equitas small finance bank ltd share price Management discussions

Global Economic Review

The global economy was on a robust recovery path at the start of CY22 until it was disrupted by the outbreak of the Russia-Ukraine conflict in February 2022. More than a year into the conflict, there are no signs of de-escalation, and geopolitics, along with the economy, continued to be volatile. Policymakers in major economies were caught between a rock and a hard place with the nascent economic recovery slowing and inflation staying at historically high levels.

Inflationary pressures had built up in the system, fuelled by the massive fiscal and monetary stimulus injected by advanced economies to contain the pandemic-induced contraction in their GDP. As central Banks prepared to wind down excess liquidity, the Russia-Ukraine conflict, coupled with Chinas stringent Zero-Covid policy, disrupted the post-pandemic normalisation of global supply chains, pushing up critical commodity prices such as crude oil, natural gas, and wheat.

(Source: *World Economic Outlook April 2023)

Further, major central Banks undertook a series of aggressive and synchronised policy rate hikes led by the US Federal Reserve which raised interest rates by 425 basis points cumulatively since March 2022. In December 2022, strong employment data and easing headline inflation pointed to a lower-than-earlier expected impact. Further, a warmer winter in Europe helped avert a near-term energy crisis while the re-opening of the Chinese economy at the end of 2022 boosted sentiments. For CY22, global economic output expanded by 3.4%.

According to the IMF*, global GDP growth is likely to slow to 2.8% in 2023, before rising to 3.0% in 2024. Inflationary pressures are expected to abate but are likely to still stay elevated, above the central Banks comfort range as well as the pre-pandemic levels of around 3.5%. This could prompt the Central Banks in major economies to keep interest rates higher for longer, pushing up borrowing costs further and even, triggering the risk of financial contagion.

Indian Economic Review

The Indian economy showed resilience during FY23 in the face of global headwinds, driven by the sharp rebound in private consumption, higher public capital expenditure, and the structure and stability of the financial system. Private consumption as a percentage of GDP stood at a historically high level, aided adequately by a strong rebound in contact-intensive services. Manufacturing and investment activities continued to gain traction, aided by policy measures such as PM Gati Shakti and Production Linked Incentive (PLI) schemes to boost manufacturing output. Further, a well-capitalised Banking sector was in a favourable position to drive credit growth.

India also faced the challenge of reining in high inflation, which largely remained above the upper band of the Reserve Bank of Indias (RBI) target range, except in November 2022. Indias Central Bank resorted to cumulative policy rate hikes totalling 250 basis points since March 2022 before hitting the pause button from

April 2023 and keeping it unchanged till June 23. The RBI has reiterated its commitment to bring inflation down to 4% from the current level of above 6%. Despite a higher interest rate environment, credit growth touched an 11-year high of 15% y-o-y in FY23¹. Credit offtake increased by 17.8 lakh crore to 136.8 lakh crore in the year ending March 31, 2023, from the year-earlier period, driven by strong demand for personal loans, housing loans and auto loans. Further, higher credit demand from NBFCs and increased working capital requirements boosted credit growth. The high volatility in bond markets and increased cost for external commercial borrowings re-directed credit demand towards Banks.

Further, improved asset quality and strong capital and liquidity buffers of Scheduled Commercial Banks (SCBs) are playing a key role in addressing the buoyant credit demand and a resumption of the investment cycle. According to the RBIs Financial Stability Report, the GNPA of SCBs fell to a seven-year low of 5.0% and NNPAs dropped to a ten-year low of 1.3% in September 2022.

Meanwhile, deposit growth lagged credit growth for the first time since the pandemic outbreak which could be attributed to expectations of higher deposit rates, as the full rate hike transmission is yet to be completed. For FY24, credit growth is expected to be in line with GDP growth.

Although most multilateral agencies like the IMF have lowered their GDP growth expectations for India in FY24 due to multiple headwinds, the projected numbers remain in the range of 5.9-6.5%, indicating that India will remain the fastest-growing major economy.

Further, buoyant tax revenues point to an upbeat investment sentiment. In addition, the progress made on digitalisation and a robust regulatory system will enable the country to maintain its growth momentum.

Small Finance Bank (SFB)

Industry Overview

With years of experience in servicing underserved and unserved populations (including individuals and small businesses) since their NBFC days, SFBs have carved a niche in financing the low-Income self-employed segment. SFBs operate in four major segments with strong growth potential - Small Business Loans (SBL), MSME finance, Vehicle Finance, Microfinance and Affordable Housing Loans.

India offers a vast opportunity landscape for SFBs catering to the informal economy. With 5.6 crore self-employed (non-agri), the addressable market for residential property-backed small business lending is estimated at 22 trillion. Such businesses include provision stores, building materials stores, tea shops, vegetable vendors and others. Small businesses in manufacturing and services include small fabrication units, machine tools manufacturers (using lathe machines), tailors, saloons, gym owners, vehicle service and repair centres, etc.

Further, there are ~7 crore MSMEs in India, contributing ~30% to the countrys GDP and ~48% to total exports. According to data available with the MSME ministry, as on March 7, 2023, there were 1.6 crore MSMEs registered on the Udyam portal. Credit growth to the MSME sector has been at over 30.6%, on average during January- November 2022, supported by the extended Emergency Credit Linked Guarantee Scheme (ECLGS). A recent CIBIL report (ECLGS Insights, August 2022) showed that 83% of the borrowers under ECLGS were micro-enterprises. In FY21, the central government announced the Scheme to insulate MSMEs from pandemic-induced distress.

Performance of Key Segments

MSE Loans

MSME lending makes ~23% ( 27 lakh crore) of the total commercial lending exposure in India as on January 30, 2023.

Type	Amount ( in Lakh Crore)
V Micro (<10 lakh)	1.2
Micro	5.1
Small	10.7
Medium	9.8
Large	87.4
Total	114.2

Source: TransUnion CIBIL Commercial Lending Overview

Commercial Vehicle (CV)

The industry witnessed strong demand recovery and higher freight rates from the second half of FY22 and continued to remain robust into FY23. Overall domestic CV sales volume is estimated to have grown by 31-33% in FY23, in line with the economic recovery, improving transporter profitability, healthy construction activity and materialisation of deferred replacement demand. Sales of Medium and Heavy (HCV), Light Commercial Vehicles (LCV) and buses—the three major CV segments—are expected to record a combined CAGR of 13-15% between FY22 and FY27. LCV sales volume in FY23 is expected to have grown ~26-28%, over a base of ~15% in FY22, with volumes topping pre-pandemic peak (FY19). LCV demand is likely to expand at a 10-12% CAGR between FY22 and FY27, due to higher private consumption, lower penetration, greater availability of redistribution freight and improved Bank finance. MHCV sales volume is likely to rise by a 12-14% CAGR, over a low base, between FY22 and FY27, compared to ~2% CAGR during FY17-FY22, driven by improving industrial activity, steady agricultural output, and the governments focus on infrastructure. This growth would be partially offset by the efficiencies achieved from GST implementation, better road infrastructure and the commissioning of the Dedicated Freight Corridor (DFC).

Microfinance (MF)

The MF industry loan portfolio stands at 3.01 lakh crore, as on September 30, 2022. An additional portfolio of 1.99 lakh crore was under the Self-Help Group (SHG) Bank linkage programme. Banks accounted for the largest share with 37.7%, followed by NBFC-MFIs at 36.7% and SFBs at 16.6%. The balance was held by NBFCs and other MFIs. Tamil Nadu, Bihar, West Bengal, Karnataka and Uttar Pradesh were the top five states in terms of portfolio outstanding. Tamil Nadu was the leading state with a portfolio outstanding of ~40,000 crore. Over FY23, SFBs together grew their MF portfolio by 20%, in line with the industry growth of 22%.

Affordable Housing Finance

The overall on-book housing loan portfolio of NBFCs/ HFCs and Banks reached 26 lakh crore as on March 31, 2022, up 14% y-o-y, as per ICRA estimates, bouncing back from an 11% drop in FY21, due to the favourable market environment post the pandemic-induced disruptions. The trend continued in Q1 and Q2 FY23, with the segment reporting 15% and 19% growth, respectively. The market share of HFCs in total housing credit stood at 32% as on September 30, 2022.

NBFC Financing

Compared to FY22, Bank borrowings by both NBFCs and HFCs increased by 3% points in FY23. Emerging out of the pandemic, collection efficiency crossed 98% close to pre-pandemic levels, according to an ICRA report. The collection efficiency of NBFCs and HFCs stood at 97%- 105% in 9M FY23, as per an analysis done on ICRA-rated retail pools securitised by NBFCs and HFCs. This was supported by improved economic activity, a favourable operating environment and a return to normalcy after two years of interrupted operations. Collection efficiency is expected to remain robust going forward. Many NBFCs have adopted strong credit risk assessment frameworks to ensure the quality of credit creation. Various policies in the aftermath of the pandemic ensured liquidity support, relief to borrowers through moratoriums etc., which eased financial conditions and provided NBFCs adequate time and resources to weather the shock and leverage on their grass-root level reach to channelise credit to productive sectors and revive growth.

About Equitas Small Finance Bank

Equitas Small Finance Bank (Equitas SFB) is one of the largest SFBs in India. As a new-age Bank is one of the fastest growing economies, the Bank offers a bouquet of products and services tailored to meet the needs of its customers - individuals with limited access to formal financing channels, as well as affluent and mass affluent, Small & Medium Enterprises (SMEs) and Corporates.

Aligned with its core values, Equitas SFBs firmly entrenched strategy focuses on providing credit to the Unbanked and Underbanked micro and small entrepreneurs, developing products to address the growing aspirations at the bottom of the pyramid, fuelled by granular deposits and value for money Banking relationships. The Bank also offers non-credit solutions comprising ATM-cum-debit cards, life and nonlife Insurance products and mutual funds from reputed insurers and asset management companies, respectively, becoming a one-stop solution for the diverse needs of its customers.

As a stable, sustainable and scalable Bank, Equitas is well positioned to capitalise on the exponential industry growth potential and also contribute to the national and global development goals.

Opportunities and Threats

Given the segments the Bank operates in, there exists a huge credit gap, which offers immense opportunities for the Bank to capitalise on and record sustained growth over the long term. Further, the increased formalisation

of the Indian economy presents significant potential for the Bank to expand its base. However, a cyclical industry downturn or any natural calamity poses immense risk to the Bank, as the customer segments the Banks serve are often the ones to take the hit first. In addition, intensifying competition could impede the Banks future growth.

Financial Performance

The Banks performance in FY23 was robust. Net interest income increased 25% YoY to 2,544.72 crore from 2,038.53 crore. Other income grew 25% YoY to 669.58 crore from 537.56 crore.

Operating expenses rose to 2,038.30 crore from 1,704.14 crore, as the Bank focussed on increasing its employee base, investing in technology and improving brand visibility on the back of improving business momentum. The cost-to-income ratio came in at 63.41% compared to 66.15% the year earlier. The provision coverage ratio improved to 56.90%. Asset quality improved significantly, with Gross Non-Performing Assets (GNPA) at 2.60%, as against 4.06% in FY22.

Net NPA came in at 1.14%, as against 2.37% in the earlier period.

Profit before tax came in at 768.80 crore. After providing for Income Tax of 195.21 crore, Profit After Tax (PAT) came in at 573.59 crore, up 105% YoY from 280.73 crore in FY22. RoA was at 1.89% and RoE was at 12.55%. As on March 31, 2023, the Banks total balance sheet size stood at 34,958.13 crore, up from 26,947.62 crore, as on March 31, 2022.

Profit & Loss summary ^{( in Crore)}

	FY23	FY22
Net interest income	2,544.72	2,038.53
Other Income	669.58	537.56
Net Income	3,214.30	2,576.09
Operating expenses	2038.30	1704.14
Operating profit	1,176.00	871.95
Provisions	366.87	493.84
Provision for Security Receipts (SR)	40.33	-
Profit Before Tax (PBT)	768.80	378.11
Taxes	195.21	97.38
Profit After Tax (PAT)	573.59	280.73

Key Ratios (%)

	FY23	FY22
Yield on advances	16.99%	17.62%
Cost of funds	6.38%	6.58%
Spread	10.61%	11.04%
Net Interest Margin (NIM)	9.00%	8.54%
GNPA	2.60%	4.06%
Credit cost	1.56%	2.60%
Provision coverage	56.90%	42.73%
NNPA	1.14%	2.37%
ROA	1.89%	1.10%
ROE	12.55%	7.75%
Balance Sheet		( in Crore)
	FY23	FY22
Capital and liabilities
Capital	1,110.56	1,252.03
Reserves and surplus	4,047.39	2,994.14
Deposits	25,380.56	18,950.80
Borrowings	2,973.76	2,616.40
Other liabilities and provisions	1,445.86	1,134.25
Total	34,958.13	26,947.62
Assets
Cash and balances with RBI	1,173.91	2,076.99
Balances with Banks and money at call and short notice	70.35	55.52
Investments	6,664.56	4,449.85
Advances	25,798.56	19,374.21
Fixed assets	379.13	200.44
Other assets	871.62	790.61
Total	34,958.13	26,947.62

Business Review

Gross Advances

Particulars ( in Crore)	FY23	FY22	YoY %
Small Business Loans	10,082.54	7,919.95	27%
Vehicle Finance	6,971.09	5,046.97	38%
Housing Finance	2,873.49	1,601.95	79%
Micro Finance	5,224.69	3,906.81	34%
MSE Finance	1,175.30	1,163.94	1%
NBFC	1,184.37	758.42	56%
Others*	349.02	198.87	75%
Total#	27,860.50	20,596.91	35%

* Note: Others includes loan-against-gold, unsecured business loans, overdrafts against fixed deposits and staff loans

# Gross Advances including IBPC

Liabilities

Particulars ( in Crore)	FY23	FY22	YoY %
Demand Deposits	973.53	772.15	26%
Savings Bank Deposits	9,758.40	9,083.22	7%
Term Deposits	14,648.63	9,095.43	61%
Retail Deposits	8,882.73	7,093.02	25%
Bulk Deposits	5,765.90	2,002.41	188%
Total	25,380.56	18,950.80	34%

Information Technology

The Banking industry is moving towards a service- oriented architecture to empower customers through digital platforms. Open Banking is also gaining popularity. Equitas SFB has embarked on an architectural transformation journey in the areas of IT infrastructure, application and information security by investing in cutting edge tools to leverage social, mobile, analytics and cloud platforms.

Further, the increased digital footprint has resulted in more online, non-physical interactions with customers, which emphasises the need to provide a safe and secure platform to build customer confidence. The Bank has laid a strong foundation for ensuring information and cyber security, which it aspires to take to the next level. The technology team at Equitas SFB is in the process of defining a risk approach that focuses on enabling quick delivery, near-zero vulnerabilities during deployment, advanced system behaviour-based detection, threatless end devices, frameworks for upcoming technologies and regulatory compliance.

Initiatives

Equitas SFB has developed a state-of-the-art internet Banking and Mobile Banking application with enhanced customer experience through personalised journeys, improved UI/UX designs and other feature-rich options. It has also created a mobile app for customers which enables them to directly apply and avail of loans and other facilities offered exclusively for borrowers.

Further, the Bank is making loan origination across verticals paperless and analytical, thereby enabling faster decision-making and quicker disbursements.

The Bank has also upgraded the core Banking software to the latest version to enable scale-up of business and launch differentiated services in the future. It has strengthened the API layer to support microservices and monetise API to improve partner connectivity and create a robust and high-performance Banking platform of the future. It has undertaken private and public cloud initiatives to address future scale-up and has developed a state-of-the-art unified CRM.

Risk Management

Managing risk is fundamental for ensuring the sustained profitability and stability of an organisation. Equitas SFB views risk management as one of its core competencies and endeavours to ensure that risks are identified, assessed, and managed in a timely manner. The Banks risk management framework aligns risk and capital management to business strategies, aims to protect its financial strength and reputation and ensures support to business activities for adding value to customers while creating sustainable shareholder value. The Bank has a risk management structure that augments its risk evaluation and management capabilities while allowing it to stay nimble to adapt to the changing business and regulatory environment in an efficient and effective manner.

The Board of Directors is responsible for the governance of risks and approves the Banks risk management policies. To ensure a focused approach, the Board has delegated the responsibility to a sub-Committee

(Risk Management Committee of the Board), which reviews the implementation of risk management policies and monitors the risk mitigation measures. The Bank has various management-level Committees like Enterprise Risk Management Committee, Asset Liability Management Committee, Credit Risk Management Committee, Operational Risk Management Committee and Information Security & Cyber Risk Committee, among others, which meet periodically to review the risks comprehensively in the respective areas. The Bank also has an independent risk management function headed by the Chief Risk Officer.

Credit Risk

Credit Risk is defined as the probability of a financial loss resulting from a borrowers failure to repay a loan. The Bank has put in place prudent risk management practices, starting from the screening of borrowers to the assessment of limits, disbursements, and monitoring of accounts, to make sure that the potential losses arising out of Credit Risk are minimised.

In FY23, the Bank focussed on further strengthening its risk management framework and implemented several steps to improve the processes. The Bank conducts an in-depth analysis of key portfolio segments to identify pockets of stress within sub-segments like geography, ticket size, and customer segment, among others, on a regular basis and based on the findings, actions were taken to ensure there is no dilution in the overall asset quality of the Bank. In addition, the Bank conducts regular assessments at the loan level, including for large borrowers, to make sure that it takes necessary actions to prevent accounts from becoming NPA.

The Early Warning Signal framework supports the monitoring of Large Borrowers. The Bank has a conservative provision policy for the NPA portfolio.

It has also been proactive in providing additional provisions to exposure to any stressed sector as well as to the portions of the portfolio showing signs of stress, within the standard assets of the Bank. Stress testing forms an integral part of risk monitoring. The Bank continued to carry out periodic stress testing to measure the after-effect of COVID as well as other recent economic developments, to gain insights on the impact of extreme situations on the Banks risk profile, and capital position and has designated a Board level Committee for review and sale of stressed assets.

ALM and Market Risk Management

Market Risk is defined as the possibility of loss to a Bank caused by changes in the market variables such as interest rates, credit spreads, equity prices, etc.

The Market Risk Management unit is responsible for identifying and escalating any risk, limit excesses on a timely basis. The unit is also responsible to establish a comprehensive risk management policy to identify, measure and manage liquidity and interest rate risk. The market risk team monitors the investment portfolio and the daily activities carried out by Treasury along with the set risk tolerance limits as per market risk policy such as VaR, PV01, and Modified Duration. The impact of interest rate risk on trading books is actively measured using trading book risk metrics like PV01, duration etc. The Bank assesses interest rate risk in the balance sheet from both earnings and economic perspectives.

Liquidity risk is assessed from both structural and dynamic perspectives, and the Bank uses various approaches like the stock approach, cash flow approach and stress test approach to assess liquidity risk. The risk team monitors the broad liquidity profile of the Bank through the Liquidity Coverage Ratio, Net Stable Funding Ratio and Structural Liquidity Statement.

Information Security Risk

The Bank has a robust risk management framework in place to identify, assess and manage information security risks and has made significant progress in

enhancing its information security governance through monitoring at the IT & Security Committees. The Bank has an Information Security Group, which addresses information and cyber security-related risks. The function is governed by Board-approved policies on information security and cyber security. Further, the Bank has an assessment programme in place to manage the information security risks for vendors.

Equitas SFB carries out periodical awareness exercises to ensure employees are updated on information security practices. It has invested in strong technical and administrative controls to proactively prevent, detect, contain and respond to any suspicious activity. The Bank has deployed a layered security defence with cutting- edge technology to defend and protect information and assets. These include but are not limited to next-gen firewalls, intrusion prevention systems and anti-DDoS, next-gen anti-malware, proactive defence through web application firewalls, periodic vulnerability and penetration testing, security architecture review and data security assessments.

A security operation centre is in place which monitors alerts and anomalies 24x7 in the Banks perimeter and internal network and systems. The Bank has put in place controls to ensure that security controls are on par with the defined standards. It periodically conducts phishing awareness and simulation exercises. Further, the advisories and alerts from regulators and CERT-In are acted upon to strengthen the Banks cyber and information security. The Bank also regularly participates in cyber drills conducted by the Institute of Development and Research on Banking Technology (IDRBT).

Operational Risk Management

Operational Risk is "the risk of loss resulting from inadequate or failed internal processes, people, systems or from external events. It excludes Strategic and Reputational Risks but includes Legal Risk".

Strategic and Reputational risks are second-order effects of Operational Risk. Legal risk includes, however, is not limited to, exposure to penalties, fines, punitive damages arising out of supervisory action, civil litigation damages, related legal costs and any private settlements.

The Operational Risk Management Committee (ORMC) chaired by the MD & CEO is responsible for supervising the implementation of the Operational Risk Management Framework in the Bank. The Committee guides, and oversees the functioning, implementation, and maintenance of operational risk management activities of the Bank, with a special focus on:

• Process review: All new processes including amendments, BRD, URD and so on are subject to a mandatory review by the Operational Risk

Management Department (ORMD). The Risk and Control Self-Assessment (RCSA) is conducted by the ORMD for all the processes, along with the relevant stakeholders. Process Approval Panel (PAP) takes into consideration the RCSA, with control rating and risk rating, before approving any process. The CRO is also a member of PAP.

• Monitoring Key Risk Indicators (KRI): The Bank has identified KRI across 15 functionals to monitor risk as part of the ORM Framework. The thresholds for each of the KRIs have been finalised in consultation with the stakeholders.

• Operational Risk Loss Database Management:

Operational Risk incidents are reported by employees in incident reporting tool. These incidents are reviewed and are classified as per Basel Risk Types. The gap resulting in OR incidents are subsequently reviewed to identify the cause and take corrective action and preventive action, as applicable. The critical incidents are presented to ORMC for review and guidance to strengthen the controls.

• Outsourcing Risk Assessment: Outsourcing is defined as the Banks use of a third party (either an affiliated entity within the corporate group or an entity that is external to the corporate group) to perform certain activities on a continuing basis that would normally be undertaken by the Bank itself, now or in the future. Key activities undertaken during Outsourcing risk assessment includes a pre- onboarding risk assessment of the partners covering financial strength, and shareholding pattern to identify the ultimate beneficial owner and internal controls available in the firm.

Business Continuity Management: Business Continuity Management is in place to ensure continued service to customers during any unforeseen adverse events. The Bank has established a Business Continuity Management Committee at the management level to monitor its business continuity preparedness on an ongoing basis. The Committee reports to the RMC of the Board. The Banks Business Continuity Plan has well-defined roles and responsibilities for IT activities through disaster recovery programmes and non-IT through simulation across the branches; periodic drills are conducted to test the effectiveness of recovery plans.

Compliance

The Compliance Function, headed by the Chief Compliance Officer, has been set up as an independent function within the Bank to assist the Management in identifying the Compliance risk across the organisation and manage them by framing appropriate policies, procedures, oversight etc., It oversees the implementation of regulatory standards across the Bank with a primary focus on the design and maintenance of compliance framework, training on the regulatory and conduct risks and effective communication of compliance expectations etc.

The Compliance Function reviews policies and products rolled out by the Bank. It has put in place the required framework to monitor transactions and test the implementation of regulations. This Function proactively engages with the regulators to ensure compliance with all applicable regulations.

Its scope of activities can be broadly listed as under

a) Identification and dissemination of new regulations and amendment to existing regulations to the top Management, clearly identifying actionables arising therefrom, processes responsible to implement the same and timelines for implementation.

b) Tracking the implementation of regulatory actionables arising from prevailing regulatory framework, new regulations, regulatory amendments, audit observations, compliance testing observations and RBI inspection observations and reporting the status of the same to Senior Management and the Board at periodic intervals.

c) Formulating risk-oriented compliance assessment plan for the year, with the approval of Audit Committee, implementing the plan, reporting the findings to Audit Committee and tracking them to completion.

d) Providing advisory support to operating departments in interpreting regulatory provisions and directions and enabling compliance with the regulations, in letter and in spirit. The Compliance function will reach out to RBI as well, where necessary, for clarity in interpreting regulations.

e) Evaluating and approving all new products, policies and outsourcing arrangements, and periodic review and amendments to existing policies, products and outsourcing arrangements, for compliance with regulations

f) Assessment and monitoring of compliance risk of the Bank at an overall level as well as at a granular level, in accordance with the Board-approved Compliance Risk Assessment framework and reporting the outcome to the Board.

g) Putting in place a framework for implementation of Anti-Money Laundering (AML) regulations and guidelines, ongoing assessment and monitoring of AML risk arising out of account-level transactions, introduction of new products and channels, expansion to new geographies, customer categories etc and periodic reporting of the outcome to

the Board.

h) Performing thematic assessment of the Banks policies, processes and systems with specific attention to certain critical areas, recommending and implementing process and system enhancements to minimise the probability of noncompliance.

Internal Audit

The Banks Internal Audit function provides independent assurance to the Board of Directors on an ongoing basis on the quality and effectiveness of its internal controls, risk management, governance, systems and processes. The internal audit function in the Bank has sufficient authority, stature, independence and resources within the Bank, thereby enabling Internal Auditors to carry out their assignments with objectivity.

Internal Audit department has the responsibility to develop an annual Audit Plan using appropriate risk- based methodology, including risks or control concerns identified by Management and the Audit Committee, and submit that plan to the Audit Committee for review and approval. Implement the annual Audit Plan, as approved, including, and as appropriate, any special mandates or projects requested by Management and the Audit Committee.

Internal Audit Department undertakes Risk Based Internal Audit (RBIA), covering all the Banking outlets (Branches, BCs), Credit Audit, Revenue Audit, Information System (IS) Audit, Thematic Audits and Head Office function audits as per the approved annual audit plan. Concurrent Audit is being carried out for various areas like Treasury, KYC/AML compliance, Payroll, Operations of central processing units, other expenditure etc. based on the mandatory regulatory guidelines on concurrent audit and internal risk assessment.

Information System (IS) Audit is also part of Internal audit function. The scope of IS audit covers all information systems used by the Bank in related activities viz. system planning, organisation, acquisition/ development, implementation, delivery and support to end-users. The scope also covers monitoring of implementation in terms of its process effectiveness, input/output controls and accomplishments of system goals. All IS audits are carried out periodically by a team of CISA qualified auditors and external CERT-in empanelled firms.

The internal audit team also tests the internal financial controls against the criteria established by the Bank, aligned with the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI.

Internal Audit was carried out diligently as per the approved plan and the reports were reviewed at appropriate levels and remedial actions were taken.

The Banks Internal Audit Function works in close co-ordination with second line of defence i.e. Risk Management Department and Compliance Department.

Treasury

Treasury primarily focuses on Balance Sheet Management, liquidity management and maintenance of statutory reserve ratios such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Basel ratios such as Liquidity Coverage Ratio (LCR) and Net Stable Funding

Ratio (NSFR) mandated by RBI. Treasury manages liquidity risk by maintaining sufficient liquidity under the LCR framework set out by ALCO. Investments in SLR securities and non-SLR securities are maintained in compliance with regulatory norms as well as the Banks Treasury and Investment Policy. The Treasury team consists of experienced professionals with proven track record in Balance Sheet Management and Trading. Treasury actively trades in SLR Securities, generating incremental revenue in addition to interest income earned with focus on maximising portfolio yield. The Banks Investment portfolio consists of Treasury Bills, Central Government Securities, State Government Securities, Equity Shares and Mutual Funds Units.

During the year, the Banks Treasury has successfully enabled and participated in Standing Deposit Facility for prudent funds management. Treasury is facilitated with Integrated Treasury Management Systems (ITMS) to capture transactions, settlement of trade and manage Market Risk and ALM Risk for the Bank. Further, Treasury is also equipped with various platforms like Bloomberg, Refinitiv, Cogencis, and other systems to provide real-time financial data and news feed, to achieve a competitive edge in the market. CCIL Platform such as Negotiated Dealing System- Order Matching (NDS-OM), NDS-Call, Triparty Repo dealing and Settlement (TREPS), Clearcorp Repo Order Matching System (CROMS) to undertake transactions in Securities and Money Market.

Treasury also participates in the equity market (both primary and secondary), focusing on additional revenue generation and income diversification. During the year under review, Treasury raised funds using a combination of instruments such as Inter Bank Participatory Certificates (IBPCs) and refinance from financial institutions at optimal cost. Treasury functions as the Banks interface with market counterparts and has successfully leveraged excellent relationships with them to aid fund raising and other activities. Treasury also closely works with the Liabilities team to aid deposit mobilisation while optimising cost of funds and seeking to broad base the Banks liabilities profile.

Human Resources

The Human Resources (HR) function collaborates with diverse businesses and functions of the Bank to foster a culture of high performance. Aligned with a shared belief and the core values integral to Equitas SFBs DNA, the HR function remains committed to creating a Happy Workplace by Engaging, Enabling and Empowering the Banks employees through the best of People Practices and Processes centred on the core tenets of Care and Connect.

During FY23, the HR function embarked on a digital transformation journey. It shifted to a cloud-based HRMS solution - HoRizone - to enable the Banks employees perform their lifecycle management and related transactions with ease and enrich them with a new level of digital experience. It has significantly improved the mobile and web experience for candidates, employees and people managers alike. New-gen features like Chatbot, Jinie and workplace collaborator, Zippie empowers the Banks employees to seek answers for routine queries.

Talent Acquisition

The Bank ended FY23 with an employee strength of 20,563, up 16.8% YoY. With increased focus on hiring women employees, the Bank raised the number of women employees by ~28% YoY; women now comprise 12% of the Banks total workforce.

The digitised hiring and onboarding process enables the Bank to ramp up hiring seamlessly wherever and whenever required. Through structured Induction Programmes and other learning initiatives for new employees, HR continues to reinforce the Banks core values and culture.

Talent Management

In April 2022, the Bank conducted its Annual Performance Review for FY22, which included 13,728 eligible employees. The Review process is based on the Banks core values of Fairness & Transparency and Pride of Performance.

To promote employee wellness, the Bank hosted various initiatives, such as the Employee Assistance Programme, Tai Chi at Work, Comprehensive Health Check-up etc.

To encourage Diversity & Inclusion, various initiatives were launched, such as Creche expense reimbursement and exclusive Professional Development Program for women employees.

Talent Development

The Centre of Excellence (CoE) for Talent Development continued its focus on upskilling the Banks employees capabilities through its developmental interventions. To augment the Banks in-house talent pipeline and equip them with the required competitive skillset, several customised learning solutions were designed and delivered during FY23.

Senior Leadership Development interventions:

Developed in-house Behavioural Competency Framework for Leaders at various levels and integrated them with the Banks Leadership Development Programmes. Partnered with Aon (a global expert in Leadership Assessment & Development) and cocreated a structured developmental intervention (Leadership Development Programme) for the Banks Senior Leadership cohort. The cohort, as a part of its development journey, successfully completed its first assessment phase during FY23.

Programmes focused on emerging technology trends:

The Bank focused on designing specialised programmes that equipped its employees to stay abreast of emerging tech-driven Banking systems and digital technologies. Several organisation-wide digital transformational initiatives were launched, and through sustained development interventions, the Bank seamlessly integrated them into its operational system. For instance, new digital applications like Hetra LoS Application (application for loan sourcing introduced in Vehicles Finance division) and other LoS to highlight a few initiatives.

Programmes catering to evolving business needs:

Development interventions were tailored and delivered to address the specific business requirements (in line with changing business strategy, structure, systems and products). These interventions prepared the Banks employees to stay nimble and vigilant against evolving business scenarios. Senior Leaders across business divisions were engaged in various development interventions addressing this specific need which included a programme on Strategy Formulation and Execution from a premier institute and an exclusive webinar focusing on Open Network for Digital Commerce (ONDC) and Emerging Opportunities for the Bank.

Culture initiatives

Culture awareness workshop:

The HR team continued to provide orientation on the Banks mission, core values and its associated behaviours. For FY23, 579 culture workshops were conducted covering 10,558 employees.

Culture deepening initiatives:

Designed and launched several new initiatives to disseminate and deepen the culture agenda across the Bank. Key programmes include byte-sized user interactive refresher video modules, Sanskriti (the monthly culture newsletter) and NEEV (the culture deepening workshop engaging business leaders). High Five Club (HFC, a culture recognition programme) was launched and rolled out to reward business leaders. Through the HFC programme, 16 leaders from the branch community were recognised under various reward categories.

Diversity & Inclusion:

Creating a more diverse and inclusive work environment is evolving as a key strategic initiative for the Bank.

The Bank believes in embracing talent representing diverse backgrounds, perspectives and experiences, as it fuels the Banks ability to further grow its business and enhance value to its stakeholders.

In this pursuit, the Bank in collaboration with International Finance Corporation (IFC) has started shaping its strategy and approach towards successfully implementing and driving the D&I agenda. A corporate gender dashboard was created by IFC in consultation with the Senior Leadership team. Gender sensitisation workshops were conducted for MANCO members and senior leaders. Subsequently, a selected cohort from the HR team underwent a Train the Trainer (TTT) programme on how to choose appropriate propagating channels and further cascade the learnings at the branch level.

Recognitions

The Banks efforts in building a conducive workplace earned its recognition in the industry. Equitas SFB was recognised among the Best Places to Work in India by AmbitionBox in the Banking industry in the year 2022.

Corporate Social Responsibility

The Mission of Equitas Group is Empowering through Financial Inclusion. In line with this Mission, besides providing quality and affordable financial services to underserved and unserved people, Equitas SFB has developed a wide range of initiatives towards improving the quality of life of its low-income constituents. These initiatives are carried out through a not-for-profit

Trust - Equitas Development Initiatives Trust [EDIT]

- established by the Company. As per the CSR Policy, contributions up to 5% of net profit in each financial year, subject to minimum contribution stipulated under the Companies Act, 2013, are made to EDIT to carry out CSR initiatives.

The various CSR activities undertaken include:

i) running eight schools (seven owned schools and one belonging to the VSKD Trust). Student strength for the 2022-23 academic year stands at 6,719;

ii) skill development of women through training in tailoring and embroidery, doll making, artificial jewellery making, candle making etc.;

iii) pavement dwellers rehabilitation programme (Equitas Birds Nest);

iv) placement coordination for unemployed youth of low-income communities by networking with employers through job fairs; and

v) conducting primary health camps through tie-ups with hospitals.

The Bank through EDIT joined hands with local state government agencies to accelerate the nationwide COVID vaccination drive and ensured vaccine access to the last mile. While the government provided vaccines free of cost and health workers to administer the doses, the Bank set up the vaccination camps equipped with communications materials, water and face masks, and transport for health workers, and leveraged its ecosystem to address hesitancy and created awareness. 54,252 vaccination camps were organised immunising more than 5 million people.

Support to women with disabilities and transgenders

Since 2010 the Bank, through its Micro Finance loan programme, has supported cumulatively 1,62,766 women with disabilities and 34,715 persons with disabilities during the year. Of these, 2,920 visually challenged persons were supported during the year and cumulatively 27,684. Every year as part of observing the International Day for Persons with

Disabilities, Equitas celebrates and honours women achievers for overcoming disability and proving their business acumen.

Encouraged by this inclusive model, Equitas SFB has mainstreamed 363 Transpersons into the women groups. The Bank also has facilitated interest free loans from other NGOs to 27 Transpersons for starting and expanding their businesses.

Nature of Activity	Number of Beneficiaries FY23	Cumulative from 2008
No. of eye-camp participants [A]	1,53,600	27,14,539
No. of spectacles [free of cost]	2,015	1,20,201
People covered in other Medical Camps [B]	2,40,691	40,26,164
People covered in Vaccination Camps [C]	12,90,147	57,52,876
Total [Eye camps + Med. Camps+ Vaccination Camps[A]+[B]+[C]	16,84,438	1,24,93,579
Health Screening at Vehicle Finance Branches	782	47,389
Veterinary camps in Rural areas	4,999	17,027
Participants in skill training programs	41,051	6,25,065
Free cataract surgeries and other surgeries through Health Helpline	1,966	66,941
Placements for unemployed youth	30,028	2,53,957
Swasth Mahila Health Education	3,32,110	6,44,000
Equitas Birds Nest (pavement dwellers rehabilitation program)	1,047	3,276
Temporary markets for women entrepreneurs to sell their products (55 exhibitions in FY23 across 10 states)	784	802

Cautionary Statement

Statements made in this MD&A describing the Banks objectives, projections, estimates, general market trends, expectations, etc., may constitute forward looking statements within the ambit of applicable laws and regulations. Actual results could differ materially from those suggested by the forward looking statements as those statements involve a number of risks, uncertainties and other factors. These risks and uncertainties include, but are not limited to, the Banks ability to successfully implement its strategies, future levels of non-performing advances, growth and expansion, the adequacy of allowance for credit losses, provisioning policies, technological changes, regulatory changes, investment income, cash flow projections, exposure to market risks, uncertainties arising out of the COVID-19 pandemic or other risks.