Greencrest Financial Services Ltd Management Discussions

ANNUAL OVERVIEW AND OUTLOOK

After a resilient 2023 powered by strong US economic growth, we see the world economy slowing next year as the lagged impact of higher interest rates filters through and other tailwinds, like strong US consumer spending, fade. (Geo) politics adds further uncertainties, with pivotal elections next year from the US to Asia. We forecast global GDP growth at 2.2% in real terms in 2024, the weakest since the global financial crisis outside of the COVID-19 crisis, and down from 2.6% in 2023, before a rebound to 2.7% in 2025 (see Table 1). We expect inflation and interest rates to moderate in 2024 and 2025, but flag upside risks to both. We see four key trends driving the global economy over the coming two years: the threat of recession, the normalization of real interest rates, geopolitics and regional conflicts, and the revival of industrial policies in developed markets. The duel of recession versus further economic resilience will persist in the near term and determine the path ahead for inflation, employment, and central bank policy rates for the cyclical outlook. The structural outlook will see higher inflation, public debt and even possibly potential growth, all which support a higher central bank natural rate of interest. Both cyclical and structural drivers also support a durable regime shift to higher sovereign bond yields. Geopolitics and regional conflict, most recently the new war in the Middle East, adds potential non-linear downside risks. The revival of industrial policy in developed markets, focused on modernizing ageing industries and establishing new ones, may add structural growth tailwinds, but will likely also contribute to structurally higher inflation in the long term. On the other hand, Indias monetary and financial sectors have performed well in the first nine months of FY25. Bank credit has grown at a steady rate in the current financial year, with credit growth converging towards deposit growth. There has been a consistent improvement in the profitability of scheduled commercial banks (SCBs) as reflected in a fall in gross non-performing assets (GNPAs) accompanied by a rise in the capital-to-risk weighted asset ratio (CRAR). The government has also achieved significant progress in financial inclusion, with the Financial Inclusion Index of the Reserve Bank of India (RBI) increasing from 53.9 in March 2021 to 64.2 at the end of March 2024. Rural Financial Institutions (RFIs) have been an important player in facilitating Indias financial inclusion journey. Development Financial Institutions (DFIs) have contributed significantly to the countrys economic progress by financing infrastructure development projects. The capital markets have demonstrated strong performance, driving capital formation in the real economy, increasing the financialisation of domestic savings, and supporting wealth creation. As of December 2024, the Indian stock market has recorded new highs, consistently outperforming its emerging market peers despite geopolitical uncertainties and election-driven market volatility challenges. Meanwhile, the insurance and pension sectors continue to perform with the vision of achieving universal coverage and strengthening the financial ecosystem further. The financial sector is currently undergoing a transformative period marked by several emerging trends. Notably, there is an increase in the share of consumer credit in overall credit extended by banks and a rise in non-bank financing options. Additionally, equity-based financing has gained popularity, with the number of initial public offerings (IPOs) increasing six-fold between FY13 and FY24. While these developments herald a new era for the financial sector, they also introduce potential risks from a regulatory standpoint. The rise in consumer debt, the expansion of unsecured lending, and the growing number of young investors underscore the need for balancing growth and stability. Such regulation should encourage financial sector growth while ensuring stability and resilience.

INDUSTRY OVERVIEW

The market focus on stocks should not preclude interest in other asset classes in 2025. Corporate bonds in the U.S., Asia and Europe, for example, are likely to remain interesting for investors for several reasons. These include institutional demand, still high yields and the return of the (term) premium. Supply and demand will remain fundamental to commodities such as oil and industrial metals but we also see other factors maintaining a relatively high price for gold in 2025. In alternative assets, we focus in this outlook on infrastructure central to investing in future growth and what we call the public and private mixology of investing in this area. FX considerations will, as always, be a central consideration for investors and here 2025 will clearly be a case of strong economy, strong currency for the U.S. dollar. The euro will look weak in comparison, but rate rises and growth could support the Japanese yen. 2025 will not always be an easy year for investors as markets navigate through geopolitical or other risks (including the “three Rs” of recession, rates and rotations). But we believe that these risks are manageable. With markets already anticipating the impact of future economic growth and development, this means that being and staying invested will be essential for portfolio success both in the short and long term. I hope you find the analysis in this annual outlook useful and we are, of course, always here to guide you through 2025 and beyond.

OPPORTUNITIES & THREATS Opportunities

The Union Budget 2025-26, unveiled by Finance Minister Nirmala Sitharaman, has set the stage for transformative changes in Indias financial sector. The upcoming budget concentrates on developing economic expansion while making credit options more accessible and improving the regulatory process to build a stronger finance system for India. The Financial Budget 2025-26 contains several essential financial sector trends that will significantly affect the industry.

AMPLIFYING CREDIT ACCESS AND FINANCIAL INCLUSION

Economic empowerment through credit recognition drove the government to establish the ‘Grameen Credit Score as a framework. The Grameen Credit Score framework enables assessment of rural debtor creditworthiness including members of Self-Help Groups (SHGs) to grant them access to formal financial channels. Integrating rural people into the finance sector mainstream infrastructure will create new economic possibilities for millions of citizens. NaBFID launched the Partial Credit Enhancement Facility while operating alongside the National Bank for Financing Infrastructure and Development. The facility enhances commercial bonds in infrastructure projects allowing corporations to receive funding for large projects. This infrastructure development will serve as a foundation for sustainable economic growth because these measures are expected to fuel development.

INVITING FOREIGN INVESTMENT: A NEW ERA FOR THE INSURANCE SECTOR

The government made a historic decision to raise the Foreign Direct Investment (FDI) limit in the insurance Finance sector from 74% to 100% in one step. The strategic change will bring substantial foreign resources to the industry and create stronger market competition which drives better insurance solutions development. The transformation means consumers obtain better financial stability together with numerous insurance products that fulfill different needs.

STREAMLINING COMPLIANCE AND STRENGTHENING REGULATORY MECHANISMS

The new India budget allocates its resources to enhance business compliance procedures through simplification methods that create a better environment for commerce. The Central Know Your Customer (CKYC) registry will receive an essential update that will activate its operations starting in 2025. The United Customer Verification system established one unifying framework that will make financial institutions operate more efficiently and reduce banking and investment procedures for consumers and organizations. The process of approving corporate mergers undergoes optimization to minimize the time spent on bureaucratic approvals. The government wants to speed up these business procedures to establish a favorable market environment for business consolidation that drives the economic movement.

BUILDING A MODERN, TRUST-BASED FINANCIAL ECOSYSTEM

A High-Level Committee for Regulatory Reforms has been established by authorities to develop contemporary financial regulations that achieve their intended performance objectives. The committee functions to inspect past rules for updating purposes because it works to simplify business operations while removing unneeded compliance constraints. An Investment Friendliness Index provides a breakthrough as it rates states according to their business environments to create healthy competition. This ranking system promotes a competitive spirit between states so they can execute reforms to draw investors and generate economic growth. The Financial Stability and Development Council (FSDC) support policy evaluation and will improve economic landscape response capabilities through its oversight function. The Jan Vishwas Bill 2.0 includes a plan to decriminalize more than 100 sections of various laws as part of its efforts to turn financial regulations more favorable toward business operations.

DIGITAL CURRENCY: EMBRACING THE FUTURE OF FINANCE

The Reserve Bank of India (RBI) continues its progress towards launching the Digital Rupee which represents a Central Bank Digital Currency (CBDC). The payment system revolution is set to occur through this digital initiative because it will decrease physical cash use while making payment systems more resilient and encouraging innovation in international transactions. The Digital Rupee represents an expected digital payment system that provides security in exchange while converging with international banking industry trends toward financial system digitization.

Threats

IMF warns of weaker Indian economy in 2025. The Indian economy is set to face challenges in 2025, with the International Monetary Fund (IMF) forecasting a slightly weaker performance despite steady global growth. IMF Managing Director

Kristalina Georgieva, in her annual media roundtable, highlighted the uncertainty that could arise from shifts in U.S. trade policy, which may further impact the global economic landscape. While global growth is anticipated to remain stable. The IMF chief warned that 2025 would likely be marked by considerable uncertainty, particularly concerning the U.S.s future economic policies under its incoming administration. Potential shifts in trade policy, tariffs, taxes, deregulation, and government efficiency as critical factors that could influence global markets. This uncertainty, according to Georgieva, is contributing to higher long-term interest rates globally, even as short-term rates have fallen. The downturn, particularly in US equities, can likely be attributed to FIIs engaging in tax-loss harvesting or reassessing their asset allocation strategies, possibly shifting assets into cash. Notably, US Treasury yields for bonds maturing from two to thirty years increased, while yields for T-bills (with maturities of one year or less) decreased, coupled with significant inflows into money market funds. This scenario, set against the backdrop of the Federal Reserve lowering interest rates, suggests asset reallocation rather than short-term gains from these funds. Given the Feds rate cuts and potential policy shifts under President Trump, including tariffs on certain foreign countries potentially leading to higher US inflation, US funds might find investments in these countries riskier. Despite short-term market fluctuations, the Indian economy appears robust, with real GDP expected to close FY2025 at 6.4% and nominal GDP at 9.7%. Inflation is expected to be well within the Reserve Bank of Indias (RBI) upper band of 6%, bringing nominal GDP growth to the 11.5%-12% range. Listed companies are expected to outpace nominal GDP growth, given the underrepresentation of the slower-growing agriculture sector in listed markets. Strong indicators, such as Purchasing Managers Indexes above 50 and a 9.1% year-on-year increase in GST collections from April to December 2024, reinforce this positive outlook. Additionally, advance tax collections for the same period show a 21% growth, with corporate advance taxes up by 17% and non-corporate taxes soaring by 35%. Government spending is anticipated to rise significantly in the last quarter, further boosting growth for FY 2024-25. The upcoming Union Budget for FY 2025-26 is expected to focus on strong capital expenditure, potentially increasing allocations by 12% or more compared to the previous year.

MARKET RISK

The Company has quoted investments which are exposed to fluctuations in stock prices. Greencrest continuously monitors market exposure in equity and, in appropriate cases, also uses various derivative instruments as a hedging mechanism to limit volatility.

LIQUIDITY AND INTEREST RATE RISK

The Company is exposed to liquidity risk principally, because of lending and investment for periods which may differ from those of its funding sources. Management team actively manages asset liability positions in accordance with the overall guidelines laid down by various regulators. The Company may be impacted by volatility in interest rates in India which could cause its margins to decline and profitability to shrink. The success of the Companys business depends significantly on interest income from its operations. It is exposed to interest rate risk, both as a result of lending at fixed interest rates and for reset periods which may differ from those of its funding sources. Interest rates are highly sensitive to many factors beyond the Companys control, including the monetary policies of the RBI, deregulation of the financial sector in India, domestic and international economic and political conditions and, inflation. As a result, interest rates in India have historically experienced a relatively high degree of volatility. The Company seeks to match its interest rate positions of assets and liabilities to minimize interest rate risk. However, there can be no assurance that significant interest rate movements will not have an adverse effect on its financial position.

HUMAN RESOURCE DEVELOPMENT

The Company recognizes that its success is deeply embedded in the success of its human capital. During 2024-25, the Company continued to strengthen its HR processes in line with its objective of creating an inspired workforce. The employee engagement initiatives included placing greater emphasis on learning and development, launching leadership development programme, introducing internal communication, providing opportunities to staff to seek inspirational roles through internal job postings, streamlining the Performance Management System, making the compensation structure more competitive and streamlining the performance-link rewards and incentives.

CORPORATE SOCIAL RESPONSIBILITY INITIATIVES

The provision of the Companies Act, 2013 relating to CSR Initiatives are not applicable to the Company.

COMPLIANCE

The Compliance function of the Company is responsible for independently ensuring that operating and business units comply with regulatory and internal guidelines. The Compliance Department of the Company continues to play a pivotal role in ensuring implementation of compliance functions in accordance with the directives issued by regulators, the Companys Board of Directors and the Companys Compliance Policy. The Audit Committee of the Board reviews the performance of the Compliance Department and the status of compliance with regulatory/internal guidelines on a periodic basis. The Company has complied with all requirements of regulatory authorities. No penalties/strictures were imposed on the Company by stock exchanges or SEBI or any statutory authority on any matter related to capital market during the last three years.