1. Macro-Economic Overview
Financial year 2023 is the first fully normalised year post COVID - FY2021 and FY2022
were beset by the first and second waves of COVID and much was done during these 2 years
across the world by the governments and the central banks to help revive the economy from
the onslaught of COVID.
FY2023 faced a very different problem in the form of increased inflation and interest
rates. The Reserve Bank of India, in its Financial Stability Report issued in December
2022 observed, “Since the June 2022 issue of the Financial Stability Report (FSR),
the global economic outlook has deteriorated further. Risks to financial stability have
become accentuated as central banks have aggressively front-loaded monetary policy
tightening synchronously across countries and have given hawkish forward guidance.
International organisations, including the International Monetary Fund (IMF), the World
Bank (WB) and the Organisation for Economic Co-operation and Development (OECD) have
downgraded their global growth projections relative to their previous revisions.
If COVID and stunted growth were the problems plaguing the world in FY2021 and FY2022,
it was inflation in FY2023. Countries across the world started increasing their rates from
March 2022. The Federal Reserve raised its interest rate from 0.25% around the mid of
March 2022, all the way up to 5.00% in March 2023, a whopping 475 bps increase in one
financial year, and probably the biggest increase during 1 financial year ever RBI
increased the repo rate from 4.00% at the beginning of the financial year to 6.50% by the
end of the financial year.
In the recent Monetary Policy, the Reserve Bank has stated that the CPI inflation
projected to average 5.2 per cent in 2023-24 - 5.1 per cent in Q1:2023-24, 5.4 per cent in
Q2 and Q3, and 5.2 per cent in Q4, with risks evenly balanced. However, the Central bank
has also cautioned that “The baseline forecasts are subject to several upside and
downside risks, given the volatile global environment and the cross-country experience
with large deviations of inflation from forecasts. Upside risks emanate from possible
escalation of geopolitical conflicts, higher global crude and commodity prices,
accentuation of global financial market volatility amidst high inflation and financial
stability concerns, renewed supply chain disruptions, extreme weather conditions and
deficient monsoon, and a larger pass-through of input cost pressures to output prices as
demand strengthens. Downside risks could stem from an early resolution of geopolitical
tensions, correction in global crude and commodity prices due to slowing global demand,
and further improvement in supply conditions.
1.1. Outlook for Growth
From a global perspective, there remains a concern on the growth projection for FY2024,
given the pronounced slowdown being witnessed in advanced economies. The World Economic
Outlook report put up by the International Monetary Fund presents a not so rosy picture
for the global growth. It states “The baseline forecast is for growth to fall from
3.4 percent in 2022 to 2.8 percent in 2023, before settling at 3.0 percent in 2024.
Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7
percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further
financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced
economy growth falling below 1 percent. Global headline inflation in the baseline is set
to fall from 8.7percent in 2022 to 7.0 percent in 2023 on the back of lower commodity
prices but underlying (core) inflation is likely to decline more slowly.
Inflations return to target is unlikely before 2025 in most cases.
However, India seems to be in a much better position showing much more resilience as
compared to the advanced economies. RBI commentary also provides a reasonably positive
picture on projected domestic growth. Their commentary states, “Domestic economic
activity remains resilient, on the back of consecutive years of strong agricultural
production, a post-pandemic rebound in contact-intensive services, buoyant growth in bank
credit, a healthy banking and financial system and the governments capex push. Slowing
global growth, geopolitical tensions, upsurge in financial market volatility and
tightening global financial conditions, however, weigh heavily on the outlook.... Taking
into account the baseline assumptions, survey indicators and model forecasts, real GDP
growth is expected at 6.5 per cent in 2023-24 - 7.8 per cent in Q1; 6.2 per cent in Q2;
6.1 per cent in Q3; and 5.9 per cent in Q4 - with risks evenly balanced around this
baseline path. For 202425, assuming a normal monsoon and no major exogenous or policy
shocks, the structural model estimates indicate real GDP growth at 6.5 per cent, with
quarterly growth rates in the range of 5.5-7.0 per cent."
So both the global and domestic economies are at a very uncertain, yet interesting
phase and the next few quarters will actually determine the direction that these economies
would take, which eventually will have an impact on the various sectors at large.
2. Industry Overview & Operating Environment
After 2 years of muted growth, bank credit saw double digit growth in FY2023. According
to RBI Monetary Policy report, growth in non-food bank credit accelerated to 15.4 per cent
(y-o-y) as at end-March 2023 from 9.7 per cent a year ago. The growth in bank credit shows
a rebound in economic activity during the year under review. As of February 2023, bank
credit to NBFCs rose y-o-y to 32.4%, which signifies that NBFCs have been one of the major
recipients of bank credit during the financial year. The signifies the strong performance
of NBFCs during the year and their ability to grow in a strong and safe manner in the
years to come.
During the year under review, the portfolio performance of the NBFCs has also improved
considerably across asset classes. An ICRA press release dated February 9, 2023, notes
that, “The collection efficiency for non-banking financial companies (NBFC)s and
housing finance companies (HFC)s has been healthy in the range of 97% to 105% in 9M
FY2023, 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
non-banks (i.e NBFCs and HFCs) returning to normalcy after two years of interrupted
operations during the pandemic. The collection efficiency is expected to remain robust on
the back of strong outlook for majority of the sectors though impact of the uncertain
global environment is difficult to ascertain at present." ICRA further expects
the collections across retail-pools to remain steady over the near to medium term should
there be no material macro or business-related disruptions.
From a regulatory perspective, a number of new norms stipulated by the Reserve Bank of
India became effective for implementation during the financial year under review.
a. The Scale based Regulations, which essentially classifies NBFCs into multiple layers
along with focused regulation based on the layer under which NBFCs fall, became effective
from October 1, 2022. With these regulations coming into effect, lot of regulatory
arbitrage that existed for NBFCs were removed for the NBFCs falling in the upper and
middle layers.
b. Another important circular that became effective from October 1, 2022 pertained to
the daily SMA and NPA recognition norms and the resultant upgradation norms under the
Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining
to Advances (IRACP). This fundamentally impacted the way NBFCs were focused on collections
- while in the past, it was agreeable if the borrowers made their EMI payments before the
end of the month, NBFCs started to educate the borrowers and fine-tune their collections
system to make the borrowers pay up their EMIs on or before the due date, failing which
they would be categorised as NPAs and can be upgraded only upon payment of all the arrear
dues.
These regulatory pronouncements changed the way of functioning at NBFCs in a
significant way and remove the regulatory arbitrage that existed between banks and NBFCs.
3. Five Star - An Overview
Five Star is registered with RBI as a non-deposit taking systemically important NBFC.
The Company is in the business of providing Secured Financial Solutions to Micro
Entrepreneurs and Self-employed individuals who are largely ignored by the formal
financial ecosystem. With experience of operating in this borrower segment for the last
20+ years, the Company has developed a unique underwriting model, which is capable of
evaluating the credit-worthiness of such borrowers. The Company provides only secured
loans which ensures robust asset quality, even during difficult times. The Company
operates in 373 branches across 8 states and 1 union territory and has a borrower base of
close to 3 lakhs as on March 31, 2023.
Unique Underwriting Approach
As many borrowers graduate from the unorganised system and do not have documentary
proofs of their incomes, traditional underwriting methodologies would be ineffective, and
it becomes essential to tailor an underwriting approach that would help the Company
understand their cashflows. Towards this, Five Star has built an unique underwriting
methodology underpinned on 3 Cs - Character, Cashflow and Collateral, which has helped the
Company build a strong and profitable loan portfolio over the last many years.
As much as it is important to evaluate the ability of the borrower to repay, it is
equally, if not more important to establish the intent of the borrower to repay. Absence
of intent would mean future complications, legal or otherwise, to effect repayment on the
loan. Hence Five Star accords maximum importance to the intent of the borrower, which is
evaluated through Neighbourhood checks, Trade checks, Credit Bureau report analysis, etc.
Good amount of time is spent by multiple teams to understand and establish the intent of
the borrower.
Understanding and evaluating the cashflows in the absence of documentary evidence poses
a unique challenge. However, Five Stars experience of operating in this segment over the
last couple of decades gives it a significant edge in terms of understanding the borrower
cashflows. Evidence is looked at to justify the cashflows - the evidence could be the
lifestyle and living conditions of the borrower or the assets that the borrower has
created for himself / herself and his / her family. Through thorough checks of the
borrowers workplace, his / her residence, lifestyle, etc, the Company is
able to arrive at a plausible cashflow which will stand support to the loan repayment.
In addition to understanding the cashflow of the customer, the Company also secures its
loan by taking a hard collateral as security for the loan. The self-occupied residential
property of the borrower serves as the collateral in about 95% of the loans, with the
balance having non-SORP as collateral. But none of the loans are unsecured, which will
ensure that the borrower prioritises the repayment on his / her Five Star loan over the
other loans.
With this underwriting methodology, the Company ensures through its sound business
model that the loans are underwritten on the basis of the cash flows of the borrowers
which is the primary security and also backed up by the hard collateral as the additional
security. This has effectively ensured a low percentage of NPA on the portfolio of
business as reflected in the financial statements.
Business Growth
During the 5 years prior to COVID, Five Star was going through a high growth phase with
the portfolio exhibiting a CAGR close to 100% between financial years FY2015 and FY2020.
The portfolio grew from a little over 130 Crores in FY2015 and almost touched 4,000 Crores
in FY2020, before COVID hit the entire world. During the 2 years subsequent to this, the
Company focused on collections, given the significantly uncertain times - this period also
saw macro-economic shocks, regulatory changes affecting NBFCs along with the first and
second waves of COVID. So the growth during this period was muted and the Company recorded
growth rates of about 14% in each of these years.
However, with COVID clouds largely settled, Five Star is back to the growth phase
during FY2023 clocking about 37% portfolio growth during the year under review. As always,
this growth has been led by an expansion in the number of branches and increased borrower
base, rather than being led by an increase in average ticket size.
Number of Loans
During the year, the Company also opened 73 new branches taking the total to 373
branches as of March 31, 2023. While the Company in the past has demonstrated its ability
to open about 50 branches on a yearly basis, the number of branches opened during the
current year was higher given some pent-up demand during the COVID period. Branch
additions are the first indicator of increased demand and given that the Company had added
sizeable branches during this year, it will pave the way for a good portfolio growth in
the forthcoming financial year. The state-wise split of branches as of March 2023 is given
below.
The combined effect of increased loans and increased branch infrastructure resulted in
a strong portfolio growth at around 37% for the year under review.
AUM
With the borrowers going through some stress in cash flows during COVID, the Company
had consciously reduced its average ticket size on fresh disbursals. However, during the
year under review, the borrower cash flows have started showing signs of good improvement
showing them rebounding from that stress. The Company also increased its ticket size on
fresh disbursals during the later part of the year. Such increase is important since
borrower businesses were also rebounding and the need of the borrowers was getting back to
pre-COVID levels. However, the outstanding per loan has not increased during the current
year and stayed around the same level of 2.35 lakhs even in FY2023. As the ticket size on
fresh disbursals keeps increasing, we will also see increase in outstanding per loan, but
this is still much lesser than other industry players which helps Five Star from a risk
perspective as well.
Collections & Asset Quality
One of the fundamental tenets of the Company is to prioritise collections over
incremental business. The ability to maintain strong collections efficiency and robust
asset quality even during difficult times is a distinguishing facet of the Company.
Towards this, the Company has always held the sourcing officer responsible for the
collections also on the loans sourced by him / her. The incentives for the Field Officers
and other branch staff have been structured in such a manner to ensure that they perform
in an exemplary manner both on business and collections.
However, the Company also understands that the same officer being involved in both
business and collections forever impairs his / her ability to onboard new business. At the
same time, completely delineating business and collections brings its own set of
challenges like complete loss of accountability etc. Towards this, the Company has created
a collections vertical at each of the branches with necessary supervisory support and
accounts with certain vintage shall move into the collections team, which will free up the
time for business team to onboard new business.
The Collections vertical has been piloted in 2 states thus far and we are already
seeing the results in terms of better collection efficiency and much improved portfolio
bucketing. We will continue to put up collections vertical in the other states as well in
the quarters to come.
The Company had also restructured a small portion of its portfolio as part of the COVID
second wave and it is heartening to note that the restructured book is performing well,
with about 91% of the portfolio remaining in the Standard category, 18 months after the
moratorium period given as part of the restructuring package ended.
The table below gives the stage-wise details of loan portfolio and improvements can be
seen in Stage 2, not just in percentage terms but also in terms of absolute quantum.
|
As of March 31, 2023 |
As of March 31, 2022 |
Stage |
Amount in INR lakhs |
% of AUM |
Amount in INR lakhs |
% of AUM |
Stage 1 |
618,839.65 |
89.49% |
421,696.36 |
83.22% |
Stage 2 |
63,249.71 |
9.15% |
79,706.41 |
15.73% |
Stage 3 |
9,393.85 |
1.36% |
5,305.00 |
1.05% |
Total |
691,483.21 |
100% |
506,707.77 |
100% |
During the year (in the second half of the year), revised IRAC norms on upgradation of
accounts from NPA to Standard became effective from October 1, 2022, and the Company
undertook the following measures bring down potential slippages into NPA:
a. Educating borrowers and staff on the need for due date payment discipline, rather
than paying any time during the month (which was a historical behavioural trait of the
borrowers).
b. Reduce the stock in the 61-90 DPD bucket which has the highest potential of slipping
into NPA, if payment is not made on the due date.
Increase provision coverage on Stage 3 assets, with a clear intent to bring down the
net NPA.
Hence, despite the revised norms coming into effect, the Company has seen very minimal
incremental slippages into NPA and the NPA was contained at 1.36%, which is still one of
the best in the industry.
4. Operational & Financial Metrics
4.1. Branches: The number of branches as at the end of March 2023 was at 373 as
against 300 as at March 2022.
4.2. Portfolio growth: Five Stars Consolidated AUM increased from INR 5,067 Cr in
FY2022 to INR 6,915 Cr in FY 20231, which translates to a growth of about 37%
for the year.
4.3. Loan disbursals: During the year, the Company disbursed an amount of about INR
3,391 Crores as against INR 1,756 Crores in the previous year, recording a growth of 93%
for the year under review.
4.4. Asset quality: For the financial year ended 31st March 2023, the Company
achieved a Gross Stage 3 assets / NPA of 1.36%, as against 1.05% in the previous year.
This is despite the fact that the Company had moved into the revised IRAC norms from
October 1, 2022. If the same yardstick as the previous year would have been used, the
Company would have achieved Gross Stage 3 assets of 1.04% as of March 31, 2023.
4.5. Capitalisation: During the year ended March 31, 2023, the shares of the
Company were listed on the National Stock Exchange and Bombay
Stock Exchange. The IPO was a complete offer for sale with the existing shareholders
tendering a portion of their shares for sale. The amount of shares sold as part of the IPO
amounted to INR 1,588.51 Crores and the shares were sold by TPG Asia VII SF Pte. Ltd,
Matrix Partners India Investment Holdings II LLC, Matrix Partners India Investments II
Extension LLC, SCI Investments V and Norwest Venture Partners X - Mauritius, as named in
the prospectus as the selling shareholders. No fresh shares were issued as part of the IPO
process, given the very healthy capitalization profile of the Company. Marquee investors
participated in the IPO, both as part of the anchor book and main book, and the share
price of the Company continues to remain above the listing price even as on March 31,
2023.
4.6. Profitability: The Company continues to remain very profitable and the full
year Profit After Tax for the period ended March 31, 2023 was INR 603 Crores as against
INR 453 Crores for the financial year ended March 31, 2022.
Some of the operational and financial highlights are given below.
Parameter |
FY 2023 |
FY 2022 |
Growth |
Assets under Management (INR Cr) |
6,914.83 |
5,067.08 |
36.47% |
Amount disbursed (INR Cr) |
3,391.44 |
1,756.24 |
93.11% |
Branches (#) |
373 |
300 |
24.33% |
Number of customers |
293,954 |
217,794 |
34.97% |
Number of employees |
7,347 |
5,675 |
29.46% |
Profit after Tax (INR Cr) |
603.50 |
453.54 |
33.06% |
1AUM is without netting off the ECL
5. Strengthening Liability Profile
Given the strong capital profile of the Company and the fact that fresh capital
infusion was made almost every year over the last few years, the Company was not required
to raise a high quantum of incremental debt anytime during the past. While the Company had
demonstrated its ability to borrow good quantum of incremental debt even during years of
stress viz. year of demonetisation, year in which large NBFCs went down leading to heavy
unavailability of debt for the NBFC sector, years of COVID 1 and 2, the quantum of debt
borrowed was still not very high during those years. For the first time during the current
year, Five Star has borrowed 3,103.56 Crores of fresh debt in a single year.
During the financial year under review, your Company has availed fresh borrowings
aggregating to INR 3,103.56 Crores, including fresh Term Loans from Banks and Financial
Institutions of INR 2,245.00 Crores. The outstanding Total Borrowings as of March 31, 2023
were INR 4,247.28 Crores. During the year, the Company also onboarded new lender such as
Indian Bank, Bank of Maharashtra, HSBC and DBS bank.
The Company has borrowed moneys through term loans from banks and financial
institutions, cash credit lines from banks, issued non-convertible debentures, issued
pass-through certificates as part of Securitisation transactions and also availed one
tranche of non-rupee denominated borrowing through the ECB route. So, the debt profile of
the Company is well diversified both from the perspectives of type of lenders as well as
the structure of debt.
Structure-wise debt outstanding is given in the graph below:
Leverage: Given the healthy capital profile, the Company has been operating at a
low leverage and low D/E ratio. During the year, the D/E ratio is reached 0.98x and it
would be the endeavor of the Company to touch optimal D/E ratio levels in the years to
come.
6. Asset-Liability Management:
Asset-Liability Management (ALM) is a very crucial requirement for the success of any
NBFC but one that is probably given much less importance than what it deserves. Whenever
there is a price arbitrage between longterm and short-term borrowing, institutions tend to
prefer short-term gains. Large banking corporations in the recent past have crumbled,
primarily due to their failure to have a healthy ALM position. However, Five Star has
always been following a conservative ALM and liquidity policy, which has helped the
Company manage all turbulence that has faced over the last many years. The Company has
never resorted to short-term borrowing of significant quantum given that it lends for up
to 7 years. The liquidity policy defines a minimum liquid balance to be maintained on a
monthly basis which will effectively take care of all obligations and other fund
requirements over the next 3 months. Despite the negative carry that such high quantum of
liquidity may entail, the Company prefers to choose safety over profitability.
The Liquidity coverage ratio, which is a measure of the next 30 days liquidity
position, is also maintain at a very conservative level. The LCR as of March 31, 2023 was
302%. To maintain High-Quality Liquid assets (HQLA) to manage its LCR, the Company has
been investing in Government Securities and Treasury Bills, which qualify as HQLA for the
purpose of LCR computations.
The Company continues to maintain positive cumulative ALM across all buckets, which
would help weather any kind of shocks that may come about. As has been seen in the past,
even during extremely stressful periods from a liquidity perspective, the Company has been
able to manage all its outflows without resorting to any kind of concessions from its
lenders.
7. Human Resources:
Amongst all the capital in this world, human capital is always the strongest and most
enduring. A person who feels appreciated will always do more than what is expected. From
that perspective, amongst the four factors of production, employees (labour) assume
maximum importance. Without them, the other factors viz. land, capital and
entrepreneurship can be of no avail.
At Five Star, employees are the fulcrum around which every other factor revolves. No
decision is taken without keeping the interests of employees in mind. The welfare of
employees is at the heart of all decisions right across hiring, training, retention,
performance appraisal and rewards and recognitions. The Company had employed 7,347
employees as of March 31, 2023 as against 5,675 employees as of March 31, 2022.
The Company prides itself upon the fact that such a large number of people have been
provided employment opportunities, more so in the local areas where they live. The fact
that employees get to stay with their family, earning a good salary to take good care of
their families makes them feel a kinship with the organisation. The Company has tailored
the right incentive schemes to reward the high-performers and keep their morale high. In
addition, more than 300 people at the field level (non-HO staff) have been given stock
options wherein they will get to become owners of the Company at a later point of time.
All these have ensured that employees feel a sense of belongingness with the Company and
tend to give their best for the mutual benefit of themselves and the Company.
The field execution team is led by a strong Management team consisting of professionals
with years of experience in the fields of banking and financial services and who bring
their rich expertise to lead their respective functions. There are 21 professionals
heading their respective functions across the various verticals. It is also heartening to
note that a number of these professionals have been associated with the Company for many
years. During the financial year ended March 31, 2023, the Company has inducted people for
positions of Chief Audit Officer and Chief Legal Officer. In this manner, the Company
shall keep making the necessary hires at the right time to ensure that the right people
are at the helm of each function and are able to provide necessary oversight.
8. Technology:
Technology has become a significant business driver in the last few years. The Company
has strategic investments in our information technology systems and implemented automated,
digitized technology-enabled platforms and proprietary tools, to strengthen its offerings
and derive greater operational, cost and management efficiencies. Our focus on technology
has been and shall be made towards the following areas:
A. Developing an Application Programming Interface (“API”) infrastructure to
leverage the strength of various third party service providers / fintech companies and aim
to partner with them to augment / create more efficient processes;
B. Improving accuracy and breadth of customer data capture across our portfolio for
purposes of analytics and insight generation;
C. Use data, analytics and machine learning to complement our current underwriting
processes to ensure we onboard the most suitable borrowers and maintain a robust asset
quality;
D. Developing a robust customer credit scoring model;
E. Automation of existing manual activities within our underwriting process to reduce
turnaround times for loan sanctions and reduce transaction costs; and
F. Supplementing our collections infrastructure by leveraging existing payment
architecture towards collecting EMI repayments from our borrowers
Towards this, the Company has built a strong technology team headed by a Chief
Technology Officer. We also have senior professionals heading the areas of Analytics and
Data Science.
Safety and Privacy of customer data is taken very at Five Star and towards this, the
Company has put strong technology infrastructure, which is completely cloud-based with
adequate levels of safety. Annual Information Security audit is also undertaken by an
independent firm and the findings / observations are taken very seriously and remediation
measures are given utmost importance.
The Company believes that the adoption of such digital service delivery mechanisms has
and will continue to enable us to be more efficient, customer friendly and over time
improve cost efficiencies through automation, and perform more reliable data analytics for
customized products to suit the diverse requirements of our customers and improved
customer satisfaction.
The Company has also tied up with the following service providers to use their
applications as against the current ones, which we believe will give us a significant edge
towards enhancing our technology stack in the years to come.
a. Salesforce for Customer acquisition and Loan origination
b. Oracle for General Ledger and Financial Reporting
c. Darwinbox for HRMS
d. Credence for Treasury Management
All these systems are various stages of development and are expected to go live in the
coming financial year.
9. Risk Management and Audit Framework:
100% in-house sourcing, comprehensive credit assessment and robust risk management and
collections framework allows the Company to identify, monitor and manage risks inherent in
its operations. Catering primarily to small business owners and self-employed customers
while maintaining asset quality requires a special skillset in absence of traditional
income evidence, such that lending to these borrowers is based on an assessment of their
income and cash-flows through various methods. As part of our sourcing and underwriting
processes, the following actions are taken from a risk mitigation perspective:
A. Ensure all loans are sourced in-house, either through branch-led local marketing
efforts (i.e., door-to-door or specific referral marketing), repeat customers or through
walk-ins. In-house sourcing allows for complete control over the quality of customer and
processes involved to disbursement, which leads to better asset quality, compared to other
methods of customer acquisition. Further, as our customers are onboarded by Companys
officers and not by third party selling agents who may or may not be working with multiple
financial institutions, there is a lower churn rate of customers throughout our portfolio.
B. In addition, self-employed customers are prone to variable cashflows and lending to
them requires robust underwriting systems to appropriately price the risk. As a result of
the Companys 2-decade experience, expertise, and underwriting model, we have been able to
effectively serve such customers, while maintaining asset quality, and expanding into
newer geographies. An estimated 95% of the loans have the security of single-unit,
self-occupied residential properties as collateral. The Company also operates with
conservative average loan- to-value ratios and instalment to income ratios, which help
mitigate adverse events and cyclical effects.
In addition to the inherent risk mitigants in the underwriting process, the Company
also has a strong portfolio risk management framework wherein the portfolio is sliced and
diced to understand the performance and also to identify underlying risks, if any. The
Company has a Risk Management Committee headed by an Independent Director, who has been a
veteran in the field of NBFCs, having run a large NBFC himself. The risk management
framework comprises of a multi-tiered approach with the initial guidance coming from the
Board / Risk Management Committee, which is implemented by the individual departments and
overseen in tandem by the Auditors and Companys risk management team headed by the Chief
Risk Officer.
During the year under review, the Company also strengthened its audit framework and
implemented the Risk-based Internal Audit Framework (RBIA) as mandated by the Reserve Bank
of India. The Companys audit process is overseen by the Audit Committee of the Board and
is broken into 3 parts - Statutory Audit undertaken by the Statutory Auditors, Internal
Audit undertaken by an external audit firm and Internal Process audit undertaken by an
in-house audit team. All the aspects across regulatory compliance, Company specific
policies and procedures, financial reporting and adherence to accounting standards, etc
are covered and reported to the Audit Committee of the Board.
The RBIA framework of the Company has analysed all the functional processes, understood
the risks inherent in such processes and tailored an audit scope which is in line with the
risk profiles. During the year under review, the Company also appointed a senior
professional as its Chief Audit Officer (CAO). The findings of the audit exercise are
presented to the Audit Committee on a quarterly basis and also reported periodically to
the Board.
10. Internal Financial Controls:
The internal financial control over financial reporting is a process that is designed
to provide reasonable assurance regarding the reliability of financial reporting and
preparation of financial statements for external purposes in accordance with the generally
accepted accounting principles. The Companys Internal Financial Control system has been
designed commensurate to the size and complexity of the Companys business and operations.
The control system is designed to provide a high degree of assurance regarding the
effectiveness and efficiency of the controls and mitigants to ensure that the operations
and processes remain at acceptable levels, as far as possible.
The following are the types of controls documented and tested as part of the Internal
Financial Controls testing. The Controls are based on the type of the Risks addressed:
Operational Controls: Controls designed and implemented to address the operational
level risks or non adherence to the policies and practices of the Company.
Financial Controls: Controls designed and implemented to address the risks of
having a financial reporting impact or misstatement in financial statements of the
Company.
Compliance Controls: Controls designed and implemented to address the risk of
non-compliance with the relevant statutory guidelines / provisions of the law of the land.
The Company has engaged an external audit firm to review the risk control matrices on a
periodic basis and undertake a comprehensive testing to certify the efficacy of internal
controls and suggest improvements as may be required. Their findings are presented to the
Audit Committee on a periodic basis. This ensures that there is an external validation to
the efficient workings of the process and financial controls that have been put in place
by the Company.
|
Lakshmipathy Deenadayalan |
Place: Chennai |
Chairman & Managing Director |
Date: May 09, 2023 |
DIN:01723269 |
+91-9892691696
