IIFL Finance Ltd Management Discussions

GLOBAL ECONOMY

Global economic growth in 2023 exceeded expectations despite significant interest rate hikes by central banks aimed at curbing inflation. According to the International Monetary Fund (IMF), global inflation is projected to gradually decline from 6.8% in 2023 to 5.9% in 2024, and further to 4.5% by 2025. Consumers in developed nations utilized pandemic savings, bolstering economic momentum. The global economy expanded by 3.2% in 2023, with similar growth anticipated through 2024 and 2025. However, several risks remain, including the lagging effects of monetary tightening, reduced fiscal support due to high government debt, persistent inflation above pre-pandemic levels, geopolitical tensions, and lower productivity growth.

INDIAN ECONOMY: OVERVIEW

The Indian economy continued its upward trajectory as the fastest-growing major economy in the world in FY 2023-24. India improved its position significantly in the ease of doing business index, attracting substantial investments from multinational corporations. Initiatives such as the Production Linked Incentive (PLI) and Make in India are yielding positive results. India is benefiting from the ‘China+1 strategy amid growing geopolitical concerns about China. Enhancements in physical and digital infrastructure are driving productivity gains, and the financial sector is effectively using technology to expand its reach, evidenced by a significant increase in the number of fintech companies.

Indias external position remains strong, with a Current Account Deficit (CAD) of just 0.7% of GDP in FY 2023-24. Foreign exchange reserves stood at US$ 646 Billion, covering almost 100% of Indias external debt. The inclusion of Indian sovereign bonds in global indices is expected to boost reserves and reduce the cost of capital. Fiscal deficit for FY 2023-24 was 5.8% of the GDP, below the target of 5.9%, with further fiscal consolidation expected in FY 2024-25 (target of 5.1%).

REAL GDP GROWTH

The Indian economy was estimated to have grown by 8.2% in FY 2023-24, up from 7.0% in FY 2022-23. This growth was driven by Indias demographic dividend, ongoing digital and regulatory advancements, and infrastructure development. Despite global headwinds and geopolitical tensions, monetary policy easing in the second half of FY 2024-25 is expected to stimulate business investment and household spending. Government investment is projected to remain robust. However, challenges such as poverty eradication, climate change mitigation, reducing income and wealth inequality require substantial fiscal efforts.

(Source: https://www.mospi.gov.in/sites/default/files/ press_ release/PressNoteGDP31052024.pdf)

INFLATION

India successfully reduced inflation closer to the Reserve Bank of India (RBI) target of 4%. The RBI maintained a pause on rate hikes, keeping the benchmark repo rate unchanged at 6.50% since February 2023. Headline CPI inflation fell to 4.85% in March 2024 from 7.44% in July 2023, primarily due to decreases in non-food and beverage items. However, food inflation remained problematic, averaging 7% during FY 2023-24. Forecasted above-normal monsoons may help reduce food inflation in FY 2024-25. Core inflation (excluding food, fuel, and energy) is stable at around 3%. The RBI has projected retail inflation to average 4.5% in FY 2024-25, with quarterly estimates of 4.9% in Q1, 3.8% in Q2, 4.6% in Q3, and 4.5% in Q4.

(Source:https://www.mospi.gov.in/sites/default/files/ press_release/CPI_PR_13may24.pdf https://www.rbi .org.in/Scripts/Publicat ionsView. aspx?id=22435#I2 )

CAPITAL EXPENDITURE

Indias capital expenditure (capex) has tripled over the past four years, significantly aiding economic growth and employment generation. The Interim Budget for FY 2024-25 announced a 17% increase in capex outlay, amounting to Rs. 11.11 Trillion, which constitutes 3.4% of GDP. The government allocated Rs. 1.3 Trillion towards 50-year interest-free loans to states to bolster their capital expenditures. In FY 2023-24, approximately 12,300 kms of national highways were constructed, averaging 34 kms per day. The Airports Authority of India (AAI) operationalized several integrated terminal buildings, enhancing passenger amenities and boosting local economies.

(Source: https://pib.gov.in/PressReleaseIframePage. aspx?PRID=2001136#:~:text=The%20Finance%20and%20 Corporate%20Affairs,per%20cent%20of%20the%20GDP

https://timesofindia.indiatimes.com/india/national- highways-construction-touched-34-km-per-day- in-2023-24/articleshow/108990468.cms

https://www.thehindu.com/news/cities/Tiruchirapalli/ new-terminal-building-of-tiruchi-airport-likely-to- become-operational-by-mid-june/article68221348.ece )

QUARTERLY ANALYSIS

First quarter: Indias GDP grew by 8.2% year-on-year (YoY) in Q1 FY 2023-24, led by a 10.7% increase in the services sector and a 6% rise in the industrial sector. Investment growth was robust, and Indias GDP growth during the quarter outpaced major economies like the US, the UK, China, Japan, and Germany.

(Source: https://www.india-briefing.com/news/indias- q1-fy-2024-gdp-growth-reaches-7-8-outpaces- major-economies-29443.html/ )

Second quarter: The economy expanded by 8.1% YoY in Q2 FY 2023-24, driven by increased government capital spending, a robust manufacturing sector, expansion in construction (owing to the infrastructure and real estate investments) and positive economic sentiment. The share of private consumption in the GDP declined and the share of investments increased significantly, as reflected in the Gross Fixed Capital Formation (GFCF). Despite the slowdown in private consumption, which is a key driver of economic growth, investments continued to gain momentum.

( Source: h t t p s://w w w. fo rb e sind ia . c o m/a r t ic le / explainers/ gdp-india/85337/1#:~:text=In%20the%20 Q2%20FY24%2C%20the,global%20risk%20and%20 unexpected%20factors )

Third quarter: The economy grew by 8.6% YoY in Q3 FY 2023-24, with strong growth in the manufacturing sector (11.5% YoY) and expansion of the construction sector (9.6% YoY). Public administration, defence, and other services also showed substantial growth of 7.5%. Private consumption rose by 4% YoY, while government expenditure contracted by 3.2%. Investments recorded an uptick of 9.7% YoY.

(Source: https://pib.gov.in/PressReleaseIframePage. aspx?PRID=2010409#:~:text=The%20Prime%20 Minister%2C%20Shri%20Narendra,and%20create%20a%20 Viksit%20Bharat )

OUTLOOK

The Indian economy benefits from a stable government, demographic dividend, favorable macroeconomics, and rising domestic demand. Sound balance sheets of banks and corporates, coupled with supply chain normalization and government capital expenditure, foster a conducive environment for private capital expenditure revival. Government revenues are buoyant, owing to strong GST and Direct Tax collections, giving it enough room for continued capital expenditure, while simultaneously making progress towards fiscal consolidation. Moreover, Indias emphasis on reducing logistical costs is crucial for its aspiration to emerge as a key player in the global supply chains. The RBI forecasts a real GDP growth of 7.2% in FY 2024-25, with quarterly growth rates of 7.3% in Q1, 7.2% in Q2, 7.3% in Q3, and 7.2% in Q4. Improving global trade and increased integration into global supply chains will support net external demand. However, geopolitical tensions, financial market volatility, and geo-economic fragmentation pose risks to the outlook.

(Source: https://www.india-briefing.com/news/indias-economy-in-2023-a-year-end-review-30561.html/ )

INDUSTRY OVERVIEW

The NBFC industry

Non-Banking Financial Companies (NBFCs) are pivotal in providing finance to a substantial portion of the population, including SMEs and economically underserved or unserved borrowers such as women borrowers, first- time home buyers, facilitating their transition into the organized credit segment from the unorganized money lenders. NBFCs address diverse financial needs with speed and efficiency, leveraging their extensive geographical coverage, understanding of varied financial requirements, on-ground presence for effective credit underwriting, and rapid turnaround times. They continue to play a vital role in advancing financial inclusion by facilitating MSME growth and self-employment opportunities.

Following the emergence and growth of numerous players with diverse business models, the sector has registered significant growth. The Indian financial services sector has transformed with growing digital payment penetration, smartphones, mobile internet, digital authentication (e-KYC), and consent-based information sharing (account aggregators).

NBFCs are increasingly embracing digitalization to enhance operational efficiency, customer experience, cost optimization, and regulatory compliance. Technologies such as cloud computing, low-code/no-code platforms, data lakes, and Artificial Intelligence (AI) drive new customer acquisition, cross-selling opportunities, application modernization, data transparency, and robust information security.

Indias household credit-to-GDP ratio of 36% (2022) is significantly lower than the 50-110% for other countries (48% for emerging markets), having declined by 6 percentage points since the Global Financial Crisis. There is substantial potential to improve credit penetration levels for retail and MSME credit in India, with NBFCs playing a crucial role. Despite MSMEs contributing ~30% to Indias GDP, only

~21% of their credit needs are met by formal finance. India has over 70 Million MSMEs, with a total credit demand of Rs. 117 Trillion and a substantial credit gap of Rs. 92 Trillion. NBFCs are well-positioned to tap into this opportunity with their ability to assess informal and irregular cash flows of MSMEs, distribution expansion through fintech collaborations, and advancements in digital technologies. NBFCs can meet credit demands of these sectors through their wide array of products, including equipment financing, hire purchase and leasing, mortgage financing (LAP), and gold loans. Moreover, they demonstrate versatility by expanding into newer segments such as consumer durable finance.

Regulatory and policy support, such as the Pradhan Mantri Mudra Yojana (PMMY), UPI platforms, account aggregators and bill discounting platforms like TReDS, GeM, and the Open Network for Digital Commerce (ONDC), will aid in improving financial inclusion.

(Source: https://www.livemint.com/industry/banking/ banks-nbfcs-meet-less-than-15-of-msme-credit- demand-11671035294728.html ,

https://www.sebi.gov.in/filings/public-issues/nov-2023/ fedbank-financial-services-limited-rhp_79210.html

https://www.pwc.in/assets/pdfs/pioneers-of-change- building-resilient-nbfcs-final.pdf )

According to RBI data as of September 2023, the outstanding credit of NBFCs stood at Rs. 37 Trillion, expanding at a 16% CAGR from Rs. 30 Trillion in March 2022. This growth was led by retail segment that clocked in a 27% CAGR from FY 2021-22 to Q2 FY 2023-24. NBFCs are expected to grow their loan books at a healthy pace, contributing to Indias growth to become the third-largest economy by the end of the decade.

Asset quality

Asset quality for NBFCs continued to improve, with the Gross Non-Performing Assets (GNPA) ratio and Net Non-Performing Assets (NNPA) ratio falling to multi-year lows of 4.0% and 1.1%, respectively. Scheduled Commercial Banks (SCBs) also saw improvements, with GNPA and NNPA ratios falling to 2.8% and 0.6%, respectively, as of March 2024. The special mention accounts-2 (SMA-2) ratio, a leading indicator of asset quality, shows relatively low levels of future impairment.

(Source: https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/0FSRJUN2024_270620242B95CB128D1847A3A- CAB5B5A4BEBF0DF.PDF )

Asset-class wise GNPA and NNPA ratios

Overall asset quality of outstanding consumer credit improved, except in case of personal loans whereas asset quality of credit cards broadly remained the same. However, there remain pockets of concern where we need to be cautious of emerging asset quality stress. Delinquency levels (90+ DPD) among borrowers with personal loans below Rs. 50,000 remain high. In particular, NBFC-fintech lenders, who have the highest share in sanctioned and outstanding amounts, also have the second highest delinquency levels, only below that of small finance banks. Besides, vintage delinquency remained relatively high in personal loans at 8.2%, apart from the fact that half of the borrowers in this segment have three live loans at the time of origination and more than one-third of the borrowers have availed 3+ loans in the last six months.

(Source: https://rbidocs.rbi.org.in/rdocs//PublicationRe- port/Pdfs/0FSRJUN2024_270620242B95CB128D1847A3A- CAB5B5A4BEBF0DF.PDF)

Note: The number in the parenthesis indicate a cohortss share in outstanding amount for personal loans below Rs. 50,000 as on March 31, 2024.

(Source: TransUnion CIBIL)

Liquidity and borrowing updates

Following the IL&FS crisis in 2018, NBFCs access to capital markets (both bonds and CPs) was impacted, leading them to tap ECBs, banks, and securitization routes to fund robust credit demand. The share of bonds and CPs in NBFCs borrowing mix declined to 38% from 56% in FY 2017-18. Bank loans to NBFCs grew at a 17% CAGR over the last five years, with the share in the mix rising to 37%. The RBI increased risk weights on bank loans to NBFCs by 25 ppt in November 2023, excluding PSL-eligible loans. This led to a slowdown in bank lending to NBFCs, reducing banks exposure to NBFCs. However, NBFCs that predominantly originate Priority Sector Lending (PSL) assets provide significant liquidity, by supplying banks with the necessary assets to meet their regulatory PSL requirements. This mutual arrangement benefits NBFCs by offering a steady liquidity source, enabling them to expand lending operations, while helping banks efficiently fulfil their PSL obligations.

Securitization remains a major funding source for NBFCs, clocking in a 28% CAGR over the last three years (FY 2021- 24), reaching pre-COVID levels. Collaborative co-lending models with fintech partners offer innovative financing solutions, and venture capital injections provide essential equity support. These funding avenues highlight the sectors adaptability and sustained financial resilience.

( Source: https://rbidocs.rbi.org.in/rdocs//Publi- cationReport/Pdfs/0FSRJUN2024_270620242B95CB- 128D1847A3ACAB5B5A4BEBF0DF.PDF)

Source: https://www.crisilratings.com/en/home/newsroom/ press-releases/2024/04/securitisation-volume-scales-peak- of-rs-1-9-lakh-crore.html

Outlook for NBFCs

NBFCs are poised to play a pivotal role in Indias growth trajectory by facilitating formalized credit penetration among underserved populations, aligning with broader policy initiatives. As customer expectations rise and digital business models proliferate, existing NBFCs must overhaul their operations while new entrants reassess market-entry strategies. Robust risk management and governance frameworks are crucial for industry players as they expand lending operations.

In FY 2024-25, AUM growth for NBFCs is expected to moderate to 15-17% range from approximately 18% in FY 2023-24. This moderation is primarily attributed to regulatory measures aimed at unsecured loan growth, reducing interconnectedness between banks and NBFCs by moderating bank lending to NBFCs and as benefit of low base effect prevalent in FY 2023-24 wanes. While the asset quality outlook remains stable for most NBFCs, there is a need for vigilant monitoring with regard to unsecured loans and microfinance loans.

(Source: https://www.linkedin.com/pulse/nbfcs-aum- grow-14-17-fy25-sustained-credit-demand-report-ulz3c )

Housing finance

Housing stands as a fundamental necessity in every economy, serving as a key indicator of growth and societal well-being. Its development not only contributes to economic growth but also acts as a catalyst for economic advancement, given its stimulating effect on various sectors of housing fosters demand for supporting industries and facilitates the creation of employment opportunities, thus signifying economic prosperity.

The affordable housing finance segment holds the largest share of Indias housing finance sector. Most of its customers reside in non-formal Tier-2 and Tier-3 cities and are new to credit facilities. These customers typically have low informal incomes and are often self-employed without formal income documentation. Affordable housing finance companies (AHFCs) are set to witness an estimated 29% growth in FY 2023-24. This momentum is driven by various factors, including a smaller base compared to traditional banks and major housing finance entities, expertise in reaching underserved market segments and effective credit risk assessment.

Over the past two years, the diminished share of priority sector lending-compliant home loans within the overall banking sector portfolio has led to substantial developments in the sector. This shift has opened new opportunities for affordable housing finance companies to expand their portfolios through co-lending agreements or direct assignment transactions, thereby enhancing market presence and expansion. The sector witnessed improvements in collection efficiency and strategic write- offs, which strengthened the asset quality metrics for affordable housing finance companies. The Gross Non- Performing Assets (GNPA) ratio stabilized at around 1.2% as FY 2023-24 concluded. The sectors capital structure remained robust, supported by solid internal accruals, with a gearing ratio approximately 2.9x as of March 31, 2024. AHFCs achieved strong profitability through improved net interest margins and controlled credit costs, despite increased operating expenses due to branch expansion.

The future of affordable housing finance in India looks promising, with continued government support and rising demand from the lower and middle-income segments. Innovations in financial technology (FinTech) are also expected to play a significant role in improving access to credit, enhancing customer experience, and streamlining operations for affordable housing finance companies.

(Source: https://www.thehindu.com/real-estate/the- growing-challenges-of-affordable-housing-in-india/ article67895595.ece#:~:text=Shrinking%20share%20 of%20affordable%20housing,the%20same%20period%20 in%202022)

Impact of urbanization on the real estate sector

Indias urban landscape is undergoing rapid transformation, witnessing a significant influx of individuals relocating to urban areas and cities in recent years. This trend is anticipated to persist, as projections from the UN indicate an addition of over 400 Million people to the population by 2050, positioning India as one of the fastest urbanizing nations globally. By 2030, over 60% of the countrys GDP is expected to be generated by the urban population, underscoring the significance of rural-urban migration. Highlighting the impact on residential sector, projections suggest that it will reach a market size of US$ 1 Trillion in India by 2030, driven by increasing incomes and urbanization. With the continuous influx of individuals into cities, the demand for homes and residential real estate is expected to continue rising. Additionally, it is estimated that India will need to invest US$ 4.5 Trillion in infrastructure by 2040 to keep pace with urbanization.

(Source: https:// www.track2realty.track2media.com/us20-trillion-infra- investment-needed-across-asia-2030-colliers/ )

Government initiatives supporting the housing finance sector

The Indian Government has acknowledged the need for affordable housing and implemented numerous initiatives and policies to address this challenge.

Pradhan Mantri Awas Yojana (PMAY)

PMAY stands as a flagship affordable housing initiative by the Indian Government, aimed at achieving housing for all, with particular emphasis on Economically Weaker Section (EWS) and Low-Income Group (LIG). It provides financial assistance, including interest subsidies to eligible beneficiaries to make homeownership more affordable. The scheme is instrumental in alleviating the housing shortage and fostering inclusive urban development.

National Housing Bank (NHB)

NHB serves as the primary financial authority for housing in India. It plays a pivotal role in regulating and supervising housing finance companies, while also extending refinancing assistance to these institutions. Moreover, NHB also fosters the development of a robust and efficient housing finance market across the country. Through its initiatives, NHB endeavors to ensure the availability of affordable housing finance options through a well-regulated sector.

Housing and Urban Development Corporation (HUDCO)

HUDCO, a government-owned financial institution, is dedicated to financing housing and urban infrastructure projects. It plays a crucial role in supporting affordable housing initiatives and urban development programs. HUDCO extends loans and grants to state governments, agencies, and organizations involved in affordable housing projects, contributing to the expansion of affordable housing options nationwide.

City and Industrial Development Corporation (CIDCO)

CIDCO is a prominent Government agency in India, dedicated to urban planning and development. It plays a key role in facilitating urban infrastructure and housing projects, with particular emphasis on Maharashtra. CIDCOs initiatives contribute to the proliferation of affordable housing options and inclusive urban development. These efforts align closely with the overarching objective of providing accessible housing to all segments of society.

Outlook

The demand for affordable housing in India is poised to surge owing to rapid urbanization, increasing incomes, and a substantial population of low-income households. According to industry projections, the potential market size for urban affordable housing in India is expected to expand by approximately 1.5 times, from an estimated 25 Million households in 2010 to 38 Million by 2030. However, the sector faces several hurdles, including limited financing avenues for developers, escalating construction expenses, and a scarcity of affordable land parcels. To tackle these challenges, developers are adopting strategies such as leveraging pre-fabrication techniques and forging partnerships with public-private entities and other stakeholders. The underpenetrated home loan market in India presents significant opportunities for banks, HFCs, and NBFCs. This market is experiencing a steady growth, registering a CAGR of 15%. Factors such as population growth, urbanization, increasing incomes, and Government initiatives like PMAY and interest subsidies are driving the demand for home loans in the country.

Government policies like the Pradhan Mantri Awas Yojana (PMAY) have propelled this sector forward by providing subsidies and incentives to developers and buyers alike. Collaboration between the Government and private sector is expected to further shape the market as they address the housing needs of a growing population. Fintech companies have a crucial role to play in this landscape by offering accessible and affordable financing solutions for prospective home buyers.

(Source: https://www.businesstoday.in/ personal-finance/top-story/story/affordable-housing- market-in-india-is-valued-at-300-billion-basic-home- loans-founder-atul-monga-407440-2023-11-28, https:// www.propacity.in/blog/affordable-housing-in-india/)

Gold loan

Gold has always held a significant cultural and economic value in India, embodying not only financial security, but also social status and cultural heritage. Indian households own a vast amount of gold –27,000 tons – accounting for 14% of the global gold market. Gold is evolving as an instrument for borrowers, especially MSME and individuals, to manage their working capital needs, with only 20% of the total gold account being pledged till now. It remains one of the most secure and flexible mediums to meet short-term cash emergencies. There is room for significant growth in the segment with 65% of the market currently being served by unorganized lenders. Whereas, the Organized Gold Loan market consists of banks (both public and private), small finance banks, cooperative banks, NBFCs, and Nidhi companies. However, organized players such as banks and NBFCs are constantly expediting their processes, offering attractive interest rates and shorter turnaround times to increase their market share in this sector.

NBFCs growth for gold loans remain highly influenced by change in the prices of the precious metal. In FY 2023- 24, gold prices in India experienced a notable increase of more than 20% YoY. The goal loan market in India stood at Rs. 2.4 Trillion in 2024 with the share of NBFCs at 59% (RBI trends and progress). Specialized gold loan NBFCs have steadily expanded their market share through aggressive investments in branding, promotional activities, and geographical expansion. These strategic investments have bolstered their brand recognition and geographic footprint, enabling them to capture a significant share of new customers entering the market. Furthermore, these NBFCs have honed their competitive edge in areas such as expedited loan processing, precise gold valuation, secure storage, and efficient auctioning processes — further sharpening their competitive edge.

Outlook

The gold loan market in India has undergone significant evolution, emerging as a crucial element of the countrys financial landscape. The combination of cultural significance, accessibility and competitive interest rates has spurred remarkable growth. As on September 2023, gold loan NBFCs held a dominant market share of 59%, with banks accounting for the remainder. As Indias economy continues to expand, the gold loan market is poised to play a pivotal role in extending credit to millions of individuals and furthering the nations financial-inclusion objectives. Expectations are high for significant growth in the Indian gold loan market, driven by changing attitudes in urban areas and cities towards availing gold loans. Moreover, the increasing penetration of gold-loan providers, banks, NBFCs, and other accessible financial institutions is expected to further fuel the market growth through 2025. Specialized gold loan NBFCs are expected to play a major role in driving AUM growth, due to their focused approach and new technology initiatives that enable customers to transact online with ease.

(Source: https://www.financialexpress.com/business/ banking-finance-banks-to-get-upper-hand-in-gold-loan- market-3435643/, https://www.thehindubusinessline. com/money-and-banking/gold-loan-nbfcs-maintain- market-share-despite-competition-from-banks-crisil/ article67701474.ece#:~:text=In%20FY24%20(up%20to%20 September,cent%20(non%2Dannualised).RBI trends and progress)

Micro, Small, and Medium Enterprises (MSME)

The MSME sector is a vital contributor to Indias economy, accounting for 96% of industrial units, 40% of industrial production, and 42% of exports. This sector provides employment opportunities in rural as well as urban areas, addressing the nations unemployment challenges. Over the last six years, 7.56 Lakh jobs have been created, with 75,000 recognized start-ups, covering diverse sectors like IT, Healthcare, Education, and Agriculture. There has been a notable 110% yearly increase in job creation during the time, presenting a promising opportunity for NBFCs to provide tailored products and digital solutions, so as to support MSMEs continued success and growth.

Government initiatives, such as the Make in India campaign aim to create a conducive environment for MSMEs by ensuring easy and secure funding, addressing credit shortages, and mitigating fraud risks. Policies like the Pradhan Mantri MUDRA Yojana (PMMY) and the Special Credit Linked Capital Subsidy Scheme (SCLCSS) further support this outlook. NBFCs play a crucial role in augmenting credit flow to MSMEs, especially in under- banked regions, through innovative tools, personalized offerings, and strategic alliances with fintech firms and banks. Leveraging technology for advanced data analytics, the NBFCs streamline processes and ensure expedited credit disbursal — demonstrating agility in meeting the diverse needs of small businesses.

(Source: https://www.forbes.com/advisor/in/business/ msme-statistics/ )

Outlook

The MSME sector possesses the talent and willingness for risk-taking, potentially making significant contributions to Indias capabilities in critical areas such as Semiconductors, Space Technology, Defence, and Medical Equipment. Despite the sectors robust growth and resilience — challenges such as the credit gap, limited access to technology, and low innovation — persist. While the governments initiatives, including credit schemes, Udyam registration, and Skill Development, are commendable, meeting the credit needs of these MSMEs will be crucial for the sustained qualitative and quantitative growth of the MSME sector in India.

(Source: https://www.infomerics.com/admin/up- loads/MSME-Industry-april24.pdf )

Microfinance

The Indian Microfinance (MFI) industry has played a vital role in serving the low-income group, individuals residing in remote regions of the country and MSMEs; thereby promoting financial inclusion at the bottom of the economic pyramid and empowering women who constitute the largest part of its borrower base. MFIs are an effective channel for providing affordable credit to low-income and mid-income households, as well as those in the informal sector. Over the past decade, MFIs experienced significant growth on account of introduction of structured guidelines, digital interventions, the governments support initiatives and redefined customer-servicing approach. The portfolio outstanding of the Microfinance industry as on March 31, 2024, stood at Rs. 4.4 Trillion with 16 Crore active loans and 8.7 Crore unique live borrowers. NBFC-MFIs were the largest segment of lenders constituting 39% of MFI loans, followed by banks at 33%, Small Finance Banks (SFBs) at 17% and NBFCs at 10% of portfolio outstanding.

(Source: CRIF)

Outlook

The evolution of the Microfinance industry into a mature sector represents a significant stride towards enhancing financial inclusion more effectively. Through structured financing and initiatives like the self-help groups bank- linked financing program, MFIs stand poised to foster greater financial stability. In India, MFIs have played a central role in extending small credit, particularly to marginalized groups that lack collateral; thereby contributing significantly to the nations efforts to promote financial inclusion. The microfinance landscape exhibits remarkable diversity, encompassing various players of different types and legal structures.

Lower operational costs associated with digitalization can lead to enhanced financial inclusion and greater benefits for customers. Technological advancements have enabled MFI lenders to expand rapidly, improve operational efficiency, and reduce reliance on cash transactions and processing times. Additionally, they have facilitated the innovation of new products, offered superior customer service, and allowed for the utilization of analytics for portfolio monitoring and credit assessment.

In the recent years, the average ticket size of MFIs has witnessed an upward trajectory, increasing from around Rs. 33,500 in FY 2020-21 to approximately Rs. 46,000 in FY 2023- 24. This increase in ticket size has been observed particularly in the states where MFIs have had a significant presence for an extended period, and where the creditworthiness of the client base is relatively well-established. However, there is a scope for further improving the penetration of MFIs in India, especially in relatively under-penetrated states such as Uttar Pradesh, Uttarakhand, and Himachal Pradesh; along with moderately penetrated states like Rajasthan, Chhattisgarh, Haryana, Punjab, and Jharkhand.

(Source: https://arflab.co.in/beyond-financial-inclusion- the-future-of-microfinance-in-india )

Key regulatory updates for FY 2023-24

• Regulated Entities (REs) have been extensively leveraging Information Technology (IT) and IT enabled Services (ITeS) to support their business models, products and services offered to their customers. REs also outsource substantial portion of their IT activities to third parties, which expose them to various risks. In order to ensure effective management of attendant risks, the Statement on Developmental and Regulatory Policies dated February 10, 2022, proposed the issuance of suitable regulatory guidelines on Outsourcing of IT Services. Accordingly, a draft Master Direction on Outsourcing of IT Services was released for public comments in June 2022. Based on the feedback received, the finalized Reserve Bank of India (Outsourcing of Information Technology Services) Directions, 2023 were released (on April 10, 2023) stating that the underlying principle is to ensure that outsourcing arrangements neither diminish REs ability to fulfil their obligations to customers nor impede effective supervision by the RBI. These Directions came into effect from October 01, 2023.

(Source: https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/102MDITSERVICES56B33FD530B1433187D- 75CB7C06C8F70.PDF )

• On June 08, 2023, RBI released guidelines on Default Loss Guarantee (DLG) in Digital Lending wherein it was stated that the recommendation pertaining to First Loss Default Guarantee (FLDG) was under examination with the Reserve Bank of India. Arrangements between Regulated Entities (REs) and Lending Service Providers (LSPs) or between two REs involving default loss guarantee (DLG), commonly known as FLDG, has since been examined by RBI and it has been decided to permit such arrangements subject to certain guidelines.

(Source:https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/NT4142A9CBCE6AC04882AD2C3B1E8718965C. PDF )

• On August 18, 2023, RBI issued a circular highlighting that many Regulated Entities (REs) levy penal rate of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned. RBI reiterated that the intent of levying penal interest/charges is to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest. However, RBIs supervisory reviews indicated divergent practices amongst the REs with regard to levy of penal interest/ charges leading to customer grievances and disputes. Accordingly, RBI issued instructions to be adopted by REs in this matter.

(Source: https://rbidocs.rbi.org.in/rdocs/notifica- tion/PDFs/FAIRLENDINGPRACTICE1B9DBE75410B- 4DA881E6EF953304B6F7.PDF)

• In its circular dated September 13, 2023, in order to promote responsible lending conduct among the REs, RBI issued some directions. These covered REs practices in the areas of release of movable/ immovable property documents, compensation to be paid by the RE to the borrower for delay in the release of movable/immovable property documents (where the delay is attributable to the RE), among others.

(Source:https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/NOTI60936A9DFA85554DD1BF77BCF4611AA69D. PDF)

• On September 25, 2023, in a bid to driver greater transparency, RBI intimated that the Regulated Entities (REs) of the Reserve Bank of India which are secured creditors as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, shall display information in respect of the borrowers whose secured assets have been taken into possession by the REs under the Act. REs shall upload this information on their website in the format prescribed by the RBI.

(Source: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/ NOTI63D6F589F933804ED992EBCFF30F5CCD5E.PDF )

• On October 19, 2023, the RBI issued a Master Direction, consolidating provisions for Systemically and Non-Systemically important NBFCs, Scale- Based Regulatory Framework for NBFCs, and related circulars into one. The framework categorizes NBFCs in the base layer, middle layer, upper layer and top layer. The Master Direction is categorized into sections applicable to different NBFC categories like NBFC-Base Layer, NBFC-Middle Layer, and NBFC- Upper Layer, based on size and function for easier reference.

(Source:https://rbidocs.rbi.org.in/rdocs/notifica- tion/PDFs/106MDNBFCS1910202343073E3EF- 57A4916AA5042911CD8D562.PDF )

• In a circular dated October 26, 2023, RBI released its framework for compensation to customers for delayed updation/rectification of credit information. Under this framework, the complainants shall be entitled to a compensation of Rs. 100 per calendar day in case their complaint is not resolved within a period of thirty (30) calendar days from the date of the initial filing of the complaint by the complainant with a Credit Institution (CIs) and Credit Information Company (CIC). It also has detailed guidelines regarding compensation to be paid by a CI/CIC in case they fail to resolve the complaint within a defined timeline.

(Source: https://rbidocs.rbi.org.in/rdocs/notifica- tion/PDFs/NOTI72FCCD26102301BDA57DCC7B- 47C9BB0B0994716BED22.PDF)

• In a circular dated October 26, 2023, RBI issued directions to CIs and CICs to strengthen their customer service practices. These include directions on implementation of access to credit information report, updation of credit information with CICs, setting up nodal points/officials by CIs, among others.

(Source: https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/NT73D86ADB78399949C199250E3E16F037D5. PDF)

• In its circular dated October 26, 2023, RBI highlighted that certain entities, which are eligible to join Account Aggregator (AA) ecosystem as Financial Information Provider (FIP), have been on boarded as Financial Information User (FI-U) only. Consequently, such entities are accessing financial information from other FIPs but are not providing the financial information held by them. As such, with a view to ensure efficient and optimum utilization of the AA ecosystem, it has been decided that RBI regulated entities joining the AA ecosystem as FI-U shall necessarily join as FIP also, if they hold the specified financial information and fall under the definition of FIP. The Master Direction – Non- Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016 is being modified accordingly.

(Source: https://rbidocs.rbi.org.in/rdocs/Notification/ PDFs/NOTI773109DABBDE4E4E27B93AB7325962E43A. PDF )

• On November 07, 2023, the RBI issued master direction detailing the Information Technology Governance, Risk, Controls and Assurance Practices of its Regulated Entities (REs).

(Source: https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/107MDITGOVERNANCE3303572008604C67AC 25B84292D85567.PDF )

• On November 16, 2023, the RBI issued fresh directives for bank credit to NBFCs, asking banks to compute risk weights for their NBFC exposures, using ratings from accredited External Credit Assessment Institutions (ECAIs). If the current risk weight based on external ratings falls below 100%, banks must increase the risk weight by 25 percentage points. However, loans extended to Housing Finance Companies (HFCs) and NBFCs, eligible for priority sector classification, are exempted from this regulation.

• In the same circular, the RBI tightened rules for consumer lending, asking banks and non-banking financial companies (NBFCs) to set aside higher buffers and put in place Board-approved policies to monitor exposure limits to this segment. The development comes after the RBI governor flagged concerns about the high rate of growth of consumer loans on multiple occasions, asking lenders to remain cautious.

(Source: https://rbidocs.rbi.org.in/rdocs/no- tif ication/PDFs /R E G UL AT OR Y M E A SUR E - S8785E7886A044B678FB8AF2C6C051807.PDF)

• The said circular also stated that in order to strengthen credit standards, RBI-regulated entities are mandated to review and establish Board-approved sectoral exposure limits for various consumer credit sub-segments. These include setting limits for all unsecured consumer credit and considering top-up loans against depreciating assets as unsecured for credit appraisal and limits.

(Source: https://rbidocs.rbi.org.in/rdocs/no- tif ication/PDFs /R E G UL AT OR Y M E A SUR E - S8785E7886A044B678FB8AF2C6C051807.PDF)

• On December 29, 2023, the RBI issued directions with a view to strengthen the Internal Grievance Redress mechanism within a Regulated Entity (RE) and to ensure a proper and speedy resolution of customer complaints by enabling a review before their rejection, by an apex level authority within the Regulated Entity. These Directions integrate and update the erstwhile Internal Ombudsman Schemes issued by the Reserve Bank of India for banks, Non-Banking Financial Companies (NBFCs), Non-bank System Participants (NBSPs) and Credit Information Companies (CICs).

(Source: https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/108MDINTERNALOMBUDSMANCC05402F- 77BE4F229B59877F341386A4.PDF )

• On January 31, 2024, the RBI issued detailed guidelines for streamlining of the internal compliance monitoring function – leveraging use of technology to be implemented by its REs. Such a solution/tool should, among other things, provide for effective communication and collaboration among all the stakeholders (by bringing business, compliance and IT teams, Senior Management, etc. on one platform); have processes for identifying, assessing, monitoring and managing compliance requirements; escalate issues of non-compliance, if any; require recording approval of competent authority for deviations/ delay in compliance submission; and have a unified dashboard view to Senior Management on compliance position of the Regulated Entity (RE) as a whole. The RE, based on the size and complexity of its operations, may decide on the tools/mechanism it would prefer to deploy for monitoring of compliance and development of the unified dashboard.

(Source: https://rbidocs.rbi.org.in/rdocs/noti- fication/PDFs/COMPLIANCEMISCIRCULARB019F- BA6000948078940E94837A11A10.PDF )

• On February 22, 2024, the RBI Retail Direct Scheme (‘Scheme) included Clearing Corporation of India as a Financial Information Provider to enable aggregation of financial information on Government Securities held by retail investors in their Retail Direct Gilt accounts under the scheme. The Master Direction – Non- Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016 is being modified accordingly.

(Source: https://rbidocs.rbi.org.in/rdocs/Notification/ PDFs/CIRCULARINCLUSIONCCIL9520A6BC53544F- 7C823581B782E5A2C6.PDF)

• On February 27, 2024, RBI issued master directions wherein all its Supervised Entities (SEs) are required to submit certain supervisory returns to the Reserve Bank of India as per various directions/ circulars/notifications issued by the Bank from time to time. In order to create a single reference for all Supervisory Returns and to harmonize the timelines for filing of returns, all the relevant instructions have been rationalized and consolidated into a single Master Direction.

(Source: https://rbidocs.rbi.org.in/rdocs/noti- fication/PDFs/MD11024D1EF9CB39B44ABB23DF- 586173E0CDE.PDF)

• On March 27, 2024, RBI issued a circular to address certain regulatory concerns relating to investment by regulated entities (REs) in the AIFs. The key recommendations include:

• Downstream investments shall exclude investments in equity shares of the debtor company of the RE, but shall include all other investments, including investment in hybrid instruments.

• Provisioning shall be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme.

• Proposed deduction from capital shall take place equally from both Tier-1 and Tier-2 capital. Reference to investment in subordinated units of AIF Scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units.

• Investmentsby REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the Circular.

(Source: https://rbidocs.rbi.org.in/rdocs/notification/ PDFs/NOTI14027032024A0474453CF9549A69FF- B3EA0CA948602.PDF)

Sectoral opportunities

• Bank-NBFC co-lending model aimed at broadening opportunities for organized lending.

• E-commerce unlocking the potential for retail lending.

• Underserved retail and MSME sectors offering significant opportunities for NBFC growth.

• Growing digitalization and analytics leading to improved lending efficiency.

• Gold loans, housing loans, and microfinance loans are helping towards improved financial inclusion.

• Credit-risk sharing agreements being facilitated between fintech companies and regulated financial institutions such as banks and NBFCs.

Sectoral threats

• Liquidity challenges may create an adverse impact on the sectors lending capability.

• Unforeseen changes in the regulatory landscape may require the NBFCs to modify their operations significantly.

• Rapid pace of technological advancement may pose the threat of obsolescence.

• Heightened geopolitical uncertainties may impact the macroeconomic environment for the NBFC sector.

COMPANY OVERVIEW

IIFL Finance Limited (Herein referred to as ‘IIFL Finance or ‘The Company, ‘Our Company or ‘We), formerly IIFL Holdings Limited, is a reputable and leading financial services institution in India. Established in 1995 and focused on financial services, it began as a research firm and has been continuously evolving, adapting, and innovating to meet the changing requisites of the financial services sector. It operates across verticals through its subsidiaries, namely IIFL Home Finance Limited, IIFL Samasta Finance Limited, and IIFL Open Fintech Private Limited. The Company and its subsidiaries offer a diverse array of loan products, including gold loans, home loans, secured business loans (LAP), digital loans, and microfinance loans, through an extensive network of branches across India. IIFL Finance follows an asset-light model wherein it partners with banks to sell its retails assets under Direct Assignment/Securitization/ Co-lending arrangements, since most of its assets meet the priority sector norms defined by RBI.

With a hybrid model combining physical and digital distribution channels, IIFL Finance Limited operates over 4,801 branches as of March 31, 2024, alongside a robust online infrastructure and cutting-edge mobile platforms. The Company serves a customer base exceeding 8 Million across various business segments through its varied financial offerings. Promoted by first-generation entrepreneurs Mr. Nirmal Jain and Mr. R. Venkataraman and supported by esteemed institutional investors like the Fairfax Group, Capital Group, among others, the Company upholds honesty and transparency as its fundamental values. It strives to keep its loan products straightforward, ensure transparency, and consistently commit to its valued customers. The Companys management team comprises highly skilled and seasoned professionals who foster a culture of growth, entrepreneurship, and innovation among its extensive talent pool.

Following an inspection of our Companys financial position as of March 31, 2023, the RBI identified supervisory concerns regarding our gold loan portfolio. In response to a press release and order dated March 04, 2024, the RBI directed our Company to cease sanctioning or disbursing gold loans or assigning/securitizing/selling existing gold loans. The order allows the Company to continue servicing its existing gold loan portfolio through regular collection and recovery processes and continue lending as usual, except for the gold loans. These restrictions will be reviewed after a special audit is conducted by the RBI and upon rectification of audit findings to the satisfaction of the RBI. The special audit commenced on April 23, 2024, and has since concluded.

FINANCIAL PERFORMANCE AND OPERATIONAL REVIEW

During the year under review, AUM witnessed a 22% growth from Rs. 64,638 Crore to Rs. 78,960 Crore as our diversified portfolio, including home loan, secured business loan, gold loan, digital loan, and microfinance loan, registered upward mobility in terms of growth.

The total comprehensive income after non-controlling interest increased by 14% YoY to Rs. 1,748 Crore from Rs. 1,534 Crore. Core AUM grew to Rs. 76,794 Crore and comprised 97% of our total AUM. Our Company enjoys surplus liquidity in all maturity segments across all levels. Our Companys asset quality has historically been amongst the best in the industry and remained solid during the year under review. Our gross NPA and net NPA stood around 2.3% and 1.2% respectively for FY 2023-24. In line with the capital optimization strategy, the Companys assigned and co- lending portfolio constituted about 36% of the total AUM. As of March 31, 2024, the Companys (Standalone) Capital Adequacy Ratio stood at 18.85%, including Tier-1 Capital of 12.56%.

Note: GNPA and NNPA numbers exclude discontinued Healthcare equipment finance (HCF) business for FY20 and FY21

Loan AUM for core products grew by 25% YoY, driven mainly by retail home loans, secured business loan, and microfinance loans. Retail home loans grew by 26% YoY, secured business loans by 29% and microfinance loans by 34% YoY. Within the home loan category, our primary focus remains on affordable and non-metro customers who possess the financial capacity to conveniently acquire products and services that align with their financial capabilities. Specifically, we cater to the affordable home segment, offering small-ticket loans to salaried and self- employed individuals with an average on boarding ticket size of Rs. 15.3 Lakh. Through the Pradhan Mantri Awas Yojana (Urban) – Credit Linked Subsidy Scheme, our subsidiary, IIFL Home Finance, has aligned its business strategy with the Governments ‘Housing for All mission. So far, more than 73,000+ families have benefited from the program, with over Rs. 1,750+ Crore in subsidies distributed. As of March 31, 2024, 98% of our Companys loan assets were retail loans secured by mortgages, other collateral like gold, or backed by cash flows to consumers underserved by banks. Our Companys success in retail lending is attributed to our broad distribution network, cutting-edge technological solutions, loyal customer base, various co- lending agreements, and robust balance sheet. Furthermore, excluding gold loans, which are not categorized as Priority Sector Lending (PSL) loans, 67% of our companys retail loans comply with RBIs PSL standards. The share of loans sold down was 20.9% of the total AUM as of March 31, 2024. Additionally, co-lending off-book stood at 14.7% of total AUM as of March 31, 2024.

The Company enjoys a well-diversified AUM mix with 78% comprising secured loans and 22% unsecured loans. IIFL has 4,801 branches, primarily for gold, home finance, and microfinance businesses. During the year under review, RoA stood at 3.4% and RoE stood at 18.4%. Consolidated net profit margin for FY 2023-24 was 18.8% down from 19.0% in FY 2022-23.

Focusing on the retail portfolio, the Company has implemented prudent risk management and sufficient provisioning to maintain asset quality and growth across segments. Leveraging technological advancements, fintech innovations, digital delivery, and paperless loan processing, we have surpassed industry standards. From customer on boarding to loan disbursement, almost the entire journey for secured business loan and digital loans has been digitalized. The Company has developed an end-to- end loan process through WhatsApp, providing borrowers with a seamless experience that includes customer on boarding, digital application, loan approval, disbursement, and collection.

Details of significant changes

* The consolidated GNPA y-o-y has increased by 48 bps (2.32% versus 1.84% in FY 2022-23), mainly because of the gold loan portfolio.

* The return on net worth was lower by 150 bps (18.42%% versus 19.92% in FY 2022-23) due to higher growth in average net worth compared to last year because of capital infusion in the Housing Finance subsidiary towards the later part of the financial year 2023.

Disclosure of accounting treatment

The Companys financial statements were prepared without deviation from the treatments prescribed in any of the Accounting Standards (AS).

SEGMENT OVERVIEW AFFORDABLE HOME LOAN

Business overview

IIFL Finance, through its subsidiary IIFL Home Finance, extends loans for various residential property needs such as home purchases, construction and renovation. Additionally, we offer mortgage-backed loans to small and medium businesses for residential and commercial properties, catering to diverse requirements, including working capital, business usage, and property acquisition.

With a robust foundation, our Company conducts thorough credit background checks on applicants, ensuring responsible lending practices. We also employ comprehensive legal and technological security assessments to safeguard our operations. For large mortgage loans, we utilize a combination of external and internal property appraisals, including evaluations by international property specialists.

FY 2023-24 UNDER REVIEW

In FY 2023-24, our Company continued its sharp focus on affordability, mainly targeting non-metro customers by leveraging the recently expanded housing finance branches. Our home loan Assets Under Management (AUM) grew by 26%, reaching Rs. 27,438 Crore by March 31, 2024. Our operations span 389 dedicated home loan branches nationwide, ensuring extensive coverage across India. As a result, our subsidiary, IIFL Home Finance, achieved the Principal Business Criteria set by the National Housing Bank (NHB) much ahead of the scheduled deadline of March 2024.

Additionally, IIFL Home Finance has emerged as the leading housing finance company in the sub-Rs. 20 Lakh ticket size segment, further solidifying its position in the market. Furthermore, we facilitated co-lending disbursements exceeding Rs. 900 Crore with various banks for home loans. Additionally, our Company forged partnerships with state housing boards and developers to construct green buildings, aligning with our commitment to sustainability.

GOLD LOAN

Business overview

The Company specializes in offering loans against gold jewelry to a diverse clientele, including small business owners, merchants, dealers, farmers, and salaried individuals. We provide competitive rates, minimal paperwork, and swift response times. Our verification process is managed by experienced officers proficient in asset quality procedures. To ensure security, the ornaments are stored in fireproof and burglary-proof vaults at our gold loan branches, monitored round the clock by electronic surveillance.

FY 2023-24 under review

Our Company has an extensive Pan-India presence catering to diverse geographies through its 2,752 dedicated gold loan branches. Our gold loans business has recorded a CAGR of 30% over the past 5 years by prioritizing growth accompanied with strong collections and resolutions, resulting in negligible losses. We continuously strive to set new benchmarks in customer service and to this end provide a seamless experience through our branches, digital platforms and our doorstep services. In FY 2023- 24, our gold loan Assets Under Management (AUM) grew by 13%, reaching Rs. 23,354 Crore by March 31, 2024. As mentioned above, RBI has effective March 04, 2024 directed our Company to cease sanctioning or disbursing gold loans or assigning/securitizing/selling existing gold loans.

DIGITAL LOANS

Business overview

IIFL Finance offers unsecured business loans, specializing in small-scale cash flow analysis-backed loans tailored for the rapidly growing, low-ticket size, high-yielding MSME sector. With a robust foundation, our Company conducts rigorous in-house underwriting and credit checks, ensuring thorough evaluation of loan applicants. Leveraging technology, we provide financial solutions to MSMEs, exemplified by our instant paperless loan offerings via WhatsApp and our app, resulting in swift processing times and heightened client satisfaction. Moreover, our seamless e-integration with various fintech partners ensures a smooth end-to-end process for our customers.

FY 2023-24 under review

Our Company optimized operational efficiency throughout the year through digital loan processing methods. Collaborating with prominent fintech lenders, we expanded our offerings to encompass business and supply chain finance underpinned by sound risk-sharing agreements. Our robust risk management framework balances cautious credit underwriting and swift decision-making, facilitated by automated disbursements and guided by analytical scorecards. Notably, the MSME loans segment experienced a commendable 71% growth in FY 2023- 24, accompanied by enhancements in asset quality and collection efficiency.

SECURED BUSINESS LOANS (LOAN AGAINST PROPERTY)

Business overview

The Companys secured business loan business is typically small, with an average on boarding ticket size of about Rs. 8.05 Lakh. Despite being categorized under LAP and MSME, these loans are physically collected, often resulting in slightly higher stages of delinquency initially. However, our experience with this product has been positive, as collections have been consistent and adequate.

FY 2023-24 under review

This segment focused on digital lending to the MSME sector and individuals. IIFL Finance aims to balance prudent credit underwriting with instant in-principle decisions. In FY 2023-24, the Companys secured business loan business witnessed a remarkable 29% YoY increase in Assets Under Management (AUM), reaching Rs. 8,607 Crore.

MICROFINANCE

Business overview

Our Company is committed to empowering communities through microloans tailored to income-generating endeavors, including initiatives like dairy cattle loans. With a focus on granularity, our portfolio yields significant returns. We primarily serve women-led Self Help Groups (SHGs), amplifying our impact on grassroots empowerment. Our subsidiary, IIFL Samasta, provides term loans called Dairy Cattle Loans to individuals or businesses involved in dairy farming. These loans are primarily used for purchasing high-quality dairy cattle, including cows or buffaloes, to establish or enhance a dairy farming operation. These loans are designed to support the acquisition, expansion, or improvement of dairy cattle and related infrastructure.

FY 2023-24 under review

In FY 2023-24, our microfinance portfolio, witnessed a remarkable 34% year-on-year increase in Assets Under Management (AUM), reaching Rs. 13,094 Crore in the microfinance segment. As of March 31, 2024, our MFI segment served nearly 30 Lakh active customers across 22 states and union territories, supported by a robust branch network comprising 1,648 branches.

RISK MANAGEMENT AND GOVERNANCE

IIFL Finance places significant emphasis on the crucial role of effective risk management in ensuring the success and longevity of its business. The Company understands the importance of integrating risk management practices into its operations to optimize the risk-return balance while adhering to all relevant laws, regulations, and standards. This holistic approach shields the Company from potential losses and strengthens its reputation as a trustworthy and conscientious financial services provider.

The Company acknowledges that risk management is an ongoing endeavor, requiring continual vigilance and adaptability to evolvingcircumstances. By fostering a culture of robust and disciplined risk management throughout the organization, the Company ensures that its employees are aware of the risks associated with their roles. Concurrently, it equips them with the necessary knowledge and tools to mitigate those risks effectively.

Fundamental changes introduced in the gold loans business in FY 2023-24

To enhance operational efficiency and security, we are setting a maximum cash disbursement limit in line with regulatory requirements. Additionally, issuing a Certificate of Purity will be an integral part of the loan agreement generated during disbursement to ensure the authenticity of pledged gold assets. Comprehensive credit information for all gold loan borrowers is reported to Credit Information Companies (CIC), facilitating informed lending decisions. To improve transparency in customer communication, SMS reminders are sent when the Portfolio Loan-to-Value (LTV) ratio crosses a set threshold, indicating either the imposition of MTM charges or gold auctioning based on the limits. Enhanced due diligence protocols are applied to customers with loan exposures equal to or exceeding threshold limits for thorough risk assessment.

We have detailed the auction process in the loan agreement to align with RBI master directions, ensuring transparency and compliance. Also, we have enhanced due diligence for borrowers with loan sanctioned during Financial year Rs.30 Lakh and Rs.1 Crore loan. This includes obtaining a certification from a Chartered Accountant (CA) to verify the intended end use of funds. Continuous Anti-Money Laundering (AML) monitoring is conducted daily for all active customers to ensure compliance and prevent financial crime. In adherence to the Fair Practices Code, loan agreements are provided in 11 languages to cater to diverse linguistic preferences, promoting transparency and inclusivity. Lastly, to mitigate risks associated with delinquent customers, new loan applications are automatically blocked for those exceeding a Days Past Due (DPD) threshold, reducing the likelihood of extending credit to high-risk individuals.

HUMAN RESOURCES

IIFL Finance values human resources, implementing people-centric policies and practices to foster a transparent, meritocratic, and performance-oriented culture. The Company attracts talented professionals from diverse backgrounds, contributing to a strong management team and organizational growth. Read more in the Human Capital chapter on pages 58-67.

INTERNAL CONTROLS

The Company implements an exhaustive internal control framework complemented by concurrent and internal audits, special audits, and regular management reviews. These internal mechanisms ensure the presence of appropriate checks and balances and compliance with regulatory standards across all organizational levels. The internal audit team conducts risk-based audits to validate the adequacy and efficacy of internal controls for fraud prevention, detection, reporting, and remediation.

In addition, the Company prioritizes examining process controls, risk monitoring, and fraud prevention measures. To attain this objective, it invests significantly and ensures that the internal audit and control systems effectively fulfil regulatory requirements and operational demands. Furthermore, the Company is committed to mitigating operational risks by maintaining robust internal controls, monitoring transactions, implementing backup procedures, and devising comprehensive contingency plans.

The Company ensures adequate insurance coverage for pledged ornaments and employs on-site and off-site security surveillance measures at branch locations. These interventions mitigate employee and consumer fraud, fire incidents, theft, and burglary. Moreover, risk-based internal audits are conducted across all branches to evaluate the adequacy and compliance of internal controls, systems, and procedures.

The Company collaborates with top-tier firms to oversee internal audits for its critical operations, including engaging KPMG for its NBFC, HFC, and MFI operations. Adopting the ‘three lines of defence risk governance strategy, the Companys line management function acts as the first line of defence, followed by the risk management and compliance functions, and ultimately, the audit function.

The Companys internal audit function, helmed by the internal auditor, operates independently under the supervision of the Audit Committee of the Board. Moreover, close collaboration with the risk management and compliance department ensures the effectiveness of controls and adherence to internal processes and procedures. Activities undergo audits based on inherent and control risks identified through an annual risk assessment exercise. Furthermore, being an ISO/IEC 27001:2013 certified company underscores its commitment to providing clients with reliable and secure technology solutions.

Following the recent regulatory action, we have implemented significant internal control improvements to enhance our compliance framework and operational resilience. We have strengthened our monitoring mechanisms with a robust quarterly dashboard for management to promptly track and address compliance issues. Our internal audit team has embraced a dynamic and proactive approach, utilizing data analytics and conducting targeted audits based on the latest regulatory guidelines and sanctions, ensuring adaptability and precision in our compliance efforts.

Additionally, we have integrated data analytics into our portfolio testing to ensure comprehensive risk assessment. As part of strengthening our second line of defence, independent compliance testing through integrated system tools by the compliance team will provide an extra layer of assurance. Further, we have also engaged expert consultants to update our Standard Operating Procedures (SOPs) and Risk Control Matrix, ensuring alignment with industry best practices and regulatory requirements. These measures fortify our internal controls, ensuring robust compliance and sustained resilience to meet current and future regulatory expectations.

INTERNAL FINANCIAL CONTROLS

The Company recognizes the importance of robust internal financial controls in enhancing operational performance and boosting financial prudence. The internal auditors scrutinized the design and effectiveness of the primary controls and found no significant deficiency during their investigation. Additionally, the statutory auditors assessed the systems and procedures, confirming their appropriateness while reiterating the successful functioning of the internal financial controls system for financial reporting.

CAUTIONARY STATEMENT

Statements made in this Management Discussion & Analysis (MD&A) outlining the Companys objectives, projections, estimates, general market trends, and expectations may fall under the category of ‘forward- looking statements as per applicable laws and regulations. Actual results may significantly differ from the suggestions put forth by these ‘forward-looking statements due to various risks, uncertainties, and other factors.