IBL Finance Ltd Management Discussions

GLOBAL ECONOMY

Global economic activity is softening amid the effect of tight monetary policies, restrictive financial conditions, and weak global trade growth. After a slowdown in 2022 and a decline in 2023, global output growth is expected to decrease again in 2024, marking the third consecutive year of deceleration. Recent conflicts in the Middle East have increased geopolitical risks and uncertainty in commodity markets, potentially negatively impacting global growth. The world economy is still grappling with the effects of the COVID-19 pandemic, the invasion of Ukraine by the Russian Federation, and rising inflation, leading to a sharp tightening of global monetary conditions. Despite these challenges, the global economy proved to be more resilient than predicted or anticipated in 2023. Several large economies showed remarkable resilience, outperforming expectations. However, simmering geopolitical tensions and the growing intensity and frequency of extreme weather events have increased underlying risks and vulnerabilities. Tight financial conditions also pose growing risks to global trade and industrial production. Near-term prospects are diverging. Growth in advanced economies and China is projected to slow in 2024, falling well below the average pace from 2010-2019. However, aggregate growth is expected to improve in emerging markets and developing economies (EMDEs) with strong credit ratings, which remain close to pre-pandemic average rates. Growth is also expected to strengthen somewhat in EMDEs with weak credit ratings from its 2023 low, but the outlook for many such countries remains precarious due to high debt, financing costs, and other unique challenges such as conflict. Global headline and core inflation have continued to decline from their 2022 peaks. However, inflation remains above target in most advanced economies and about half of inflation-targeting EMDEs. Global inflation is projected to stay above its 2015-2019 average beyond 2024. Monetary tightening in advanced economies is concluding, but real policy interest rates are expected to remain elevated for some time as inflation returns to target only gradually. This will keep the stance of advanced-economy monetary policies restrictive in the near term. The world economy continues to face multiple crises, jeopardizing progress towards the Sustainable Development Goals (SDGs). These challenges underscore the need for global cooperation and concerted efforts towards sustainable and inclusive growth.

Source: Global Economic Outlook Report 2024

INDIAN ECOMONY

India is a significant global economic player, with its nominal GDP at current prices estimated at 296.58 trillion (US$ 3.56 trillion) in 2023-24. The country boasts the third-largest unicorn base globally, reflecting a vibrant startup ecosystem. The government is committed to renewable energy sources, aiming for 40% of energy from non-fossil sources by 2030 and striving for Net Zero

Emissions by 2070 through the ‘Panchamrit strategy. India ranks third in the renewable energy country attractive index, indicating a favorable environment for renewable energy investments.

Indias GDP growth is projected to moderate to 6.8% in the upcoming fiscal year, down from the current fiscals better-than-expected 7.6%. This moderation is due to several factors. Firstly, higher interest rates, which are typically used to manage inflation by reducing borrowing and spending, can potentially alleviate inflationary pressures. Secondly, a reduced fiscal impulse, indicating a decrease in government spending or an increase in taxes, can affect inflation dynamics by impacting consumer spending and overall economic activity. Lastly, the normalizing effect of net taxes on demand refers to tax adjustments that could affect consumer purchasing power and, consequently, inflation trends.

Indias GDP growth is projected to moderate to 6.8% in the upcoming fiscal year, down from the current fiscals 7.6%. Despite this moderation, India is expected to retain its position as a significant global economic player. The Interim Budget for 2024-25 allocates a significant amount for capital expenditure, focusing on infrastructure and development projects. This investment is expected to stimulate economic activity and contribute to GDP growth. Tax receipts are estimated to increase, with GST collections crossing significant benchmarks. This increase in tax collections indicates a robust economy. The fiscal deficit is estimated at 5.1% of GDP in 2024-25, aligning with the goal of reducing it below 4.5% by 2025-26. This reduction in fiscal deficit is a positive sign of fiscal responsibility and economic stability. According to the McKinsey Global Institute, India needs to create 90 million non-farm jobs between 2023 to 2030 to achieve 8-8.5% GDP growth. This indicates a strong focus on employment generation in the coming years.

The governments commitment to renewable energy sources and its aim for 40% of energy from non-fossil sources by 2030 shows a progressive approach towards sustainable development. Global uncertainties and domestic factors, such as the ongoing effects of previous interest rate increases and the Reserve Bank of Indias measures, could pose challenges. However, these are being actively managed to ensure stable economic growth. In conclusion, while there are challenges ahead, the article suggests that India is well-positioned to maintain strong economic performance in the future. The governments focus on infrastructure development, fiscal responsibility, employment generation, and sustainable energy sources are key factors that will contribute to this growth. However, its important to note that these projections are based on current data and assumptions, and actual outcomes may vary. In conclusion, while there are challenges ahead, India is well-positioned to maintain strong economic performance in the future.

The governments focus on infrastructure development, fiscal responsibility, employment generation, and sustainable energy sources are key factors that will contribute to this growth. However, its important to note that these projections are based on current data and assumptions, and actual outcomes may vary.

Source: Crisil Growth Marathon, Interim Budget 2024

INDIA INCLUSIVE GROWTH

The Survey highlights the importance of inclusive growth, particularly when it comes to job creation. It points out that both official and unofficial sources confirm a rise in employment levels in the current financial year. In rural areas, UR decreased from 5.3% in 2017-18 to 2.4% in 2022-23, while for urban areas, it decreased from 7.7% to 5.4%. UR for males in India decreased from 6.1% in 2017-18 to 3.3% in 2022-23, and the corresponding decrease in UR for females was from 5.6% to 2.9%. In rural areas, LFPR increased from 48.9% in 2017-18 to 56.7% in 2022-23, while for urban areas, it increased from 47.1% to 49.4%. LFPR for males in India increased from 75.1% in 2017-18 to 77.4% in 2022-23, and a corresponding increase in LFPR for females was from 21.1% to 31.6%. This improvement in the labor force participation rate (LFPR) further confirms the economys emergence from the pandemic-induced slowdown early in FY24. The Indian economy has sustained its growth momentum, with overall economic activity remaining resilient. MSME sector, which is the backbone of Indias economy, reflects these trends and shows steady credit growth trajectory. This credit growth is broad-based, marked expansion is seen amongst semi-urban and rural MSMEs. Credit supply to MSMEs grew by 20% YoY by volumes in quarter Jul-Sep 2023 indicating improved lender confidence. Commercial credit lending continues to maintain its overall growth post initial boost provided by ECLGS Scheme (launched by Government of India to support credit to MSME sector). Availability of enriched and timely credit data and rapid implementation of digital lending infrastructure has contributed significantly towards enhancing lender confidence. 7% YoY growth is seen in borrowers who availed sub-INR 1 Crore loans

(Micro segment) while growth of borrowers seeking greater than INR 10 Crores (Medium) has decreased by value. Furthermore, the governments implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been successful in rapidly creating more 26 assets related to "Works on individuals land" than in any other category. Additionally, schemes like PM-KISAN, benefiting households covering half the rural population, and PM Garib Kalyan Anna Yojana, have significantly contributed to reducing poverty in the country. Indias performance in FY24 was marked by resilient economic growth, prudent management of external balances, well-contained inflation, and a resilient financial market. These factors underscored Indias economic prowess and its ability to withstand global shocks, positioning the country as a bright spot in the global economy. As the third-largest economy in the world in PPP terms and the fifth-largest in market exchange rates, India has almost "recouped," "renewed," and "re-energized" what was lost, paused, or slowed during the pandemic and the European conflict. This reflects the strength and adaptability of the Indian economy in facing and recovering from challenging circumstances.

Source: pib.gov.in, transunioncibil.com

INDIAN ECONOMY OUTLOOK

Indias financial sector is undergoing significant growth and diversification, comprising a wide range of entities, including commercial banks, insurance companies, non-banking financial companies, cooperatives, pension funds, mutual funds, and other smaller financial entities. The banking regulator has recently allowed the establishment of payment banks, further expanding the variety of financial services available in the country. The financial sector in India is predominantly a banking sector, with commercial banks accounting for more than 64% of the total assets held by the financial system. The Government of India and the Reserve Bank of India (RBI) have introduced several reforms to liberalize, regulate, and enhance this industry. These measures aim to facilitate easy access to finance for Micro, Small, and Medium Enterprises (MSMEs), such as launching credit guarantee schemes, issuing guidelines on collateral requirements, and setting up a dedicated refinancing agency, Micro Units Development and Refinance Agency (MUDRA). During the fiscal year 2024, the mutual fund (MF) industry witnessed a significant increase in new investors, up by 70% from the previous year, mainly due to the recovery in the equity market. This rise added 6.8 million unique investors, taking the total MF subscriber count to 44.5 million. The industrys assets under management (AUM) experienced a notable 35% growth, marking the second-highest increase in a fiscal year, while the number of folios reached a record high of 147.8 million, indicating the industrys healthy expansion. The heightened investor interest extended beyond mutual funds to encompass other equity investment avenues, indicative of a broader trend towards increased participation in capital markets. Active SIP accounts observed a significant rise, with net additions doubling from the previous year and over 82% of these accounts being dedicated to active equity schemes. However, the MF customer base of 44.5 million remains only around half of the latest tally of income tax return filings, signalling substantial room for further expansion. The fiscal year 2024 highlighted a notable shift towards an investment culture driven by market performance, advancing financial literacy, and the ongoing transition from saving to investing in the economy. The recovery in equity market indices such as Nifty 50 and Sensex by over 25%, combined with the introduction of new fund options in popular categories, boosted investor confidence. The adoption of mobile wallets is rapidly rising in India, outpacing traditional payment methods like cash and cards. Global Data forecasts mobile wallet transactions to exceed $6.39 trillion (Rs. 531.8 trillion) by 2028, growing at a robust compound annual growth rate (CAGR) of 18.3% between 2024 and 2028. This growth is fuelled by government initiatives promoting digital payments, particularly through the unified payments interface (UPI), 27 which saw transactions valued at $2.5 trillion (Rs. 202.8 trillion) in 2023, with a staggering CAGR of 72.1% from 2019 to 2023.

Indias financial sector is experiencing a significant transformation, characterized by the expansion and diversification of financial institutions, reforms initiated by the government, and the swift integration of digital payment technologies, notably mobile wallets. This evolution signifies a promising outlook for Indias capital markets, showcasing vibrant growth prospects and abundant opportunities for both investors and enterprises.

Source: https://www.ibef.org

NBFC SECTOR

The Indian financial sector features a robust ecosystem of non-banking financial companies (NBFCs), with 9,356 registered with the Reserve Bank of India (RBI) as of 29 September 30, 2023. This underscores their significant role in the economy. The vast majority (8,799) are non-deposit-taking NBFCs (NBFC-NDs), driving financial inclusion by extending credit to underserved sectors and boosting economic growth. The RBI maintains vigilant oversight of NBFCs, particularly the subset designated as systemically important NBFC-ND-Sis (507), owing to their size and potential impact. This regulatory approach ensures financial stability. Additionally, the RBI regulates 27 Asset Reconstruction Companies (ARCs), specialized entities that resolve non-performing assets (NPAs) and support the financial sectors health. The RBIs comprehensive regulation across both NBFCs and ARCs promotes a financially inclusive and stable landscape in India.

NBFC SECTOR ANALYSIS

The Non-Banking Financial Company (NBFC) sector has emerged as a vital source of finance for a diverse range of individuals and businesses, including Small and Medium Enterprises (SMEs) and economically unserved and underserved people. NBFCs have excelled in meeting the varied needs of borrowers with remarkable speed and efficiency, leveraging their extensive geographical reach, understanding of diverse financial requirements, and rapid turnaround times. By supporting the growth of millions of MSMEs and facilitating independent employment opportunities, nonbank money lenders have played a pivotal role in fostering financial inclusion. A significant catalyst for the expansion of the NBFC sector has been the escalating demand for credit from MSMEs, who often face challenges in accessing loans from traditional banks due to stringent eligibility criteria. In response, digital lenders offering alternative financial solutions have emerged, playing a crucial role in driving the growth of the NBFC sector. This growth has been accompanied by the entry of numerous players with diverse business models, signalling a transformation in the Indian financial services landscape. The increasing adoption of neo-banking, digital authentication, the proliferation of UPI and mobile phone usage, and the spread of mobile internet have led to the modularization of financial services, particularly in the realm of credit.

Key reasons for growth

? Deep demographic and addressable market understanding: With their operations in the unorganized and underdeveloped segments of the economy, NBFCs have created a niche for themselves by understanding what customers want from them and guaranteeing last-mile delivery of goods and services. ? Tailored product offerings: NBFCs have adapted their product offering to meet the specific characteristics of a customer group and are focused on meeting appropriate needs by carefully analysing this target segment and customising pricing models. ? Wider and effective reach: NBFCs are now reaching out to Tier 2, Tier 3 and Tier 4 markets, distributing the loan across several customer touchpoints. In addition, they are building a connected channel experience that provides an omnichannel, seamless experience of sales and service 24 hours a day, seven days a week. ? Technology advancements and growing fintech ecosystem for improved efficiency and enhanced experience: The use of technology is helping NBFCs customise credit assessment.

? Co-lending: RBI, in November 2020, issued co-lending norms that enable banks and NBFCs to collaborate for priority sector lending (PSL).

? Government and central bank Initiatives: The Government of India also unveiled several initiatives aimed at addressing some of the structural issues stressing the small business lending segment. These include granting licenses to account aggregators, initiating the Pradhan Mantri Mudra Yojana (PMMY), launching UPI platforms, unveiling platforms such as TReDS, GeM and Open Network for Digital Commerce (ONDC) and implementing GST. The COVID-19 pandemic and consequent acceleration in both adoption of technology and change in consumer habits, as well as increasing availability of data for credit decision-making, has made it possible to build an NBFC lending business without investing large sums to have brick-and-mortar presence on the ground. Overall, between FY23 and FY25, research shows NBFC credit will increase at a CAGR of 13 15 per cent.

NAVIGATING FUNDING CHALLENGES: EMERGING SOURCES AND REGULATORY IMPACT FOR NBFCS IN INDIA.

Non-Banking Financial Companies (NBFCs) play a crucial role in Indias financial landscape, yet they encounter evolving hurdles in accessing funds. This article investigates emerging fund sources and analyses how regulatory measures affect NBFCs ability to raise capital. Historically, NBFCs in India heavily depended on traditional financing avenues like bank loans and debenture issuance. However, recent regulatory interventions and expanded options have prompted NBFCs to explore alternative funding channels.

Sources of borrowings

In Fiscal 2023, there was a notable surge in NBFCs borrowings from banks, leading to a significant uptick in their share of total funding to 36%, up from 29% at the conclusion of Fiscal 2022. Over the past decade, the proportion of bank lending to NBFCs has nearly doubled. However, it is anticipated that NBFCs will continue to rely heavily on funding from banks, as well as from other NBFCs and small finance banks, throughout Fiscal 2024 and Fiscal 2025.

1. MSMEs

The MSME sector is anticipated to play a pivotal role in Indias growth trajectory, with its contribution to the GDP projected to escalate from approximately 30% in FY23 to about 40% within the next five to seven years. Formal credit allocation will be a vital catalyst in fostering the expansion of this sector, with NBFCs poised to emerge as critical facilitators. The key contributors are as follows: ? Trade: The burgeoning e-commerce landscape, coupled with government initiatives such as the Open Network for Digital Commerce (ONDC) and Unified Logistics Interface Platform, alongside rising demand for indigenous products, is anticipated to propel growth in this domain. ? Manufacturing: Government impetus to augment manufacturing output, coupled with a focus on green energy initiatives and the burgeoning electronic vehicle (EV) ecosystem, is expected to galvanize MSME growth, consequently generating financing requisites for both capital and operational expenditures. ? Services: Sectors such as tourism and hospitality are projected to offer substantial avenues for NBFCs, presenting ample platform expansion and investment opportunities.

2. RETAIL CREDIT

Sub-sectors like consumer durables, vehicle loans, microfinance, and affordable housing are experiencing a surge in demand, buoyed by robust macroeconomic indicators and an uptick in private consumption. NBFCs, renowned for their agile operational frameworks, are strategically positioned to meet this escalating demand. To fortify the MSME and retail credit sectors, the government has introduced an array of reforms and initiatives. These encompass schemes such as the Pradhan Mantri Mudra Yojana (PMMY) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Additionally, digitization endeavors like India Stack, the JAM (Jan Dhan-Aadhaar-Mobile) trinity, and Udyog Aadhaar for streamlined business registration are in place. Initiatives like the Open Network for Digital Commerce (ONDC) and the ambitious National Infrastructure Pipeline, under the Gati Shakti program, further bolster these efforts. In the realm of retail credit, policies like the Pradhan Mantri Awas Yojana (PMAY) are driving growth in the affordable housing sector. Similarly, initiatives promoting vehicle electrification and the implementation of the Vehicle Scrappage Policy are propelling the vehicle loan segment forward. Furthermore, microfinance institutions are being strengthened through initiatives such as PMMY and a concerted focus on on-lending and co-lending models.

COMPANY OUTLOOK

Non-Banking Financial Corporations (NBFCs) have become instrumental in Indias lending framework, demonstrating adaptability amidst changing economic environments. Unlike traditional Banks, NBFCs provide a unique combination of reach, flexibility, and understanding of specific financial requirements, especially for small and medium-scale enterprises (SMEs) and the underserved sectors. IBL Finance Limited is a systemically important non-deposit taking Non-Banking Financial Company (‘NBFC) registered with the Reserve Bank of India (‘RBI) and is engaged in the business of lending. It has a diversified lending portfolio across retail and MSME customers with a presence in all major cities of India. The global economy is gradually recuperating from the repercussions of the conflict between Russia and Ukraine continued for the second consecutive year. In the second half of the year, violence in Israel and Gaza added to socio-political instability. Despite the hurdles, the growth of NBFCs is undeniable. Their market share, as a proportion of overall credit, has increased over the years. The global economy is continuing growing at a modest pace, the global economy has proved resilient, inflation has declined within sight of central bank targets, and risks are becoming more balanced. Significant uncertainty remains. Inflation may stay higher for longer, resulting in slower-than-expected reductions in policy interest rates and leading to further financial vulnerabilities. GDP growth in the United States is projected to be 2.6% in 2024, before slowing to 1.8% in 2025 as the economy adapts to high borrowing costs and moderating domestic demand. In the euro area, which stagnated in the fourth quarter of 2023, a recovery in real household incomes, tight labour markets and reductions in policy interest rates will help generate a gradual rebound. Euro area GDP growth is projected at 0.7% in 2024 and 1.5% in 2025. Despite the global turmoil, the Indian economy continued to show resilience and strength. Carrying forward its momentum from FY23, India was one of the fastest-growing large economies of FY24 and is a key driver of growth globally. Indias GDP growth for the financial year is expected to be above 7.5%; and going forward, around 7% GDP growth is estimated for FY25.

SEGMENT WISE OR PRODUCT-WISE PERFORMANCE & DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The company is primarily engaged in the business of finance, which constitute a single reportable segment in accordance with Accounting Standard 17 "Segment Reporting".

RISK AND CONCERNS

The Company is exposed to various risks and uncertainties which may adversely impact its performance. The Companys future growth prospects and cash flow generation could be materially impacted by any of these risks or opportunities. The major risks as identified by the Company are demand-risks due to any resurgence in the COVID 19 pandemic, currency risk associated with foreign direct investments, unfair competition, etc. The Company follows the Enterprise Risk Management (ERM) framework to manage and mitigate such risks which is primarily based on the integrated framework for enterprise risk management and internal controls developed by the Company.

Financial Highlights

DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS