Frontier Capital Ltd Management Discussions

Your Directors are pleased to present the Management Discussion and Analysis Report for the year ended 31st March, 2024.

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 geoeconomic 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 2023-24, 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 7.8% in the 2023-24 fiscal year (FY) and exceeded the average G20 rate of 3.4%.

Outlook:

The Indian governments high capital spending has brought the fiscal deficit to 5.8% in FY 2023-24 and the combined debt-GDP to above pre-pandemic levels.

The RBI paid a higher than expected dividend payout of Rs 2.1 trillion to the government, v/s the expected Rs 0.9 trillion. This is likely to lead to lower market borrowings in the second half of the year and consequently lower bond yields.

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 organisations to enhance customer engagement and deliver services with speed and transparency.

Indian stock markets have generated an impressive performance during the FY 2023-24. The Nifty 50 index delivered a substantial return of 29 percent in FY 24. According to the data shared by the National Stock Exchange (NSE), the growth of the Indian markets has marked the eighth consecutive year of positive returns. Notably, the last instance of negative returns in the Indian market dates back to 2015, highlighting the consistent upward trajectory of Indian equities.

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.

As the economy has moved past the impact of the pandemic, the NBFCs sector is anticipated to experience a substantial growth in both FY2023 and FY2024, following the rebound of the economy. ICRA Ratings predicts that during these fiscal years, the sector will witness a loan growth of 10-12% and a rise in profitability by 50 basis points. The PCA framework implemented by RBI has created a level playing field for NBFCs with banks, thus enhancing corporate governance and leading to sustainable growth in the sector.

Retail-focussed NBFCs are expected to grow by 12-14%, whereas housing finance companies are expected to grow at 10-12%, primarily due to an improvement in asset quality and an increase in overall credit demand. Microfinance and personal loans are likely to continue growing at a high pace and lead the growth chart.

The report reveals that the NBFC sector has witnessed an improvement in asset quality, with higher collections and a lower-than-anticipated share of restructured portfolio. ICRA envisages that the majority of stress from the restructured book is likely to be absorbed in FY 2022-23 and slippages are expected to remain range-bound.

The rising interest rates may put some pressure on net interest margins, but this impact has been offset by the limited rate hikes passed on to borrowers. With stable margins and moderation in credit cost, NBFCs are expected to report a return of 2.6-2.9% on managed assets in FY2023.

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 specialises 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.28.12/- Lakhs and the previous years revenue from operations of Rs.31.23 Lakhs. Net Profit (PAT) is Rs.10.97 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 5th 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.

With increasing financial inclusion, a large part of this opportunity shall arise from the deeper markets, where both banks and non-banks have started making significant inroads. This has led to both larger and smaller players alike to increasingly adopt a phygital strategy allowing them to cater to this largely new-to-credit base in a cost- effective manner, leveraging both physical presence alongwith superior digital capabilities. Further, the sector is also witnessing a collaboration between incumbents and new age FinTechs for both capability building as well as distribution that has helped the former to provide their customers with a seamless experience, creating win- win propositions for all stakeholders involved in the lending lifecycle.

Over the few years, the regulator has been actively involved in bringing regulations that have strengthened the sector and improved customer protection. This shall go a long way in enabling innovation and growth in a responsible manner. In the last year alone, the RBI has introduced multiple guidelines on consumer credit & bank credit to NBFCs, fair practice code, investments in AIFs, implementation of Key Facts Statement by lenders, etc. This shall also spur both banks and non-banks to conform to highest levels of corporate governance and compliance standards across the board.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has adequate internal controls and standardised 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 recognises the crucial role played by its employees in driving its growth and success. To this end, the Company prioritises 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 becoming increasingly important players in the financial sector, as they cater to the needs of previously overlooked or underserved segments of the population. Their market share and product range are expected to expand as they target this vast and growing segment. Digital tools and technology are already being used by NBFCs to enhance their efficiency and customer outreach, and their clients will continue to use their services as they rise in economic status, provided they have positive experiences and are offered suitable products.

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 statements about expected future events, financial and operating results of Frontier Capital Ltd, which are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the assumptions, predictions, and other forward looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause assumptions, actual future results and events to differ materially from those expressed in the forward-looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications and risk factors referred to in the managements discussion and analysis of the Companys Annual Report FY 2023-24.