Frontier Capital Ltd Management Discussions.

Annexure 5

A. GLOBAL ECONOMIC OVERVIEW

Global economic activity gathered momentum since January, 2018, both in advanced and emerging market economies. In the middle of the year, the global growth became uneven with rising trade tensions. The economic activity of emerging market economies had decelerated in the middle of the year on account of weak domestic demand, rising trade tensions, elevated oil prices, tightening of financial conditions, etc. In the later half of the year, global economic activity showed increasing signs of weakness on rising trade tensions.

B. DOMESTIC MARKET: -

The Indian economy began the year with 8.10% year-on-year growth in Gross Domestic Product (GDP) in January-March 2018, driven by higher growth in manufacturing, the farm sector and construction. It surpassed Chinas GDP growth rate of 6.80% in the January-March 2018 quarter, confirming India as the fastest growing major economy. The economy grew at 8% in AprilJune 2018 quarter on strong performance by manufacturing and consumer spending but slowed to 7% in July-September 2018 quarter on slower consumer spending and farm growth. The economy further slowed down to 6.60% in October-December 2018 quarter on weaker consumer demand and lower government spending.

RBI increased repo rate by 25 basis points each in its June,2018 and August, 2018 bi-monthly policy meetings. However, it cut repo rate by 25 basis points each, in February, 2019 and April, 2019 bimonthly policy meetings to spur growth.

The government has exceeded the disinvestment target for the second year in a row in financial year 2018-19. Disinvestment through the Exchange Traded Fund (ETF) route proved to be a best route for the government.

The second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019 revised Indias real GDP growth downwards to 7.0% from 7.2% in the first advance estimates.

Domestic economic activity decelerated for the third consecutive quarter in Q3:2018-19 due to a slowdown in consumption, both public and private.

The governments total revenue of Rs. 12.66 trillion upto February, 2019 was 73.2% of the estimated revenue for the financial year 2018-19, out of which the net tax income was Rs. 10.94 trillion and non-tax revenue was Rs. 1.72 trillion, which were below the estimates for the financial year 2018-19.

The revenue expenditure was at Rs. 19.15 trillion in the first 11 months of the financial year 2018-19, 89.4% of the budgeted expenditure. The capital expenditure stood at Rs. 2.74 trillion during the said period, 86.6% of budget for the capital expenditure.

While announcing the interim budget for the fiscal year 2018- 19, the government had revised its targeted fiscal deficit at 3.40% of GDP for FY 19 which has been met.

C. FINANCIAL SERVICES SECTOR

Indias financial services sector comprises of commercial banks/co-operative banks, non-banking financial companies, insurance companies, pension / mutual funds and other various entities.

Scheduled Commercial Banks credit growth on a year-on-year (y-o-y) basis improved across bank groups between March and September 2018, largely driven by the private sector banks (from 21.30% in

March 2018 to 22.5% in September 2018). Private sector banks deposit growth continued to be robust at

18.40%. The performance of the Public Sector Banks (PSBs) has witnessed an overall improvement with credit growth increasing from 5.90% in March 2018 to 9.10% in September 2018 and deposit growth increasing from 3.20% to 5.00% in the same period.

While, Non-Prompt Corrective Action (NPCA) PSBs credit growth improved from 9.10% in March 2018 to 13.60% in September 2018 and deposits increased from 6.10% to 7.90% in the same period, the PCA-PSBs registered negative growth in both credit and deposits.

In order to develop and deepen the corporate bonds market, SEBI has recently issued a circular on fund raising by issuance of debt securities mandating the large corporates to raise 25% of their incremental borrowings from the financial year 2019- 20 onwards through corporate bond market. This will address concentration risk in the banking system.

D. NBFC SECTOR

As of 27th March, 2019 there were approximately 10,000 NBFCs registered with Reserve Bank of India (RBI), of which 89 deposit accepting NBFC. The primary activities of NBFCs are providing consumer credit, including automobile finance, home finance and consumer durable products finance, wholesale finance products such as bills discounting for small and medium companies and infrastructure finance, and fee based services such as investment banking and underwriting. NBFCs have carved niche business areas for them within the financial sector space and are also popular for providing customized products. For instance, your Company providing finance for re-possessed vehicles at the doorstep of the customer. NBFCs bring the much needed diversity to the financial sector. NBFCs play an important role to promote financial inclusion agenda of the government by catering to the financial needs of people belonging to weaker section of the society The crisis faced by a large prominent financial institution of the country in September led to drying-up bank lending, thereby forcing NBFCs to scout for alternate sources of funding.

In February 2019, Reserve Bank of India (RBI) had eased risk weight norms to increase credit flow to NBFCs.

The banks are now required to assign differential risk-weights to their exposures to NBFCs based on ratings assigned by credit rating agencies, as against the existing practice of a uniform risk weight of 100%.

The move is aimed at not only freeing up capital for banks for further lending but also slash borrowing costs for well-rated NBFCs, which have been grappling with a systemic liquidity crisis triggered by a series of defaults by a large prominent financial institution and its subsidiaries.

In order to provide NBFCs with greater operational flexibility, the RBI has merged the categories of NBFCs classified as asset finance companies, investment companies and loan companies into a new category called NBFC - Investment and Credit Company ("NBFC-ICC").

E. FINANCIAL AND OPERATIONAL PERFORMANCE (AS PER IND AS)

There are no significant changes in key financial ratios of the Company for F.Y. 2018-19 as compared to F.Y. 2017-18.

As Company is under its re-structuring process, 100% provision was made on all NPAs, because of which loss after tax was . 9,26,20,919 as against the loss of . 8,81,38,682 in previous year.

F. SWOT ANALYSIS

Strengths

• Unique relationship-based business model with extensive experience and expertise in credit appraisal and collection process • Strong brand name • A well-defined and scalable organizational structure based on product, territory and process knowledge • Experienced senior management team • Strong relationships with public, private as well as foreign banks, institutions and investors,

Weakness

• Business and growth directly linked with the GDP growth of the country

• Companys Customers-SRTOs and FTUs are more vulnerable to negative effects of economic downturn

Opportunities

• Growth in the commercial vehicles, passenger vehicles and tractors market

• Meeting working capital needs of persons in commercial vehicles eco-system

• Higher budgetary allocation by the Government to give boost to infrastructure sector involving construction of roads, new airports, ports etc. creating huge demand for Commercial Vehicle

• Cross selling of insurance products, invoice discounting etc.

Threats

• Competition from captive finance companies and small banks

• Ad-hoc policies on phasing out of older vehicles

• Inadequate availability of bank finance and upsurge in borrowing cost

• External risks associated with liquidity stress, political uncertainties, fiscal slippage concerns, etc.

G. FUTURE STRATEGY

The Board has determined the following medium-term and longterm strategies to achieve its corporate goals over a period of next 3-5 years:

• Further strengthening the leadership position in financing vehicles

• Further enhancing quality of loan portfolio Maintaining customer loyalty through winning relationship and customer satisfaction

For and on behalf of the Board of Directors
Sd/- Sd/-
Hemendranath Choudhary Usha Iyengar
Place: Mumbai Whole - Time Director Director
Date: 6th September, 2019 DIN:6641774 DIN: 03447551