Frontier Capital Ltd Management Discussions

Your Directors are pleased to present the Management Discussion and Analysis Report for the year ended 31st March, 2025.

NBFC Company:

The financial statements have been prepared in compliance with the requirements of the Companies Act, 2013 and as per Indian Accounting Standards (Ind AS) and as per the directions issued by Reserve Bank of India for Non-Banking Financial Companies from time to time, wherever applicable. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably present the Companys state of affairs and profits for the year. The following discussion may include forward looking statements which may involve risks and uncertainties, including but not limited to the risks inherent to Companys growth strategy, change in regulatory norms, economic conditions and other incidental factors. Actual results could differ materially.

ECONOMIC OVERVIEW:

Global Economy:

The global economy is exhibiting resilience and fortitude. There are, however, multiple challenges emanating from still elevated inflation, tight monetary and financial conditions, escalating geopolitical tensions, rising geo- economic fragmentation, disruptions in key global shipping routes, high public debt burdens and financial stability risks. Global financial markets are on edge, with recurrent bouts of volatility as every incoming data increases uncertainty around monetary policy trajectories of major central banks.

Indian Economy:

Amidst global challenges, Indian economy exhibited robust growth in 2024-25, underpinned by strong investment activity, amidst subdued external demand. Manufacturing and services sectors were the key drivers on the supply side while agricultural activity slowed down due to uneven and deficient monsoon rainfall. The growth outlook remains buoyant, given the governments sustained focus on capital expenditure while maintaining fiscal consolidation. Strong corporate balance sheets, rising capacity utilisation, double digit credit growth, healthy financial sector, and the ongoing inflation are likely to be other growth levers. Indian economy boasted an impressive growth rate of 6.5% in the 2024-25 fiscal year (FY).

Outlook:

The NBFC sector in India is poised to benefit from a favorable macroeconomic environment in FY 2024 25. The Indian governments high capital spending has supported economic growth, though it has pushed the fiscal deficit to 4.9% of GDP, and combined debt-to-GDP levels remain above pre-pandemic levels. Despite these challenges, liquidity conditions are expected to remain supportive for financial institutions.

A key positive development is the RBIs higher-than-expected dividend payout of 2.69 trillion (against an expected 2.11 trillion). This strengthens the governments fiscal position, reduces the need for additional market borrowings in the second half of the year, and is likely to keep bond yields lower. Lower yields translate into reduced borrowing costs for NBFCs, which should improve funding access and profitability margins.

INDUSTRY OVERVIEW:

Financial Services Industry:

The Indian financial services industry is a dynamic and evolving sector, poised for further growth and innovation. It is a vital component of the countrys economy, providing a range of financial products and services to individuals and businesses alike. The sector has seen significant growth in recent years, expanding into segments that were previously underserved or overlooked in a bid to promote financial inclusion. The industry is diverse, with a mix of traditional players such as commercial banks, insurance companies, and NBFCs, along with newer entities such as payment banks and small finance banks. The sector is well-regulated by the RBI, which has also allowed fintech companies to enter the fray, bringing innovation and efficiency to the industry. The adoption of digital technology has been a game-changer, enabling organizations to enhance customer engagement and deliver services with speed and transparency.

NBFCs in India:

The Non-Banking Financial Companies (NBFCs) sector plays a significant role in the Indian economy, providing credit to individuals, small and medium-sized enterprises, and rural areas, among others. NBFCs have emerged as a key segment in the financial sector, bridging the gap between banks and borrowers who are underserved or excluded from traditional banking services. In recent years, the sector has witnessed significant growth, fuelled by a rise in demand for credit and the emergence of new players.

NBFCs are generally maintaining healthy earnings performance. NBFCs are actively embracing digital technologies and system-driven changes, keeping pace with other financial sector players. NBFCs are generally well-capitalized, supporting their operations and lending activities.

COMPANY OVERVIEW:

Frontier Capital Limited was founded in 1984 and is a registered Non-Banking Finance Company (NBFC) regulated by the Reserve Bank of India (RBI). The Company operates out of Mumbai and specializes in providing retail financing services to the lower and middle-income groups of society. Over the past two and a half decades, Frontier Capital Ltd has been dedicated to serving the financially underserved masses across urban, semi-urban, and rural areas, both in the formal and informal sectors of the economy.

The Companys revenue from operations for the financial year was Rs. 54.03/- Lakhs and the previous years revenue from operations of Rs. 28.12 Lakhs. The Company reported a Net Profit (PAT) is Rs. 29.63 Lakhs.

Details of significant changes in Key Financial Ratios:

OPPORTUNITIES & THREATS:

The biggest opportunity for financial services sector in India currently lies in the sheer size of the economy. India is now the 4th largest economy worldwide and well on its way to become the 3rd largest within this decade. The infrastructure push, revival in private capex, growth of the SME ecosystem, increasing consumer demand, and potential of demographic dividend are all expected to drive this growth. Further, the current credit penetration in India Credit to GDP ratio remains low at ~70% compared to other larger economies; this is expected to sharply increase over the next decade backed by rapidly developing digital public infrastructure and a notable improvement in the credit appetite seen across segments. All of this indicates a significant market opportunity of INR 500 lakh crore+ for all lenders in the country.

NBFCs can offer limited access to low-cost deposits compared to banks. Rising NPAs or defaults can dent investor sentiment, restrict capital-raising ability, and affect stock valuations of listed NBFCs. NBFCs are very sensitive to changes in the economic cycle. An economic slowdown impacts them in multiple ways since their business model depends heavily on borrowing from the market and lending to relatively higher-risk segments. Higher risk perception raises the cost of borrowing.Net Interest Margin (NIM) shrinks due to Rising cost of funds and Lower lending opportunities.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has adequate internal controls and standardized operating processes that are envisaged to protect assets and business efficiency. The Company has established strong and well-entrenched internal control procedures commensurate with its size and operations and relevant to its broad domain of the lending business.

HUMAN RESOURCES:

The Company recognizes the crucial role played by its employees in driving its growth and success. To this end, the Company prioritizes providing a supportive work environment that fosters employee satisfaction and motivation to achieve both personal and professional goals. The Company has cultivated an inclusive work culture that values responsibility and instils a sense of pride in its employees, resulting in a high retention rate.

OUTLOOK:

NBFCs are emerging as increasingly significant players in the financial sector by catering to segments of the population that were previously underserved or overlooked. Their market share and product portfolio are expected to expand further as they continue to address this vast and growing customer base. With the adoption of digital tools and technology, NBFCs are enhancing operational efficiency and strengthening customer engagement. Going forward, as clients progress in their economic status, they are expected to continue availing NBFC services provided they are offered positive experiences, innovative solutions, and products tailored to their evolving needs.

DISCLOSURE OF ACCOUNTING TREATMENT:

Till the quarter ended 31st December, 2023, the Company opted a prudent practice of amortising the income over the tenure of loans assigned instead of booking it upfront. This practice in managements view ensures true and fair financial position of the Company. The same is a deviation from the Ind AS 109 ‘Financial Instruments. However, during the quarter ended March 31, 2024, the Company has received a directive from the Reserve Bank of India to book such gain upfront in the statement of profit and loss in accordance with Ind AS 109 instead of amortising it over the period of the underlying residual tenure of the assigned loan portfolio.

CAUTIONARY STATEMENT:

This document contains forward-looking statements regarding the expected future events, financial performance, and operating results of the Company. Such statements, by their very nature, involve assumptions and are subject to inherent risks and uncertainties. There is a significant risk that these assumptions, expectations, and projections may not prove to be accurate. Readers are therefore cautioned not to place undue reliance on these forward-looking statements, as actual results and outcomes may differ materially due to various factors. Accordingly, this document should be read in conjunction with, and is qualified in its entirety by, the assumptions, qualifications, and risk factors detailed in the Managements Discussion and Analysis section of the Companys Annual Report for FY 2024 25.