dhfl vysya housing finance ltd Management discussions

1. Indian Economic Overview

The global economy faced numerous difficulties in 2023, including inflation, geopolitical tensions, and the resurgence of COVID-19 in China. According to the International Monetary Fund (IMF), global growth slowed down to 3.4% in 2022 from 6.3% in 2021.

However, in the latter part of 2023, there were positive indications of economic recovery. This was primarily due to stronger-than-expected private consumption, increased investment despite tight labour markets, and higher-than- anticipated fiscal support. Although monetary policy tightening has started to dampen inflation, the full effects are not expected to be realised until 2024. The IMF notes that global headline inflation reached its peak in the third quarter of 2022 and is now stabilizing as fuel and nonfuel commodity prices level off. The IMF projects global growth to be 2.8% in 2023 and 3% in 2024, reflecting the implementation of higher central bank rates to combat inflation.

The Indian economy remained in a resilient position and was globally one of the fastest-growing major economies in FY 2023, driven by strong domestic consumption and relatively less exposure to international trade flows. As per the recent report from the National Statistics Office (NSO), the Indian GDP experienced a growth of 7.2%, surpassing market expectations. This growth was supported by an uptick in the manufacturing and agricultural sectors.

The industrial sector in India has seen a significant uptick in growth during the first half of FY 2023. Gross Value Added (GVA) increased by 3.7%, which is higher than the average growth of 2.8% recorded in the first half of the last decade, as per the Economic Survey 2022-23. This growth has been supported by robust private final consumption expenditure, export stimulus, increased investment demand due to public capex, and strengthened bank and corporate balance sheets, which have provided a demand stimulus to industrial growth. The industrial sector saw robust growth, with the PMI manufacturing remaining in the expansion zone since July 2021 and the Index of Industrial Production growing at a healthy pace.

India remains vulnerable to external shocks, impacting major macroeconomic variables. However, retail inflation slipped to a 16-month low of 5.66% in March 2023, slightly below the Reserve Bank of Indias upper tolerability level of 6%, led by the Indian governments implementation of an inflation-targeting framework. During FY 2023, the Reserve Bank of Indias Monetary Policy Committee hiked repo rates to 6.25% (a total of 250bps in FY 2023) with a view of keeping inflation in check.

(Source: IMF, World Bank, Indian Economic Survey, Union Budget 23-24)

1.1. Outlook

The Asian Development Bank (ADB) forecasts that the growth of Indias GDP will moderate to 6.4% in FY 2023 and rise to 6.7% in FY 2024, driven by private consumption and investment in response to government policies aimed at enhancing the nations transport system, logistics, and business ecosystem.

The inflation trajectory in India is likely to be determined by factors such as volatility in international commodity prices and pass-through of input costs to output prices, extreme weather conditions like heatwaves and the possibility of an El Nino year. Inflation is expected to be moderate in FY 2024 compared to FY 2023 declining to an average of 5.2%. The Union Budget 2023-24 demonstrates the governments continued dedication to boosting economic growth through investments in infrastructure development, agriculture, health, etc. According to IMF, India is expected to be globally the fastest-growing economy in FY 2024. The Economic Survey 2022-23 have projected Indian economic growth at 6.5% in FY 2024 despite high global uncertainties. Moderation in inflationary pressures and increased public capital expenditure are expected to boost domestic economic growth.

(Source: IMF, World Bank, ADB)

2. Industry Overview

2.1. Indian Housing Sector Overview

The Indian housing sector is a crucial aspect of the countrys economy, contributing nearly 11% to the GDP and providing employment opportunities to millions of people. However, in the last decade, the sector has faced various challenges such as a shortage of affordable housing, a lack of adequate funding for developers, and limited access to mortgage finance for consumers.

As of the 2011 census, India has a total of 330 million houses, of which 18% were used for other purposes such as shops, offices, schools, hotels, lodges, hospitals, factories or places of worship, and 7% were vacant. Merely ~240 million houses were used for residential purposes or residence-cum-other use purposes. Additionally, 5% of houses used for residence were in very poor condition, and 44% of residential houses were just liveable. The census also found that India has a total of 449,787 homeless households, comprising a population of 1.8 million, around 0.2% of the total households in the country.

The housing shortage in India has continued to worsen since the estimates made during the Twelfth

Five-Year Plan. According to a report by an RBI- appointed Committee on the Development of the housing finance securitisation market in September 2019, the housing shortage in India is projected to increase to 100 million units by 2022, with 95% of the household shortage being from the Lower Income Group (LIG) and the Economic Weaker Section (EWS), and the remaining 5% coming from the middle- income group or above

The Committee report estimates that the total incremental housing loan demand required to address the entire shortage is in the range of ^50-60 trillion. This is in comparison to the overall disbursed housing loans of around Rs. 9 trillion in 2022 as per a study done by Equifax and Andromeda, indicating the massive potential of the market if concrete steps are taken to address the shortage of housing in the country.

The residential real estate market in India experienced significant impacts from the Covid-19 crisis. With health concerns and stay-at-home orders in place, the number of buyers looking for homes decreased during the initial phase of the pandemic from April to June 2020. However, the industry regained momentum from September 2020, reaching its peak in the quarter ending in March 2021. The second wave of the pandemic again impacted the real estate sector as home buyers postponed purchases due to uncertainty and restricted movement.

Despite this, the governments timely policy interventions stimulated demand and attracted buyers, particularly in the low-income housing segment in FY 2023. As per Indian Brand Equity Foundation, the sector has been showing signs of recovery, with home sales in the top eight cities of the country surging by 68% to reach ~308,940 units in 2022, indicative of a healthy growth trend in the housing sector.

The future looks bright for the housing sector as the Indian real estate sector will reach a market size of $1 trillion by 2030 and will account for 18-20% of Indias GDP by 2030 as per a joint report by NAREDCO and EY. Already the third-largest sector to bring about economic growth, the real estate industry is expected to continue its upward trajectory in 2022. According to International Market Analysis Research and Consulting Group (IMARC Group), the Indian real estate market is expected to exhibit a 9.2% CAGR during 2023-2028, with the same trend to be shown by the housing market as well.

(Source: NITI Aayog, IBEF, IMARC, PBI, RBI)

2.2. Indian Housing finance market overview

According to ICRAs study on Affordable Housing Finance Companies published in April 2023, public sector banks (PSBs) and private Sector banks held the largest market share in housing loans, with a market share of 69%. Housing finance companies (HFCs) had a 29%, followed by a 2% market share by affordable housing finance companies (AHFC). Although AHFCs only constitute around 6% of the overall housing finance industry as of 31^st December 2022, the market remains severely underpenetrated.

Despite a few highly rated entities accessing the capital markets, banks remain the primary source of borrowing in the overall mix. The presence of capital market funding has remained relatively stable. However, the effects of the rise in systemic rates are expected to become evident in the second half of FY 2023 and the first quarter of FY 2024.

The Indian housing market has faced its share of challenges in recent years, including the impact of the Covid-19 pandemic. ICRAs analysis suggests that as of 31^st December 2022, the aggregate loan portfolio of AHFCs amounted to Rs. 83,052 crore, up 25%. This growth was aided by an improved operating environment and strong demand. However, the future growth of the market looks positive led by several factors such as the governments focus on housing and incentives provided by some state governments, an increased supply of affordable homes, rising demand for affordable homes in tier 2/3/4 cities.

(Source: ICRA, Indian Economic Survey 2022-23)

2.3. Key growth drivers

The Indian government has initiated a Housing for All scheme by 2022 to promote affordable and low- cost housing in the country. To achieve this objective, the government has introduced several measures, including the Pradhan Mantri Awas Yojana (PMAY) for rural and urban regions aims to provide affordable housing for lower-income groups and economically weaker sections of society.

The government has also relaxed External Commercial Borrowing (ECB) guidelines to help finance homebuyers. In addition, the government has announced tax incentives to promote growth in the housing sector. The Real Estate Regulation and Development Act (RERA) has been implemented to improve transparency, timely delivery, and organised operations in the sector. The government also announced a last-mile affordable housing funding package to complete ongoing housing projects in affordable and middle-income categories.

Another initiative taken by the government is bringing HFCs under the ambit of the SARFAESI Act, which has led to accelerated recoveries.

Moreover, the NHB refinancing schemes have been beneficial for HFCs in reducing their borrowing costs. To promote the Pradhan Mantri Awas Yojana (PMAY), the RBI has also revised the Priority Sector Lending (PSL) guidelines by increasing the threshold limit for home loans to be classified as PSL. These measures are expected to have a positive impact on the real estate sector in India.

(Source: PMAY, CRISIL)

2.4. Key challenges

If the inflation turns out to be persistent it will have a negative impact on the overall Indian real estate sector. Inflationary pressures may cause a sharp rise in input costs such as construction materials, labour, and financing costs. The increase in input costs will adversely impact the profitability of real estate developers, leading to a slowdown in new project launches. The rise in input costs will also make it difficult for developers to keep prices affordable, further dampening demand. Additionally, persisting inflation may result in a rise in interest rates, making it more expensive for homebuyers to avail of loans, which may further affect demand in the sector.

The persistent global inflation may have an impact on potential private and foreign investment in the Indian real estate sector. The real estate industry, being a capital-intensive sector, is sensitive to interest rates and inflation. As inflationary pressures rise, it leads to higher input costs for developers, which in turn, increases the cost of housing. This could lead to dampened demand for real estate, as investors may opt for alternative options.

3. Company Overview

Aadhar Housing Finance Ltd. (referred to as Aadhar Housing or the Company) provides home loan services to the low-to-middle income group segment in Indias low-income housing finance sector. The Company, the largest housing finance company focused on the low- income housing segment in India in terms of AUM, focuses on providing small-ticket mortgage loans to the retail segment, particularly the salaried, self-employed, and informal business segments, emphasising on the salaried group. The Company offers a variety of mortgage- related loan products, such as loans for purchasing and constructing residential properties, home improvement and extension loans, as well as loans for commercial property construction and acquisition.

Blackstone Companys BCP Topco VII Pte. Ltd. acquired a majority stake in Aadhar Housing Finance Ltd. in June 2019 to become its parent company. As of 31^st March 2023, BCP Topco holds 98.72% stake in the Company. The Company immensely benefits from the Blackstone groups resources, relationships and expertise. The Blackstone Groups steadfast dedication to maintaining the highest standards of professionalism and corporate governance has earned

the Company an reputation with financial institutions, rating agencies, and regulatory bodies. This gave the Company an advantage in securing funds at highly competitive rates, cementing its position as a trusted and reliable financial partner.

The Companys board of directors is comprised of seasoned professionals with vast experience and knowledge, ensuring sound strategic decisions and governance practices. The Company also has a very experienced and dedicated senior management team, playing a crucial role in the organisational growth. Following its acquisition by BCP Topco in June 2019, the Company has further fortified its corporate governance framework by welcoming three independent directors to the board, one of them serving as the Chairman. At the helm is the Chairman, Mr. O.P. Bhatt, an esteemed figure in the financial industry as the former Chairman of the State Bank Group, lending unparalleled guidance and leadership to the Company.

With a mission to drive positive change and improve lives, the Company has woven social objectives into the fabric of its operations, offering a financially inclusive, customercentric lending business that empowers customers to achieve their dreams of owning a home. The Companys business model contributes significantly to the economic upliftment of targeted customers and has partnered with various government schemes such as Pradhan Mantri Awas Yojana (PMAY) to make housing more affordable. The Company is also playing a crucial role in financial inclusion.

In addition to customer-facing social objectives, the Company has integrated social objectives into all aspects of its business, embodying a values-driven approach that fosters inclusivity and equal opportunity. Furthermore, the Companys presence in the outskirts of major urban centres and semi-urban locations across India has the added benefit of generating employment opportunities in these areas.

3.1. Operational performance

Being a low-income housing segment focussed HFC the target audience is primarily first-time home buyers in economically weaker and low-to- middle income customers. The Company caters to the housing needs of both formal and informal customers. Apart from home loans, it also offers loans against property, loans for renovation and property extension and loans for the purchase of commercial property.

• The number of loan accounts increased to 233000+ at FY 2023 end from 204000+ at FY 2022 end.

• AUM grew by 17% to Rs. 17,223 crore as on FY 2023 end from Rs.14,778 crore as on FY 2022 end. In FY 2023 the PMAY subsidy received by the Companys customers was Rs. 742 crore as compared to Rs. 311 crore reported in FY 2022.

• The Company has assigned a portfolio of ^3282 crore as on FY 2023 end, of which Co-lending is Rs. 127 crore. Fresh Direct Assignment and CoLending done during the year is Rs. 1,133 crore and Rs. 128 crores respectively.

• Disbursements grew 48% to Rs. 5,903 crore in FY 2023 from Rs. 3,992 crore in FY 2022.

• GNPA decreased to 1.16% on AUM at FY 2023 end from 1.46% in FY 2022 end.

• In terms of liquidity, the unencumbered liquidity was ^1525 crore at FY 2023 end.

• Capital adequacy was a strong 42.73% which is well above the NHB norms and the gross debt to equity was 3.29.

_{• The Company operates out of 479 branches and offices as of FY 2023 end.

• As of 31^st March 2023, salaried customers accounted for 59% of Gross
AUM and selfemployed customers account for 41% of Gross AUM.
_{• As of 31^st March 2023, home loans and nonhome loans) accounted
for 78% and 22% of Gross AUM, respectively.

• For the disbursements made during FY 2023, approximately 12% of customers are
new-to-credit.

• The average ticket size of AUM was Rs. 9.2 Lakh, with an average loan-to-value
of 57.8%, as of 31^st March 2023.

The Company utilises a diverse range of lead sourcing channels such as Direct Selling
Teams, Direct Selling Associates, Aadhar Mitras, digital channels and call centres with a
continuous focus on ground-level activities such as market combing, loan tents and various
other marketing activities to assist the front- end teams reach out to the desired
segment.

The Company has been actively participating in various affordable housing initiatives
of the government. It participates in the Pradhan Mantri Awas Yojana, pursuant to which it
provides a subsidy to borrowers from economically weaker segments in the payment of
interest.

3.2. Financial performance

• Standalone total income increased by 18% with portfolio yields on AUM at 13.0%
for the year ended 31^st March 2023

• Spread improvement is attributable to a sharp drop in the cost of funds to 7.00%
from 7.23%

• Operating expenses are very stable and the overall cost-to-income ratio moved to
35.6% (on a standalone basis)

• Profit after Tax for FY 2023 at Rs. 545 crore was 22.5% higher than FY 2022 PAT
of Rs. 445 crore. Further, in FY 2023 there was an exceptional item of Rs. 25 crore
(one-time special bonus).

• The Company has delivered a strong ROA of 3.51% in FY 2023 as compared to 3.18%
in FY 2022

• The Company has delivered strong ROE of 15.9% in FY 2023 as compared to 15.2% in
FY 2022

3.3. Company strategy and outlook

The Indian mortgage market is significantly underpenetrated with robust growth
prospects. The Company has a comprehensive pan-India presence. With increased
urbanisation, continuously expanding its physical and digital presence across India, acts
as a key enabler for business growth. The current operating model is scalable and acts as
an enabler in expanding operations with lower incremental costs to drive efficiency and
profitability.

With a strategy to leverage its distribution network and widen sources of funds, the
Company entered into a co-lending agreement with UCO Bank in FY 2022 (came into effect in
FY 2023) and PNB, Yes Bank in FY 2023, under the terms of the revised Co-Lending Model.
These partnerships are witnessing good traction and the Company may enter into more such
arrangements with other private and public sector banks to increase the number of
co-lending partners.

The Company intends to focus on growing the share of the low-income housing segment
mortgage market and the economically weaker and low-to- middle income group segment of the
economy. It believes the objective of financial inclusion for these categories of
customers coupled with a digitally enabled customer-centric approach will allow the
Company to continue to grow its customer base and loan portfolio. In addition, the Company
is looking to explore selective opportunistic acquisitions of low-income housing segment
loan portfolios from banks and financial institutions as means of inorganic growth.

The fully built-out distribution and collection infrastructure are a key strategic
investment made by the Company. The Company expects that strategic investments in
technology, data analytics and digitisation across the business will further reduce
operating expenses and credit costs over time. The Company will continue to invest in
distribution, technology, analytics and work on progressively improving the cost to income
ratio.

The key strategies for growth are:

• Expand Distribution Network to Achieve Deeper Penetration in key states

• Continue to focus on target customers and grow the customer base
_{• Continue to invest in and roll out digital and technology-enabled
solutions across the business to improve customer experience and improve cost efficiency

• Use of data analytics with a view of improving business metrics

• Efficient risk management practices to ensure that various types of business
risks are identified early and are mitigated or controlled

• Optimise borrowing costs and reduce operating expenses further

The Company remains confident to continue to maintain low NPA and credit cost levels,
maintain interest spreads, improve cost efficiencies and hence sustainably deliver
superior return ratios.

3.4. Customer base

Aadhar Housing Finances primary target market is individuals belonging to the
economically weaker and low-to-middle income segments living in urban, semi-urban, and
outskirts of cities and towns who have limited access to formal banking credit. The
Company provides home loans to both salaried and self-employed individuals, including
those in the formal and informal employment sectors who may not have formal income proofs
such as payslips or income tax returns, making it difficult for them to be served by
traditional banks and large financial institutions. Despite the associated risks, Aadhar
Housing Finances expertise, experience, and business model enable it to effectively serve
such customers while growing its business. To obtain deep insights into customers
behavioural traits and other data points, the Company has developed detailed customer
interviews as part of its personal discussion process, which serves as a substitute for
traditional data.

The Company has traditionally focused on loans to salaried customers, as these
customers are typically more resilient to economic cycles. Within the salaried customer
segment, the formal segment (customers who have a documented monthly salary typically
credited directly in their bank accounts) contributed 47.8% to Gross AUM, while the
remaining 10.8% of Gross AUM is derived from the informal segment (customers that receive
a monthly salary that is not supported by documentation and may be paid in cash). In the
self-employed customer segment, 10.5% of customers belonged to the formal segment
(customers that have income tax returns or bank accounts), and 30.9% belonged to the
informal segment (customers that do not have formal income documentation) as on 31^st
March 2023

To improvise its customer service, the Company undertook several measures including, an
online payment facility for EMI payments, welcome calling in regional languages, an SMS
facility in 5 vernacular languages, introduced CRM system, a customer awareness programme,
mandate/NACH activation online, conducted half yearly training for all branch staff/call
centre. The Company redesigned the website with documents made available in 10 regional
languages. The Company also launched a mobile app service and a customer service web
application. In addition, the notice board display at branches was done in English and
regional languages for the benefit of the customers. All the new customers received
welcome calls from the Company and feedback was taken from customers for the services
provided.

The total number of loan accounts as of FY 2023 end was 233000+ as compared to 204000+
and 182000+ at the end of FY 2022 and FY 2021 respectively.

3.5. Loan sourcing

Aadhar Housing generates loans through both inhouse and external sources using a mix of
direct selling teams, external channels, corporate channel partners, and digital
platforms. Its direct-selling teams, which include DSTs, resident executives, and
relationship managers, form the core of its in-house sales approach. The Companys
external channels include direct sales agents (DSA) and in addition, the Company has a
unique referral programme known as Aadhar Mitra that involves individuals from nonallied
industries, acting as lead providers to the DSTs. These Aadhar Mitras are incentivised
with a referral fee for every successful loan disbursal. The Company also has a Mahila
Aadhar Mitra programme, which enrols women as Aadhar Mitras to expand its network and
provide a source of income to women.

To cater to the housing needs of customers in rural areas and expand its business
presence in nonurban locations. Aadhar Housing has implemented a separate strategy
tailored to the funding needs of customers in these locations. It has formulated a
separate product, Aadhar Gram Unnati (AGU), which provides a platform to test market
demand in new geographies that the Company wishes to expand into, particularly the rural
and non-urban locations. Depending on market demand in such locations, the Company may
establish its business presence by setting up branches to leverage the local demand.

Apart from these, Aadhar Housing Finance Ltd also generates business through corporate
channel partners and digital platforms such as digital lead aggregators under the Digital
Aadhar Mitra

programme, website, and social media platforms. In FY 2023, 59% of the disbursement was
done through in-house channels, with Aadhar Mitras contributing 18%.

3.6. Branch network

Aadhar Housing Finance boasts an extensive presence throughout India, with an extensive
network of 479 branches and offices spanning 20 states and union territories. To reduce
the risk of geographic concentration, the Company has spread its branch & offices
network widely, with just 56% of its branches situated in five states and the remainder
spread across 15 states. No single state has more than 15% of the branch network. This
approach enables Aadhar Housing to meet the demand for affordable housing finance
throughout India, strategically expanding to regions with significant housing finance
needs. In FY 2023 alone, Aadhar Housing added 138 new branches (including Sales Offices)
and offices.

The Companys branch network comprises several types of branches, including: pan India
branch network is divided into the following types of branches:

- Main Branch

- Small Branch

- Micro Branch

- Ultra Micro Branch

Depending on the business potential of each location, Aadhar Housing selects the
appropriate type of branch to open. The Company continuously monitors individual branch
performance based on a range of factors, including portfolio size, portfolio performance,
branch operating expenses, and the vintage of the branch. This ensures that Aadhar Housing
maintains a nimble, flexible, and cost-effective operating model for geographical
expansion. Additionally, the Companys gross AUM is spread widely across India, with not
more than 29% coming from top two states and a single state contributing not more than
15%.

3.7. Credit approval and disbursement process

Aadhar Housing Finance utilises a blend of technology and manual verification methods
for credit underwriting and verification. The Companys credit officers are highly trained
and proficient in both approaches, allowing them to underwrite customers from both formal
and informal employment segments. Aadhar Housing employs technology-led solutions, such as
online verification of EPF, TDS, Company/employer profile, and income tax returns, to
process KYC documents and verify income for customers in formal employment. On the other
hand, for informal employment customers, credit managers visit their residential or
business premises to evaluate their income based on pre-defined policies and procedures.

The Company has both, centralised and decentralised processing mechanisms:

• Centralised processing: The Company

operates two centralised credit processing hubs located in Mumbai and Bangalore, where
all loan applications from formally salaried customers are processed. This approach
enables the Company to achieve standardisation, cost optimisation and faster turn-around
times in loan processing. During the year the Company has started Regional Processing hubs
in cities where there are multiple branches with a view of improving loan sanctioning TAT
and employee productivity.
• Decentralised processing: In cases where loan applications are
submitted by customers from informal segments such as self-employed individuals or those
who receive their salary in cash, the Company employs branch-led processing through branch
credit managers. This approach is necessary as it requires onground verification of
business and income assessment to accurately assess the customers creditworthiness.

Upon sourcing a customer and obtaining a loan application along with the relevant
documentation, the branch sales manager hands over the application file to the branch
operations team. The operations team checks the application for various parameters,
including the completeness of the application form, relevant KYC documents, an initial
money deposit cheque and income proof. All the documents are then scanned and shared with
an outsourced centralised data entry team. Thereafter, the centralised data entry team
completes the detailed data capture including customer demographics, income and banking
details into the Synergy system and assigns the application to the credit manager. To
identify any fraudulent activity at an early stage, the risk control unit screens every
application and document. Any suspicious documents are sampled and verified at the source
of the document. The credit manager performs the de-duplication and credit bureau checks.
The credit manager checks the complete credit bureau report where the credit score of the
applicant is reviewed along with a track record of loan repayments.

Upon the receipt of property documents, which are to be used as collateral, the branch
credit manager initiates a legal and technical assessment to verify the authenticity of
the documents, the legal title to the collateral property and its market value.

For customers from the self-employed and informal salaried segments, the credit
managers visit the customers place of business to understand their business, review the
proof of salary, revenue streams and expenses and, based on income validation, determine
their loan eligibility. The credit manager then prepares the disbursement memorandum and
cash flow analysis. For customers from the salaried segment, the credit manager conducts
telephonic discussions to prepare the disbursement memorandum. At this stage, if the
credit manager receives any additional documents, then these are shared with the risk
containment unit to verify the authenticity of such additional documents. The risk
containment unit also conducts in-person meetings with certain customers. The loan
application is then sent to the sanctioning authority for final approval. The Company
seeks to mitigate the risk of default by including specific covenants in the loan
documentation in addition to general terms and conditions, on a case- by-case basis.

The Company has established a credit assessment system consisting of four components:

Underwriting: The Company employs credit managers in both its branches and central
underwriting hubs, who perform thorough verification of customers, assess their business
and financing requirements, and analyse their loan repayment capacity. These credit
managers also evaluate the current and projected cash flow of a customers business.

Legal assessments: The Company performs legal assessments through its in-house team
of lawyers and by partnering with empanelled vendors, such as lawyers or law firms, who
assist in functions like document verification and property title examination. Empanelled
lawyers legal reports are reviewed by the Companys in-house legal team. Additionally,
the Companys regional legal manager is responsible for verifying all collateral.

Technical assessments: The Company carries out technical assessments, primarily
through its inhouse team of engineers and empanelled valuers, for loans related to
construction, home improvement or home extension. This includes site visits, technical
evaluation of properties, and periodic reviews of construction projects. For properties
that exceed a certain threshold, the Company obtains additional valuation from independent
third parties. The branch managers or credit managers also conduct visits to such
properties.

Risk containment unit: The Companys risk control unit performs various measures to
identify and mitigate risks. This unit conducts trigger- based checks, scrutinises
documents and field investigations, and visits certain customers to identify fraud at the
early stages. Additionally, the risk control unit conducts geography-specific risk
assessments and authenticates demand letters, and employment certifications to ensure
compliance with regulatory requirements and mitigate potential risks.

3.8. Loan collection and monitoring

Effective loan collection is enabled through well- articulated processes coupled with a
robust four- tier collections infrastructure consisting of four tiers: tele-calling, field
collection, legal recovery, and settlement to facilitate loan collections. The Company
offers multiple payment options to customers, such as automated clearing house payment
gateways, post-dated cheques, and digital payment modes. To assist customers who have
limited digital access, the Company has collaborated with service providers to provide
assisted digital payment services.

The Company collects pre-authorisations from customers for electronic auto-debits from
their bank accounts and post-dated cheques in advance in case of delays in registering the
auto-debit facility. Its field executives are responsible for collecting instalments from
borrowers and are supported by third-party call centres. Aadhar Housing employs a
structured collection process, which includes reminders to customers of their payment
schedules through text messages, pre-recorded voice calls, and calls from tele-callers.

In case of delayed payments, a member of the Companys collections team may visit the
customer, and legal action is initiated if the customers ability or intent to repay is in
question. The Company reviews all customer accounts at periodic intervals, especially for
customers with larger exposures or who have missed payments.

Aadhar Housings field executives visit borrowers to collect overdue instalments, with
each executive assigned a specific number of borrowers based on the volume of loan
disbursements in the area. If a customer defaults on their loan, the Company may begin the
process of repossessing collateral. The Company works with local authorities to repossess
assets and takes appropriate measures while dealing with customers during the enforcement
of assets. In such cases, the Companys collections department coordinates with its legal
team and external lawyers to initiate and monitor legal proceedings.

The Aadhar collections app also allows for offline features for anytime anywhere login.
It has additional features like providing digital receipts to customers via SMS,
geo-tagging, geo-tracking, route planner and scorecard. The app aided in issuing ~2.5 lakh
receipts Full e-receipting has eliminated manual receipting and associated control
challenges. This app is in use by collection team across the country. There are controls
to help the Operations team to track and ensure deposition of amount collected from
customers for which e receipts have been issued.

3.9. Treasury functions

The treasury department manages the Companys capital requirements. In addition, asset
liability management, liquidity management and control, diversification of fund-raising
sources, interest rate risk management and investment of surplus funds in accordance with
the criteria set forth in the investment policy, are also taken care of by the treasury
department. The Company secures financing from a variety of sources including term loans,
working capital facilities, Non-convertible Debentures (NCDs), refinancing from the
National Housing Bank (NHB), and subordinated debt borrowings from banks, mutual funds,
DFIs and insurance companies. The Company assigns loans through direct assignment to banks
and financial institutions, enabling it to optimise its cost of borrowings, funding,
liquidity requirements, capital management and asset liability management. The Companys
treasury and finance team periodically submit reports to its asset liability management
committee, which in turn submits its findings to the Companys Board.

As of 31^st March 2023, the Companys total borrowings of ^12153 crore
comprised 53.8% loans from banks, 21.5% non-convertible debentures, 24.7% loans from NHB
and 0.03% Others. Aadhar Housing has been increasing the share of NHB borrowings in its
overall borrowing mix intending to maximise NHB borrowings to the extent allowed by NHB
regulations and in compliance with their limits sanctioned as per the credit appraisal
method.

Aadhar Housing has effective asset liability management strategies in place to ensure
that the Company does not have any negative cumulative asset/liability mismatches. The
Company runs a Direct Assignment programme whereby pools of Home Loans and Loan against
Property are sold to PSU and private sector banks, with the Company retain up to 20% of
portfolio and continuing to act as servicing agent on entire portfolio. Direct Assignment
is an important part of the overall borrowing strategy of the Company, which intends to
use the same to deepen its relationship with its banking partners. With the approval and
consent of its secured lenders, Aadhar Housing has appointed a security trustee in respect
of its banking arrangements, which would enable the security trustee to monitor the
Companys assets that are provided as security.

Aadhar Housings cost of borrowing has been steadily declining due to its proactive and
flexible fundraising strategy. The Company intends to continue to diversify its funding
sources, identify new sources and pools of capital, and implement robust asset liability
management policies with the aim of optimising its borrowing costs and helping expand/
increase its Net Interest Margin (NIM). The Company intends to increase the share of NHB
refinancing in its total borrowings and access international sources of funding to reduce
its overall cost of borrowing.

The RBI amended the co-lending framework in November 2020 to improve the flow of credit
to the unserved and underserved sector of the economy and make funds available to the
ultimate beneficiary at an affordable cost. Under the terms of the revised Co-Lending
Model (CLM), banks are now permitted to co-lend with all registered NBFCs (including HFCs)
based on a prior agreement in a manner akin to a bilateral assignment.

In November 2021, the Company initiated a strategy to expand its distribution network
and broaden its sources of funds. As part of this effort, the Company entered into its
first co-lending agreement with UCO Bank, followed by a similar agreement with PNB and Yes
Bank in March 2023. The Company views co-lending as a promising opportunity that
capitalises on the banks low-cost funds and the NBFCs or HFCs efficient customer
acquisition and management, including collections. By partnering with banks, NBFCs or HFCs
can reach a wider customer base with less capital and leverage the larger balance sheet of
their bank partner.

3.10. Risk management framework

Aadhar Housing places great importance on risk management in its business operations.
To this end, the Company has implemented a set of internal policies that are consistently
enforced to ensure smooth functioning. Being a lending institution, the Company is exposed
to various risks, including credit, liquidity, operational, interest rate, cash
management, and collateral risks. The Companys risk management framework is overseen by
the Board and sub-committees, including the Audit Committee, the Asset Liability
Management Committee, and the Risk Management Committee. The full-time Chief Risk Officer
leads the framework. Aadhar Housing follows prudent lending practices and implements
various measures to mitigate risks, such as credit history verification from credit
bureaus, multiple verifications of a customers business and residence, income
verification, and KYC document validation.

The Company has a formal risk management structure that includes an active and
experienced Board of Directors, a senior management team, and a centralised risk
management team led by an independent Chief Risk Officer. The Executive Risk Management
Committee (ERMC), comprising senior management, monitors risk indicators, stress
scenarios, and risk appetite, and takes necessary actions. The Company has established a
Risk Appetite Statement (RAS) that sets the aggregate level and types of risk it is
willing to accept while achieving its business objectives. The RAS provides a benchmark
for business decisions based on balancing risk and return and making the best use of the
Companys capital. The RAS is monitored regularly and presented quarterly to the Risk
Management Committee.

The Company has implemented a three-line of defence model to create a robust control
environment to manage risks.

• The first line of defence owns the risks. It is responsible for identifying,
recording, reporting and managing them, and ensuring that the right controls and
assessments are in place to mitigate them

• Risk and Compliance forms the second line of defence responsible for
monitoring the first line by setting the limits, reviewing and putting constraints on the
first line operations commensurate with the risk appetite
_{• The Companys Internal Audit function forms the third line of defence,
responsible for independent and objective assurance of the adequacy of the design and
operational effectiveness of the risk management framework and controls governance
process.

3.11. Branding and marketing

Aadhar Housing seeks to reach out to its target audience through local outreach
activities and social media efforts, given its demographics and widespread presence. The
Company engages in various activities such as branding of DSA/Aadhar Mitra, local
marketing activities, wall paintings for local branding and advertising, and branding of
Aadhar Mitra boards to increase visibility in the target markets. Additionally, the
Company provides branded merchandise to its partners and sales force to enhance brand
recall with the target audience.

Aadhar Housing utilises its social media handles extensively to connect and interact
with prospective and existing customers, promote its services, and update customers on new
products or service offerings. The Company also relies on its website and call centre to
generate leads and source new business cost-effectively. Furthermore, the Company employs
public relations initiatives to raise awareness among its target audience and
stakeholders, thereby strengthening its goodwill and brand equity in the market.

3.12. Information technology

Aadhar Housing relies heavily on its information technology systems and is committed to
continuously investing in upgrading these systems, including data storage and backup
systems, to enhance operational efficiency, customer service, and decision-making
processes. This is to ensure business continuity and minimise the risk and negative
impacts of system failures. The Company has implemented digital solutions across various
aspects of its business, including credit underwriting, risk management, fraud detection,
and collections, which allow it to increase customer penetration while reducing manual
intervention and improving data integration across all platforms. This digitisation of
work processes improves customer experience through convenient accessibility, better
service and engagement, and faster turnaround times while benefiting the Company through
cost reduction and increased productivity.

The Company proactively automates various processes through Robotic process automation
thereby saving man-days. This included the automation of
_{• user creation, activation, and deactivation in DOB & LOS modules,
_{• disbursal reversal (partial disbursals)

• PDC clearance status updation
_{• branch asset depreciation & amortisation
_{• securitisation documents download automation

• automation of DOB UAT application creation

In addition, the Company successfully implemented features through in-house software
development. The key developments include a physical asset verification module, document
tracking module, part prepayment automation for tenure reduction, insurance portal, E-NACH
functionality, teal integration for digital legal search and BBPS IPPB integration for
collections payments.

At Aadhar, the major branches are equipped with an SD-WAN network for safe and secure
access. The Company undertook automating load balancing of Linux servers which improved
server uptime. All Company websites have secure access through SSL certification updation.

In October 2021, the Company has replaced its enterprise-wide loan management system
with the TCS Lending and Securitisation Platform as a part of its Digital Transformation
Programme. The Company has also implemented analytics platforms to enable data-backed
decision-making and develop a comprehensive information management system. Further, Aadhar
Housing has implemented an online payment gateway on its website, which enables its
customers to make payments via digital modes such as internet banking, UPI, and debit
cards, and has joined hands with banks and online payment aggregators to improve
collection efficiency. The Company has also installed a three-layered multiprotocol label
switching security at its branches, which helps prevent unauthorised access to its
network, manages network broadcasting, and provides security from spoofing attacks. In
addition, Aadhar Housing has enabled work- from-home for employees through secure VPN
access, implemented digital human resources management solutions, and has a dedicated IT
infrastructure with a data centre hosted in Mumbai and a data recovery centre hosted in
Hyderabad. The Companys overall infrastructure is designed and deployed with layered
security architecture, which assures high up-time for better customer service and
acquisition.

In FY 2023 the Company also launched a Sales Mobility app in collaboration with a
software vendor. This mobility app was launched for a test in a couple of regions and the
acceptance has been quite encouraging. The advantage of the app is that the front line
sales employees can directly enter data into the app which has validations built in
including PAN check, Adhaar OTP verification, credit bureau check etc. Post data entry and
validation the application form is digitally generated. The main advantage of the sales
mobility app is that it speeds up the data capture and has an improved First Time Right
(FTR) ratio and thereby helping in improving the overall sanction TAT to the customer. In
FY 2023 the app will be launched across other regions in a phased manner.

The Company undertook digitisation of its compliance and information security
through"

• automated data flow to the regulator National Housing Bank (NHB),

• developing AVACOM compliance software for tracking all compliances across the
Company,

• developing FINTRAK insider trading management application,

• i mplementing EDR Crowdstrike for endpoints security and

• Bitlocker Encryption to avoid data leakage for lost devices.

• The Company has also brought about annual vulnerability assessment and
penetration testing at the data centre and DR sites and SIEM integration for 24x7
monitoring of security incidents.

For better customer engagement, a new Customer app was launched available both in
Android and IOS versions in both English and Hindi languages. The app aids in secure and
easy login through OTP/MPIN. The app provides unique onboarding features for prospective
new customers and customer services for existing customers. The app allows for direct
integration with CRM for raising requests. During the year we have witnessed a drop in
customer walk ins as customers are being encouraged to download the app and raise their
requests through the app. In the next year the Company is committed to expand the number
of users - both existing and new customers.

3.13. Data Analytics

The Company has also established a data science practice led by its Chief Data Officer
(CDO) to use a data-driven approach, artificial intelligence, and machine learning to
enhance its business operations. The centralised data and data science function, coupled
with the CDO role, enables the Company to better manage risk, grow its business, perform
market research, and improve data and analytics integration. The data science team
includes data engineers, visualisation and data discovery experts, and data scientists.

Currently, the data analytics team is focussed on:

• improving its asset quality by enhancing the robustness of its risk analytics
for credit risk underwriting,
_{• collections analysis, and identification of high- risk customer cohorts.
_{• automating its risk-based pricing solutions to improve approval rates and
pricing of credit risk, thereby boosting overall yields and profitability.
_{• integrating its branch opening strategy

with its data science initiatives to

maximise effectiveness.

The Companys strategy is to weave in data analytics within the Companys business
model with a view to reduce risk build up, improve productivity and enhance overall
decision making.

3.14. Human resource development

Human capital is a key pillar for organisational growth. Aadhar Housing recognises the
value of its employees and implements various measures to attract and retain the best
talent while fostering a work environment that enables them to perform at their best. To
ensure employee satisfaction, the Company offers a safe, conducive, and productive
environment. It undertakes several initiatives to not only attract but also retain the
best talent. It provides technical and soft skill training to employees with the aim to
balance the personal and professional growth of every employee. To ensure employee
satisfaction and focus on areas of improvement the Company conducts an Employee Engagement
Survey through an independent consultant.

During the year, the Company launched a new mobile app namely, AHFL Connect. This acts
as an all-in-one app with a single touchpoint for the work line, Aadhar neo platform, CRM
and helpdesk. It has several helpful features like an asset tracking option, allows
sharing of digital business cards via WhatsApp, storage of litigation videos, a job
referral option, instant password reset, download of medical insurance cards, etc. It acts
as an effective communication medium for all employees.

As of 31^st March 2023, the Company had 3621 employees on its payroll. For
the fourth consecutive year, the Company has been awarded a Great Place to Work.

3.15. Corporate Social Responsibility

At Aadhar, engaging in corporate social responsibility means in the ordinary course of
business operations contributing to enhancing society and the environment, preventing any
negative impact on them. Through social interventions, philanthropy, and volunteering
efforts, the Company aims to benefit society while ensuring brand enhancement. The Company
believes that CSR is equally important for the community and the Company. CSR initiatives
are aimed to forge a strong bond between employees and the Company, boost employee morale
and help both employees and the Company feel more connected with the world around them.

The Company ensures that sustainability, accountability and transparency are the three
solid principles that get woven into all initiatives. The attitude has been ingrained in
the culture of the organisation. To ensure a focused approach and stronger impact, the
Company has invested in projects revolving around the thrust areas - Education and
Skilling, Healthcare and Sports.

FY 2023 was exciting with respect to social projects. Aadharites participated
enthusiastically in various volunteering programmes. Each Aadharite extends his/her utmost
support to demonstrate their commitment to being part of positive societal change.

While planned interventions in the field of education and skilling include - Setting up
digital libraries in police stations for children of lower income segments, skilling kids
of destitute homes, supporting higher education of needy children, skilling women &
empowerment of acid attack survivors; interventions in health include - health camps for
the needy across India, supporting aanganwadis for early childcare & education &
distribution of mobility aid to specially challenged. Support is also being extended
towards the training of para-athletes to promote paralympic sports.

Major focus areas of CSR initiatives are

• Inclusive development: To benefit marginalised sections of people through
interventions in skilling/education, health and general wellbeing. All the initiatives are
executed in and around the Companys business priorities.

• Beneficiaries: To reach out to the maximum number of beneficiaries especially in
tier II, III and IV cities pan India.
_{• Stakeholder accountability: To ensure visible accountability by closely
monitoring all sanctioned projects and through a participatory approach to
decision-making.

• Employee participation: To drive the initiatives through maximum employee
participation and create a sense of ownership amongst employees.

• Ethical compliance: To operate within the law in letter and spirit and ensure
all the interventions are aligned with the Companys CSR mission & vision.

Aadhar undertook various initiatives towards promoting preventive healthcare
facilities, providing employment through enhancing vocational skills and preventing hunger
by providing food and various such other activities that are focused primarily on the
improvement of health and education.

The details of the various CSR activities carried out by the Company have been provided
as part of the Directors Report in Page No. 65.

3.16. Internal control

Commensurate with the size and industry of operations, the Company has devised robust
internal control systems emphasising the importance of a strong culture of integrity and
ethics. The internal control framework enables efficient conduct of business, adequate
safeguarding of assets, prevention of frauds/errors and appropriate regulatory compliance.
It helps in regular monitoring of the adequacy, efficacy and usefulness of financial and
operational controls. The Company maintains a comprehensive system of internal controls,
establishing systems and procedures to monitor transactions, maintaining key backup
procedures and undertaking contingency planning. The Company has appointed audit firms to
conduct internal and process audits to assess the adequacy of and compliance with internal
controls, procedures and processes. Reports of the internal auditors as well as the action
taken on the matters reported upon are discussed and reviewed at the Audit Committee
meetings.

3.17. Awards and accolades

• Certified as Great place to Work for 4 consecutive years

• Recognised as Indias Best Workplaces in Health & Wellness by Great Place to
Work Institute

• Awarded with the Pradhan Mantri Awas Yojana - Empowering India Awards 2022 for
contributing towards Housing for All initiative
_{• Awarded with the Annual HR Excellence Award 2022 in the category of
Effective Drivers of Recruitment, Engagement & Retention held by Associate Chambers of
Commerce and Industry of India (ASSOCHAM)

• Won the NBFC100 Leaders of Excellence Award for Best Data Transformation by
Elets Technomedia. This achievement reflects success of the transformation journey to
build strong data centric and data driven organisation
_{• Recognised as one of the Best Brands of 2022 by The Economic Times
_{• Presented with the Silver Award for Excellence within Competition Class
for the development of Annual Report 2021-22
_{• Awarded as the Best Financial Crime Investigation & Reporting Company
at the Fraud Risk Management Summit & Awards 2023

• Conferred with the Best Initiative in Technology Orientation in NBFC/HFC/MFI
segment at the 4^th Edition of ET BFSI Awards

• Recognised as Indias Leading NBFC at the Dun & Bradstreet BFSI Fintech
Summit 2023

• Conferred with the Best Data Analytics Initiative of the Year at the 2^nd
Annual NBFC & FinTech Excellence Awards 2023 by Quantic Business Media Pvt Ltd

• Awarded with the Resilient Organisation of the Year at India Credit Risk
Management Summit & Awards 2023 by Synex Group

• Ex-MD & CEO, Shri. Deo Shankar Tripathi (during his term) was conferred with
theTransformative Trailblazing Leader award at the Business Icons of India Awards 2022

• MD & CEO, Shri. Rishi Anand was recognised as one of the Most Promising
Business Leaders of Asia 2022-23 by the Economic Times

• Chief Data Officer, Mr. Haryyaksha Ghosh was
recognisedasthetop100AIInfluentialLeadersAwardat
theMachinecon22organisedbyAnalyticsIndiaMagazine

4. Cautionary statement

It is worth noting that past performance does not necessarily indicate future results,
and some information in this Management Discussion and Analysis section may contain
forward-looking statements. The Company has based these forward-looking statements on its
present beliefs, expectations, and intentions regarding the facts, actions, and events
that may occur in the future. Forwardlooking statements typically include words such as
believe, plan, anticipate, continue, estimate, expect, may, will, or other
similar words. A forward-looking statement may also include a statement of the assumptions
or basis underlying the forward-looking statement. The Company made these assumptions or
basis in good faith and believes that they are reasonable in all material respects.
However, it cautions that forward-looking statements and assumptions typically differ from
actual results, and the differences can be significant depending on the circumstances.
Investors should also be aware that any forward-looking statement made by the Company in
this MDA or elsewhere only reflects its views as of the date of the statement. As new
risks and uncertainties emerge from time to time, it is impossible to predict these
events outcomes or how they may affect the Company. Therefore, it has no obligation or
intention to update or modify the forward-looking statements in this MDA after the
publication date. Due to these risks and uncertainties, any forward-looking statement made
in this MDA or elsewhere may or may not occur, and investors should understand and read it
along with this supplemental disclosure.

The Company employs various financial and operational performance indicators to analyse
its financial performance and condition from period to period and manage its business.
However, these financial or performance indicators have limitations as analytical tools
and should not be considered as a substitute for analysing its historical financial
performance, as reported and presented in its financial statements included in the DRHP.}}}}}}}}}}}}}}}}

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