflation as a material risk. This has been underscored by the majority of the members of the RBIs Monetary Policy Committee (MPC) — when they recommended two successive cuts of 25 bps each in the policy rates and also maintained a neutral monetary stance.

While gross NPAs of scheduled commercial banks declined from 11.5% in March 2018 to 10.8% in September 2018, thus putting out hope of an orderly resolution, the Supreme Court intervened and created uncertainties. Its recent decision, setting aside the RBIs circular of 12 February 2018 to replace several existing restructuring schemes by a formal process under the Indian Bankruptcy Code, has resulted in considerable ambiguity regarding NPA resolutions. The RBI has issued a statement that it will take necessary steps, including issuing a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets.

Systemic liquidity swung between surplus and deficit during FY2019, with the RBI needing to intervene to smoothen liquidity flows. This liquidity stress was compounded thanks to major debt defaults of a systemically important NBFC. The default resulted in a virtual drying up of the money markets; and access to funds for borrowers such as NBFCs and HFCs were deeply impacted. The consequent increase in interest rates for fresh borrowings in Q3 FY2019 resulted in business disruptions. While H2 FY2019 has been an extremely challenging period for both NBFCs and HFCs, these disruptions have not yet completely settled. Banking credit continued to post double-digit growth, registering 14.1% increase on- ycar as of 15 March 2019. However, this growth was still not broad-based. Industrial credit growth continued to remain anaemic, while the service sector and the retail segment saw fairly strong growth in bank credit. However, the healthy credit growth from banks to non-banks was largely nullified by money markets refraining from lending to NBFCs and HFCs during Q3 FY2019.

We at MFL believe that FY2020 may be a challenging year. Our views are based on four factors:

• Recent increases in international crude prices;

• Some high frequency indicators — such as growth in manufacturing and capital goods, the Index of Industrial Production, auto sales — suggest a significant moderation in activity, amid a slowing global economy;

• The possibility of El Nino and its risk to food prices; and

• The possibility of rise in inflation

Having stated our concerns, it should also be stated that, with our expanding branch network and increasing customer franchise, strong human capital and robust risk metrics, we at MFL are confident of successfully dealing with these challenges in FY2020.

Industry overview

NBFCs continued to grow their share in the financial services industry. Data published by the RBI in its Financial Stability Report dated 31 December 2018 show that NBFCs have outperformed scheduled commercial banks (SCBs) on growth in advances, asset quality and profitability. This growth momentum of NBFCs should result in their share in the financial services sector increasing in the near future. Table 2 gives the data.

Table 2: Comparison of growth in advances, asset quality and profitability of NBFCs and SCBs

31 March 2018

30 September 2018

NBFCs SCBs NBFCs SCBs
Growth in advances 19.2% 10.4% 16.3% 13.1%
Growth in NPA 5.8% 11.6% 6.1% 10.8%
Net NPA 3.8% 6.1% 3.1% 5.3%
ROA 1.7% (0.2%) 1.8% 0.0%
ROE 7.5% (1.9%) 1.4% (0.04%)

Source: Financial Stability Report of RBI dated 26 June 2018 and 31 December 2018.