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INDIAN ECONOMY: OVERVIEW

As per International Monetary Fund (IMF), India was among the fastest-growing major economies in CY 2022

In the post pandemic period, Indian economy has demonstrated remarkable resilience by replacing external stimuli with domestic ones. This resulted in a robust recovery in economic activity, particularly in private sector consumption, and increased government focus on infrastructure development. Despite global challenges and tighter domestic monetary policy, Indias growth momentum remained steady. Thus showcasing the underlying strength of the countrys economy in recovering and revitalising growth drivers.

Real GDP growth

Indias GDP grew 7.2% during FY 2022-23, slightly above the National Statistical Organization (NSO)s forecast of 7%. The ministry also announced a revised estimate of 9.1% GDP growth for FY 2021-22, which is an increase from the May 2020 estimate of 8.7%.

Several factors can be attributed to the healthy growth rate, including rebounding private consumption, increased production activity, and higher capital expenditure.

The growth outlook for India is strengthened by the limited health and economic impact on the rest of the world from the recent surge in COVID-19 infections in China. This has resulted in the normalization of supply chains, and experts believe any inflationary impulses from the reopening of

Chinas economy are likely to be insignificant and shortlived. Additionally, recessionary tendencies in major Advanced Economies (AEs) may trigger a halt in monetary tightening and the return of capital flows to India, with a stable domestic inflation rate below 6%. Thus boosting human morale and driving private sector investment.

Inflation

The prolonged geopolitical tension between Russia and Ukraine has adversely affected global trade and crude oil prices, weighing heavily on raw material prices. As a cascading effect, economies across the world have witnessed a tighter inflationary grip. In the Indian context, in March 2023, the retail inflation fell to its lowest in the past 15 months, below the 6% upper limit tolerance set by the Reserve Bank of India (RBI). The recorded rate for March 2023 was 5.66%, as opposed to 6.95% in the previous year. For FY 2023-24, the central bank has projected CPI at 5.2%, with 5.1% in Q1, 5.4% in Q2, 5.4% in Q3, and 5.2% in Q4, and risks evenly balanced. Inflation has started to decrease gradually post implementation of higher interest rates. In this instance, the RBI in its second bi-monthly monetary policy of FY 2023-24, in June, kept its repo rate unchanged at 6.50%. This further indicates the gradual smoothening of the inflationary grip on the countrys economy.

Capex

In the past two decades, the Governments focus on capital expenditure was not solely aimed at bridging infrastructure gaps. However, it was also part of a strategic plan to attract private investment by divesting non-strategic Public Sector Enterprises (PSEs) and utilizing idle public sector assets. The 37.4% increase in capex budget to 10 Trillion in the Union Budget 2023-24, along with higher direct tax and GST collections, enabled the Government to utilize the capex budget without hampering the fiscal deficit targets.

The gross GST revenue collection for FY 2022-23 marked a 22% rise, amounting to 18.10 Trillion. Also, the direct tax collection marked an increase of 17.63%, amounting to

16.61 Trillion for FY 2022-23. Limited revenue expenditure and a rise in private sector investment since January-March 2022 led to a surge in announced projects and capex spending by private players, indicating a growing trend.

(Source: https://pib.gov.in/PressReleasePage.aspx?PRID=1894932, RBI Estimates, NSO Estimates)

(Source: MoSPI, https://www.reuters.com/world/india/india-sees-gdp-growth-slowing-6-68-202324-govt-survey-2023-01-31/)

First quarter

According to data released by the National Statistical Office

(NSO), Indias real GDP grew 13.1% in the quarter ending June 30, 2022. This was the fastest growth in the previous four quarters and the fastest globally. In the same quarter of the previous year (FY 2021-22), the Indian economy grew by 21.6%. Although the growth rate in Q1 of FY 2022-23 was lower than the RBIs estimated 16.2%, it was mainly driven by consumption, which led to a revival in domestic demand, particularly in the services sector.

(Source: NSO estimates, RBI Estimates, MOSPI)

Second quarter

Indias real GDP grew by 6.2% YoY in Q2 of FY 2022-23, driven by robust domestic demand and steady investment activity. Sequentially, Indias real GDP increased by 3.6% from Q1 to Q2 of FY 2022-23, indicating a significant release of pent-up demand in the economy. This led to a gradual increase in manufacturing and investment activity even as export growth moderated. Notably, private consumption as a percentage of GDP reached 58.4% in Q2 of FY 2022-23 the highest for any second quarter since FY 2013-14.

( Source: https://www.mospi.gov.in/sites/default/files/press_release PressNoteQ4_FY2022-23_31may23.pdf)

Third quarter

Indias economic growth decelerated to 4.5% in Q3 of FY

2022-23, compared to 5.2% in the same period of the previous year. This happened due to the fading of the pandemic-induced base effect. The high inflation rate led to the RBI increasing its benchmark repo rate by 250 basis points since May 2022 till February 2023. During the quarter, the manufacturing sector contracted by 1.1% YoY. This reflected weakness in consumer demand and exports and external demand affected by global central banks continued monetary tightening. Despite headline inflation declining, core inflation remained high at 6% in November 2022. This was partly due to increased pass-through of high manufacturing costs to consumer prices as demand recovered rapidly. Nevertheless, private capex has been on the rise, reflecting the strengthening balance sheets of corporates and increased credit financing.

Gradual and steady improvements in the investment climate, such as deleveraged corporate balance sheets and banks increased appetite to lend, are overall supportive of private investments. The manufacturing sector may also see gradual progress in investments with better capacity utilization. Furthermore, Government impetus, including the PLI scheme, is boosting the likelihood of investment across various sectors, such as automobiles, solar energy, pharmaceuticals, and electronics.

(Source: https://timesofindia.indiatimes.com/business/india-business/indias-q3-gdp-at-4-4-economy-to-grow-at-7-in-fy23/ articleshow/98306889.cms https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/ echap09.pdf https://www.outlookindia.com/business/growth-premium-news-244264)

Fourth quarter

In the fourth quarter of the FY 2022-23, the nation achieved a real GDP growth rate of 6.1%, surpassing the Reserve

Bank of Indias earlier projection by 100 basis points. This positive outcome can be attributed primarily to significant progress in the agricultural and service sectors, which made notable contributions to the overall expansion of the economy. Furthermore, capital formation played a crucial role in supporting the expenditure side of the economy. Notably, Indias manufacturing sector demonstrated a year-on-year increase of 4.5% during this period, representing a significant improvement compared to the 1.1% contraction observed in the preceding quarter. Additionally, agricultural output experienced a growth rate of 5.5%, exceeding the 3.7% growth recorded in the corresponding period.

Looking ahead, the Union Budget 2023-24, released in February 2023, has outlined seven key focus areas, including inclusive growth, green initiatives, infrastructure and investment, last-mile connectivity, unleashing potential, youth empowerment, and financial sector reforms. To bolster economic growth in the midst of an uncertain macroeconomic climate, a substantial capex of 10 Trillion has been allocated towards the countrys infrastructure development.

Outlook

India is expected to experience a slower real GDP growth (relative to FY 2022-23) of 6% in FY 2023-24 according to S&P Global Ratings. The country has recovered quickly from the pandemic, and the growth in the upcoming year will be driven by robust domestic demand and increased capital investment. The Government has raised capital expenditure to offset the private sectors cautious stance on capital expenditure, supported by strong financials and high GST and direct tax collections. Nevertheless, global spill overs, high inflation, and aggressive monetary policies could hinder the steady growth trajectory. Given Indias deepening trade and financial linkages with advanced economies, caution is essential. Indias growth cycle has exhibited a high degree of synchronization with advanced countries, and it is impossible to avoid the short-term consequences of a potential downturn.

(Source: MOSPI, NSO, https://www.outlookindia.com/business/growth-premium-news-244264 https://www.deccanherald.com/business/business-news/indias-gdp-to-grow-at-6-in-2023-24-sp-1204173.html)

INDUSTRY STRUCTURE AND DEVELOPMENTS Non-Banking Financial Company (NBFC)

During economic crises, financial institutions play a crucial role in promoting stability and implementing regulatory measures to support households and businesses. Ongoing geopolitical conflicts have slowed countries post-pandemic recoveries and hastened the normalization of monetary and fiscal policies after years of unprecedented stimulus measures. In such situations, NBFCs have emerged as principal institutions providing credit financing to the unorganized and underserved sectors, playing a significant role in the Indian financial system.

NBFCs have revolutionized the lending system in India by providing financial inclusion for those who lack easy access to credit. Leveraging digitalization and technology, NBFCs offer a quick and convenient customer financing experience, especially for low-income and untapped segments of the creditworthy population. They offer a range of services, including MSME financing, home finance, EV finance, microfinance, gold loans, and other retail segments.

The NBFC segment has also strengthened its business proposition by integrating fintech and developing newer products of the technological age. These companies have unlocked industrial opportunities by leveraging a hybrid model of physical and digital delivery. The Government is also focusing on developing NBFCs with high emphasis on driving quality corporate governance across these entities.

NBFCs take an individualized approach to reach out to borrowers, utilizing segment-definitive standards, leveraging different data sources, and making credit decisions using scorecards. Following sluggish years amid liquidity stress, NBFCs have bounced back strongly with higher capital levels, reasonable stability in delinquency accounts, better asset quality and larger balance sheets. Stronger risk assessment frameworks, Government support such as debt moratorium and liquidity enhancement measures, and broader economic revival have helped them tide through these challenges and pursue innovative strategies to meet evolving opportunities.

The MSME sector will play a pivotal role in the growth of NBFCs in the country. Despite being one of the major contributors in the countrys economy, the MSME sector is facing credit gap from the financial institutions. The total addressable market for MSME financing is 46.4 Trillion with a CAGR of 13% in the MSME credit. Only 15% of total addressable market is served by the formal institutions. NBFCs, under this scenario, can utilize the opportunity and help in the growth of the sector with better financing through customized products and digital solutions.

The rationalization and consolidation of the MSME industry in India is a much-needed process that is expected to bring a host of benefits to the sector. The RBIs efforts to strengthen the digital ecosystem in India are a critical part of this transition. The Account Aggregator network, for instance, is expected to unlock significant value by providing a secure and efficient platform for sharing financial data. This will make it easier for MSMEs to access credit, and for lenders to assess creditworthiness. Similarly, the OCEN network is expected to revolutionize the way credit flows in the economy by providing a seamless platform for all stakeholders. Overall, the convergence of digital technologies and the consolidation of the MSME industry in India is expected to create a powerful combination that could unlock significant economic potential.

The RBI has implemented the co-lending mechanism to facilitate the provision of low-cost funds from banks to NBFCs operating in underserved areas and catering to the needs of micro, small, and medium enterprises (MSMEs), economically weaker sections (EWS), low-income groups (LIG), and middle-income groups (MIG). This mechanism aims to address the reluctance of banks to lend in these segments due to the associated higher operating costs and credit risks.

According to the Reserve Bank of India (RBI) data, as of December 2022, outstanding bank credit to NBFCs has significantly increased from 3.68 Trillion in 2017 to 13.20 Trillion, non-bank lenders surpassed banks in the microlending category, with NBFC-microfinance institutions (NBFC-MFIs) accounting for 35.1% of outstanding loans compared to 34.8% for banks.

The steady momentum of NBFCs is heavily backed by robust demand for personal loans which they need for their growth and working capital. According to ICRA Analysis, NBFCs are expected to witness 8-10% growth in assets under management in

FY 2022-23 compared to 5-7% growth in FY 2021-22. NBFCs are expected to play a crucial role in financing Indias transition from the worlds fifth-largest to the third-largest economy by the end of this decade. nBFc IndUStry aUm

(Source: CRISIL NBFC Report 2021, https://economictimes.indiatimes.com/industry/banking/finance/non-bank-lenders-surpassed-banks-in microlending-segment-in-september-2022-report/articleshow/97703891.cms?from=mdr https://assets.kpmg.com/content/dam/kpmg/in/pdf/2022/11/role-of-nbfcs-and-hfcs-in-driving-sustainable-gdp-growth-in-india.pdf https://www.icraresearch.in/research/ViewResearchReport/4225)

Major Regulatory Updates, FY 2022-23

The Reserve Bank of India implemented Scale-Based Regulation (SBR) for NBFCs in FY 2022-23, to harmonize regulatory frameworks with these institutions evolving risk profiles.

The main points are as follows

Regulatory Structure-Categorization of the NBFCs

NBFCs will be categorized into four layers based on their size, activity, and riskiness. Here are the layers and their components:

Layers	Classifications	Components
Basic	NBFC-Base Layer (NBFC-BL)	(a) Non-deposit taking NBFCs below the asset size of 1,000 Crore
		(b) NBFCs undertaking the following activities:
		(i) NBFC-Peer to Peer Lending Platform (NBFC-P2P),
		(ii) NBFC-Account Aggregator (NBFC-AA),
		(iii) Non-Operative Financial Holding Company (NOFHC)
		(iv) NBFCs not availing public funds and not having any customer interface

 

Layers	Classifications	Components
Middle	NBFC-Middle Layer (NBFC-ML)	The Middle Layer shall consist of (a) All deposit-taking NBFCs (NBFC-Ds), irrespective of asset size
		(b) Non-deposit-taking NBFCs with asset size of 1,000 Crore and above
		(c) NBFCs undertaking the following activities:
		(i) Standalone Primary Dealers (SPDs),
		(ii) Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs),
		(iii) Core Investment Companies (CICs),
		(iv) Housing Finance Companies (HFCs) and
		(v) Infrastructure Finance Companies (NBFC-IFCs)
Upper	NBFC-Upper Layer (NBFC-UL)	The Upper Layer of NBFCs will be identified by the RBI using specific parameters and scoring methodology for enhanced regulatory requirements
Top	NBFC-Top Layer (NBFC-TL)	Upper Layer NBFCs may move to the Top Layer if the RBI perceives a significant increase in potential systemic risk

Regulatory Structure-Categorization of NBFCs carrying out specific activity

As the regulatory structure envisages scale-based as well as activity-based regulation, the following prescriptions shall apply in respect of the NBFCs

A	NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will always remain in the Base Layer of the regulatory structure.
B	NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the Base Layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer.
C	NBFCs like NBFC-ICC (Investment and Credit Companies), NBFC-MFI (Micro Finance Institutions), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) could be categorized in any of the layers based on the parameters of the regulatory framework.
	NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in the Base Layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer.
D	Government-owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case may be. They will not be placed in the Upper Layer till further notice.

Regulatory Framework and Guidelines-basic parameters

References to NBFC-ND,	Starting October 01, 2022, NBFC-BL replaced NBFC-ND, and NBFC-ML or NBFC-UL replaced
NBFC-ND-SI & NBFC-D- Existing classifications	NBFC-D and NBFC-NDSI, respectively, in all references.
Progressive applications for	Regulatory revisions applicable to lower layers of NBFCs will automatically be applied to
regulations	NBFCs residing in higher layers, unless stated otherwise.
Regulatory guidelines for	NBFCs in Base Layer (NBFC-BL) follow NBFC-ND regulations, except for NOF and ICAAP
NBFCs in Base Layer	changes. NBFC-P2P, NBFC-AA, and NOFHC follow existing regulations.
Regulatory guidelines for	NBFCs in the Middle Layer (NBFC-ML) will follow current regulations for NBFC-ND-SIs,
NBFCs in Middle Layer	NBFC-Ds, CICs, SPDs, and HFCs, except for changes related to NOF and ICAAP.
Regulatory guidelines for	Regulations for NBFCs in the Upper Layer (NBFC-UL) include those applicable to NBFC-ML as
NBFCs in Upper Layer	well as changes related to NOF and Internal Capital Adequacy Assessment Process (ICAAP).

Regulatory changes under Scale Based Regulation (SBR) for all layers of NBFCs

The regulatory minimum Net Owned Fund (NOF) for NBFC-ICC, NBFCMFI and NBFC-Factors will be increased to 10 Crore, while for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF will remain at 2 Crore. There will be no change in the existing regulatory minimum NOF for NBFCs - IDF, IFC, MGCs, HFC, and SPD.

The NPA classification norm for all categories of NBFCs will be changed to an overdue period of more than 90 days.

At least one director of NBFCs should have relevant experience working in a bank/NBFC.

A ceiling of 1 Crore per borrower will be set for financing subscription to an Initial Public Offer (IPO), but NBFCs can

more conservative limits.

(Source: https://taxguru.in/rbi/sbr-revised-regulatory-framework-nbfc.html https://www.rbi.org.in/Scripts/NotificationUser. aspx?Id=12179&Mode=0) https://msme.gov.in/msme-annual-report-2022-23

Asset quality

The NBFCs are experiencing a significant uptick in credit demand, leading to a substantial improvement in their asset quality levels, which are now approaching pre-pandemic levels. This is evidenced by the declining gross non-performing asset (GNPA) ratio of 5.1% as of September 2022, down from 6.9% in June 2021. Moreover, the NBFCs have seen an uptick in credit deployment, with their aggregate outstanding amount reaching 31.5 Trillion in September 2022. The industrial sector received the largest share of credit, followed by retail, services, and agriculture. ICRA analysis suggests that the NBFC sectors growth is being supported by broad-based growth in various sub-sectors, such as microfinance, personal loans, vehicle financing, and housing finance. For FY 2022-23, the NBFC-retail segment is expected to grow at 12%-14%, while the NBFC-HFC could grow at 10%-12%. Assets under management of NBFCs are expected to grow by 13-14% in FY 2023-24. The industry is optimistic that the demand will remain strong, but there could be some downside risks in early FY 2023-24 due to uncertain global macroeconomic conditions.

(Source: RBI Supervisory Returns, https://www.moneylife.in/article/ growth-revivalamidstassetqualityimprovementtodriveprofitability -for-non-banks-icra/69204.html)

(Source: RBI supervisory returns and staff calculations. RBI Financial

Stability Report, December 2022)

Regarding Scheduled Commercial Banks (SCBs), the GNPA ratio reached a seven-year low of 5% as of September 2022, down from 6.9% in September 2021. This improvement in GNPA is attributed to lower slippages and a reduction in outstanding GNPAs due to recoveries, upgrades, and write-offs in FY 2022-23. Additionally, the NNPA ratio also decreased by 10 basis points from September 2020 to 2.3% in September 2021.

Sep-22

(Note: SCBs: Schedule Commercial Banks, PSBs: Public Sector Banks, PVBs: Private Sector Banks, FBs: Foreign Banks)

(Source: RBI supervisory returns and staff calculations RBI Financial

Stability Report, December 2022)

Improved asset quality due to effective recoveries is expected to benefit the NBFC industry. This improvement can be attributed to the increased utilization of co-lending and co-origination arrangements with scheduled commercial banks (SCBs), which play a key role in asset sales and securitization transactions conducted by NBFCs. The NBFCs liquidity and cash flows are likely to be boosted by the improvement in asset quality of SCBs. However, the impact of the updated Prudential Norms by RBI must be considered. Though the RBIs one-time loan restructuring option provided the NBFC industry with some relief, lower provisions are expected to be made by NBFCs assuming they will be better placed than in the previous year.

Liquidity update

As per the data published by the Reserve Bank of India, there has been a considerable upsurge in the quantum of funds extended by banks to non-banking financial companies (NBFCs) over the last five years, with an approximate value of 10 Trillion. The magnitude of this growth has escalated multi-fold to reach a cumulative value of 13.20 Trillion by December 2022. Despite the substantial increase in interest rates and global uncertainties, the overall bank credit demonstrated a significant year-on-year growth of 15% in the fiscal year

2022-23, totalling to 133 Trillion by December 2022. The sturdy credit expansion can be attributed to multiple factors, such as a surge in the demand for personal loans greater working capital needs resulting from elevated inflation, and a higher demand from NBFCs. Notably, the lending to NBFCs alone accounted for 3.5 Trillion, with a 20% incremental increase in bank advances during December 2021 to December 2022. It is worth mentioning that the outstanding credit to the NBFC sector grew by 36% year-on-year as of December 2022. Countering the inflationary pressure in the economy, the RBI implemented its improvized monetary measures, leaning towards a tighter stance, by increasing the repo rate. Maintaining the continuum, the increment followed six consecutive hikes with a 250 bps rise which ultimately resulted in taking the repo rate to 6.50% as of April 2023 – the highest in five years. However, despite the tighter economic environment, the robust demand of credits compelled the NBFCs to manage their liquidity adequately.

(Source: Supervisory returns of various regulators and RBI staff calculations)

Outlook

Looking ahead, NBFCs are expected to enter FY 2023-24 with strong momentum, as their Assets Under Management (AUM) are predicted to increase by 13-14% – reaching a four-year high. Despite facing competition from banks in traditional segments, NBFCs have raised 700 Crore in equity over the past 3.5 years, improving their gearing levels

(NBFCs gearing up for growth, CRISIL Assocham, February

2023). Despite yield pressure, the sector is also expected to improve its asset quality metrics. The demand for housing, vehicles, and microfinance will continue to drive

AUM growth, although competition from banks and higher borrowing costs could pose challenges. With more robust balance sheets, lower leverage, and steadily improving funding access, NBFCs are well-positioned to capitalize on credit demand, with a strategic focus on non-traditional segments such as unsecured loans, used vehicles, and the MSME sector.

(Source: https://www.theweek.in/news/biz-tech/2022/12/05/nbfcs-witness-healthy-growth-despite-competition-from-banks.html https://www.financialexpress.com/industry/banking-finance/nbfcs-assets-under-management-to-grow-by-13-in-current-financial-year-says-crisil/2897156/)

Housing finance

As a fundamental need for humans, housing not only provides shelter but also drives the economic growth and development of low-income households, families, communities, and countries. Widespread vaccination coverage and rising consumer spending on contact-based services led to a significant reduction in housing market inventory. In FY 2022-23, the loan book outstanding stood at approximately 9.1 Trillion. This growth is expected to continue, with the housing loan segment projected to contribute about 13% to Indias GDP by CY 2025, while rising at a CAGR of 20.58% between CY 2022 and CY 2031. A host of factors such as affordable housing, declining property prices, attractive tax incentives, and an increase in household income are driving this growth. Alongside, the housing finance industry is undergoing significant structural changes, with a focus on credit quality and collection efficiency.

(Source: KPMG Report November 2022)

NBFC HFCs housing loan book

It is anticipated that the assets under management of HFCs will exhibit a growth of 10%-12% during the FY 2022-23, in contrast to the previous financial years 8%, primarily owing to the growth of home loans. There is a possibility that home loans may register a year-on-year (y-o-y) growth of 15%. The NBFCs current loan outstanding stands at

8.9 Trillion with an addressable loan market of 21 Trillion. In FY 2021-22, there was cumulatively 95 Million units of housing shortages due to demand supply gap in the sector specially in the urban areas. The aggregated loan demand for this sector stood at 35 Trillion. The credit growth outlook for affordable HFCs is looking robust with 10-12% growth in FY 2022-23. This is further backed by the various Government initiatives for the housing sector like PMAY, tax incentives, RERA, GST, special financing windows. This will help in bridging the demand supply gap in the sector. Also, significant regulatory measures implemented by the RBI and NHB focuses towards fuelling the affordable housing sector with easy flow of credit. https://economictimes.indiatimes.com/industry/banking/finance/ banking/home-loans-form-the-biggest-chunk-of-household-debt-credit-card-outstanding-picks-up/articleshow/93995492.cms?from=mdr https://www.moneylife.in/article/housing-finance-companies-aum-to-grow-10-percentage-12-percentage-in-fy22-23-crisil/68351.html

Rapid urbanization to drive growth of the real estate sector

The process of urbanization creates a significant impact on the real estate market, as the demand for housing increases with the growth of cities. This trend is particularly relevant in developing countries such as India, where demographic changes and rising population levels are driving demand for residential and non-residential constructions, including offices, healthcare facilities, and hotels. According to the

UN World Urbanization Prospects 2018 report, Indias urban population is expected to reach 46% by CY 2025, with 814 Million people living in cities by 2050. This growth is expected to be driven by the demand for higher education, infrastructure development, and the shift away from unremunerative agriculture. The Indian real estate market has already witnessed a significant rise in sales volume, with

3,12,666 residential units sold across eight major cities in CY 2022, representing a growth of 34% over the previous year. The office space market is also recovering, with gross office leasing reaching 51.6 Million square feet and new office space completions growing by 28% in CY 2022. This growth is attributed to factors such as a changing attitude towards home ownership, return to work-from-office, increased hiring, and the proliferation of e-commerce, all supported by economic stability.

(https://www.financialexpress.com/money/residential-sales-in-top-8-cities-at-nine-year-high-in-2022-knight-frank-india/2942300/)

Government impetus to boost the housing sector

The housing finance industry continues to benefit from the

Governments ‘Housing for All mission, which includes the credit-linked subsidy scheme to expand institutional credit flow to meet the housing needs of people in urban areas. The extension of the Credit Linked Subsidy Scheme (CLSS) provides financial assistance to homebuyers, which is expected to increase demand for housing. Moreover, with the aid of the Pradhan Mantri Awas Yojana (PMAY) scheme, construction of 6.4 Million homes has already been completed by November 2022. The allocation for PMAY has been increased by 66% to 790 Billion in the Union Budget 2023-24, indicating the Governments commitment towards the ‘Housing for All mission.

Post increasing the repo rate in FY 2022-23 by 250 bps to 6.5%, RBI decided not to bring any further hike in the rate in their recent monetary policy committee meet in June 2023. This will impact the home loan segment positively and help in regenerating demand among the home buyer segment. A pause in the repo rate hike is more likely an indication towards further easing of the interest rates on home loans that will keep the buyers interested in owning their own shelter of living. https://www.ibef.org/industry/real-estate-india (Source:, https://www.moneycontrol.com/news/business/real-estate/ budget-2023-affordable-housing-gets-push-pmay-allocated-rs-79000-crore-9920551.html)

Outlook

According to a Jefferies report, home loan credit outstanding is expected to register a healthy 13% CAGR during FY 2023-26. This growth shall be driven by the increasing demand from Tier-III and Tier-IV cities, rising disposable incomes, and Government initiatives such as the Pradhan Mantri Awas Yojana (PMAY), interest rate subvention schemes, and fiscal incentives. The visible recovery across most sectors is expected to further increase disbursements in the rest of the fiscal year. On the supply side, lenders are focusing on co-lending with Scheduled Commercial Banks (SCBs) to the retail housing industry. On the demand side, Knight Frank India reports that India witnessed a 34% increase in housing demand in CY 2022, reaching a nine-year high. This trend is driven primarily by a post pandemic need for security, increased savings, and relatively little income disruption for middle and higher-income groups.

Also, the significant improvement in the home affordability and stable property prices is also propelling the market demand. The increased Government thrusts, such as the PMAY and other initiatives, continues to add to the sectors promising outlook in future.

(Source: CRISIL NBFC report 2021, ICRA, BCG analysis, CBRE Research, Credit Suisse estimates, UN World Urbanization Prospects, India datahub, Macquarie Research, November 2021 https://theprint.in/economy/why-indias-housing-market-hit-a-9-year-high-in-2022-higher-savings-need-for-security/1308059/)

Gold loan

Gold has always held a significant cultural and economic value in India, with Indians accounting for the majority of gold consumption globally. Indian households own a vast amount of gold –27,000 tons – accounting for 14% of the global gold market. Gold has become a popular instrument for borrowers to manage their working capital needs, with only 20% of the total gold account being pledged till now. The market is yet to evolve to its full potential and it witnessed an 8% CAGR growth over the last decade. Indians typically do not sell but pledge their gold jewellery to lenders to obtain a short-term loan. Gold continues to remain one of the most secure and flexible mediums to meet short-term cash emergencies. The popularity of gold loans is high in Indian rural areas, with unorganized players holding 65% of the total pledged chunk in the country. However, organized players such as banks and NBFCs are constantly expediting their processes to penetrate this sector, driven by the lower interest rate charged by organized players, quick disbursement, and the perceived safety of the instrument.

India has a total gold loan market of 12.3 Trillion out of which 35% share is of organized players (Source: Role of NBFCs and HFCs in driving sustainable GDP growth, KPMG, November 2022).

The market is anticipated to grow by 12-14% in FY 2022-23. While banks have a larger share in the organized gold loan sector due to lower interest rates and larger ticket sizes, NBFCs play differently in this context with a greater focus on customer convenience, quick disbursement, and flexibility. In FY 2020-21, NBFCs retained a 23% stake in the

Indian gold finance sector, with the total NBFC gold loan

AUM increasing by an astounding 44%, surpassing 4.7 Trillion. This demand was fuelled by a 30% YoY uptick in gold prices in FY 2020-21. The gold industry contributes 1.3% to Indian GDP. Further, the gold loan NBFCs are expected to maintain their outstanding performance due to increasing digitization, a wider physical branch network, minimum documentation, faster turnaround time, and increased demand following the COVID-19 pandemic.

(Source: Gold Financing Sector Outlook, Sep21) https://www.newindianexpress.com/business/2022/sep/29/financing-remains-crucial-challenge-for-gold-jewellery-industry-report-2503110. html

(Source: Systematix Gold Finance Sector Report Nov. 22, BCG Analysis, CRISIL NBFC Report 2021)

Outlook

Gold is a popular asset class that offers security to borrowers in times of financial need. This has contributed to the steady demand for gold as a source of financing. Additionally, the gold loan sector is transforming, shifting from unorganized to organized and from organized to digital means. This shift is expected to support the increased demand for gold financing in the future. 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: Gold.org, IBEF, CRISIL NBFC Report 2021, BCG analysis)

Microfinance

Microfinan ce institutions have emerged as a solution to address the credit needs of low-income rural consumers who lack recognized revenue streams and collateral availability. With the introduction of structured guidelines, technological innovations, and increased Government support, microfinance has undergone a massive transformation to enable easier and more recognized credit facilities for these households. These institutions not only assist in accumulating assets, surviving crises, and establishing small businesses but also act as a potent tool for empowering women who constitute the largest part of its borrower base. The microfinance sector has witnessed a significant improvement in the total disbursal loan portfolio of microfinance institutions during Q3 of FY 2022-23, rising to 778.77 Billion as compared to the same quarter of the last financial year. Additionally, the total microfinance gross loan portfolio grew by 25.2% year-on-year basis, to

~ 3.21 Trillion as of December 2022, serving 64 Million unique borrowers with 126 Million loan accounts. Although the start of FY 2022-23 was mostly sluggish for the microfinance sector due to macroeconomic turmoil, the sector started reviving as the demand for credit increased among the borrowers community in the later stage of the year.

(Source: CRISIL Research, KPMG Report)

(Source: BCG Analysis, CRISIL NBFC Report 2021, MFIN Micrometer

Dec 2022)

Major regulatory updates

Removal of interest rate cap on MFI loans

The Reserve Bank of India has taken a noteworthy step to further strengthen the MFI sector. RBI has removed the interest cap on loans to such households whose annual income is up to 3 Lakh. This has increased the eligibility criteria as well as redefined the microfinance loan definition.

Percentage of secured loan given by NBFC MFIs

NBFC-MFIs are presently permitted to allocate 25% of their overall loan portfolio to borrowers beyond the microfinance category, a notable increase from the previous limit of 15%. Consequently, NBFCs, which are not explicitly engaged in microfinance lending, are now authorized to extend up to 25% of their total loan book to microfinance borrowers, up from the previous threshold of 10%.

Household income assessment

RBI regulated entities within the MFI sector will be required to set a policy approved by the respective boards, to assess the household income, either adopted or as modified frameworks from Self-regulatory Organization (SRO) or any other agencies.

Obligations of loan repayment

RBI regulated MFI entities will have to set a policy in place for the limit on the repayment outflows of monthly loan obligations of a household. This would be in the form of a percentage of their monthly household income, with the maximum limit of 50%.

Pricing

Entities will have to set policies in place for the pricing of microfinance loans, which will include a thoroughly documented interest rate model, a detailed explanation of interest rate components, the range of spread and any other charges on loan. This will bring better transparency for the customer to assess the interest rate calculations.

(Source: KPMG Report Role of NBFCs and HFCs in driving sustainable

GDP growth in India)

Outlook

The microfinance industry in India holds immense potential and presents a promising future, with its role of catering to the credit needs of low-income households and small businesses. Despite expansion plans being put on hold due to the COVID-19 pandemic, the demand for microfinance is expected to rise as more people seek financial aid. The total addressable market for MFIs was 2.6 Trillion in FY 2020-21 for JLG loans and anticipated to grow by 40% by 2025. The growth will be majorly driven by women oriented MSMEs. Microfinance institutions AUMs are projected to grow by 25-30% in FY 2023-24. In addition, the widespread immunization in the country and the adoption of data-driven customer-centric digital technologies are set to improve the loan experience for customers and lead to paperless lending procedures. As many of the states are coming back to the pre-COVID level growth, the traction for geographically diversified MFIs are also on a upward momentum. As India strives to become a US$ 5 Trillion economy by CY 2025, the microfinance industry is expected to play a crucial role in achieving this goal, by empowering low-income families and small businesses to contribute to the countrys economic progress.

Source: CARE Research, CARE EDGE Research, BCG Analysis, ICRA Research

Opportunities

Bank-NBFC co-lending model expanding the avenues for better lending options

E-commerce unlocks the potential of retail lending

Underserved retail and MSME sector providing greater opportunities for NBFCs to grow

Robust working capital demand continues to remain poised

Growing digitalization and analytics enhancing lending efficiency

Gold loans, housing loans and microfinance to advance financial inclusion

The introduction of the guidelines for the First Loss

Default Guarantee (FLDG) represents a momentous achievement for Indias FinTech sector. This is a pioneering occasion as it marks the Reserve Bank of Indias endorsement of the FLDG program, facilitating credit-risk sharing agreements between FinTech companies and regulated financial institutions such as banks and Non-Banking Financial Companies (NBFCs). Under this lending arrangement, a proportion of the default loan portfolio held by registered entities is safeguarded through guarantees provided by FinTechs or Lending Service Providers. FLDGs provide FinTechs with the means to demonstrate their underwriting capabilities and foster trust among banks and NBFCs.

Generative AI presents exciting opportunities for NBFCs, empowering them to revolutionize their operations. By leveraging generative AI, NBFCs can enhance risk assessment and underwriting processes, provide personalized customer experiences, and strengthen fraud detection capabilities, opening doors to more efficient operations, better decision-making, and a competitive edge in the financial industry.

T HREATS

Liquidity squeeze may adversely affect the lending capability of our Company

NBFCs play a crucial role in providing access to credit for individuals and businesses in India. However, to meet their financing requirements, NBFCs heavily rely on external funding sources such as banks, mutual funds, and capital markets. Any disruptions in the availability of external funding or a liquidity crunch due to reduced loan recovery, unforeseen events or market volatility can significantly impact the NBFCs loan disbursement cycle, leading to subdued performance. As such, NBFCs must maintain a strong balance sheet and have adequate contingency plans to mitigate such risks. Hence, co-lending, co-origination and direct assignments are important.

Unanticipated changes in regulatory norms may cause certain impact in our companys operations

In India, effective regulation and supervision of NBFCs are essential for sustainable growth of the financial sector. The regulatory framework for non-bank lenders has evolved, with a focus on ensuring responsible supervision and regulation. However, sudden, and unanticipated regulatory changes or restrictions may lead to increased compliance costs and affect the production or delivery of current products or services in the NBFC space. Therefore, regulatory bodies must ensure that changes, if any, are well-communicated and implemented in a phased manner to minimize the impact on the sector.

Technology disruption may affect operational efficiency, resulting in business slowdown

The NBFC sector in India is experiencing a surge in technological advancements. Keeping up with these developments is crucial for businesses to stay competitive. With new digital innovations constantly emerging, NBFCs need to remain at the forefront of technology-based innovation. However, as with any disruptive change, there is always the potential for unforeseen challenges and disruptions, that may arise from emerging technologies.

Global economic downturn may cause market slowdown

The NBFC sectors performance is not only influenced by the domestic economic situation but also by the global economic climate. Emerging economies such as India can be especially vulnerable to the effects of a global economic downturn. Fluctuating capital flows, currency volatility, and trade barriers can all have significant impact on the productivity and business of

NBFCs. Therefore, NBFCs must keep a close eye on global economic trends to mitigate potential risks and adapt to changing market conditions.

Global geopolitical crises may affect the business scenario of the country, ultimately affecting our Companys business

The Indian NBFC industry is vulnerable to global risks as the country continues to emerge as a major player in the global economic platform. Changes in policies and protectionism of developed and emerging countries, along with trade and capital market conditions, may significantly impact businesses locally. Moreover, geopolitical and trade tensions in the global market pose additional risks to the Indian NBFC sector, making it imperative for companies to keep a close eye on global developments and adapt accordingly.

COMPANY OVERVIEW

IIFL Finance Limited (‘our Company or ‘IIFL Finance ‘We), formerly known as IIFL Holdings Limited, is a prominent and well-respected financial services institution in India. Founded in 1995 as a research firm, we consistently innovated and reinvented ourselves to meet the evolving needs of the financial services industry. Along with our subsidiaries, IIFL

Home Finance Limited, IIFL Samasta Finance Limited and IIFL Open Fintech Private Limited, our Company offers a diverse range of financial services, including Gold, Home, Loan Against Property, Digital loans and Microfinance loans, through an extensive network of branches across India. We utilize a hybrid model of physical and digital distribution to deliver financial services, with 4,200+ branches as well as a robust online infrastructure and innovative mobile platforms. We serve over 8 Million customers across various business segments. Our Company is led by first-generation entrepreneurs Mr. Nirmal Jain and Mr. R. Venkataraman and is supported by reputable institutional investors, like

Fairfax Group. Honesty and transparency are core values of our Company, as we aim to keep our loan products simple, ensure transparency, and demonstrate unwavering commitment to our customers. Our management team comprises highly skilled and experienced professionals, committed to fostering a growth culture, entrepreneurship, and innovation among our vast talent pool.

During the year under review, our Company entered into a joint venture with Open Financial Technologies Private Limited, which is the 100th unicorn of India and the largest SMB (Small and Mid-sized Business) Neo-bank. Open has integrated with 17 large banks and has an existing customer base of 2 Million+ merchants. Our Companys existing lending book and infrastructure will be used by Open to offer innovative lending solutions to these merchants on their platform. This joint venture will also give access to users business transactions leading to better insights for underwriting decisions and it will lead to growth in IIFL Finances lending book by offering credit solutions to Opens existing merchant base.

Financial performance and operations review

With recovery witnessed across sectors in the FY 2022-23, our business across different verticals continued to grow. Our diversified portfolio, including Gold loan,

Home loan, Loan Against Property, Digital loan and

Microfinance loan registered upward mobility in terms of growth. During the year, AUM grew by 13,428 Crore and 26% YoY to 64,638 Crore, while core AUM grew to

61,502 Crore.

Total CAGR growth for Core 23%

The total comprehensive income grew 28% YoY to 1,534 Crore (post non-controlling interest).

Liquidity has improved significantly in FY 2022-23. We raised long-term funds (excluding assignment/securitization) of

15,085.93 Crore and were able to assign and securitise assets of 14,418.44 Crore. IIFL had 9,356 Crore in cash and cash equivalents, and committed credit lines from banks and institutions as on March 31, 2023, adequate to meet not only all near-term liabilities but also fund the growth momentum.

Though this has a minor impact on margins, it showcases our Companys prudent policy making and resolution to grow. We enjoy surplus liquidity in all maturity buckets across all levels of IIFL Finance. Our Companys asset quality continues to be among the best in the industry. Consolidated GNPAs and NNPAs, recognized as per RBIs updated prudential norms and provisioned according to Expected Credit Loss (ECL) model prescribed in IndAS, stood at 1.8% and 1.1% of loans, respectively. Furthermore, the coverage for NPAs was 167% under ECL provisioning in Ind-AS (including standard asset coverage). Our Companys (Standalone) Capital Adequacy Ratio was 20.38%, including Tier 1 Capital of 12.85%.

Loan AUM for core products grew faster YoY at 29%, driven mainly by retail Home loan, Gold loan and Microfinance loan. Gold loan grew by 28% YoY, Microfinance loan by 59%

YoY, and Home loan by 23% YoY.

Within the Home loan category, our primary focus remains on affordable and non-metro customers who possess the financial capacity to conveniently acquire or avail products and services that align with their financial capabilities. we cater to the affordable home segment, offering small-ticket loans to both salaried individuals and self-employed individuals, with an average ticket size of

14.3 Lakh.

Through 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 more than 1,750 Crore in subsidies distributed.

At year ending March 31, 2023, 96% of our Companys loan assets were retail loans secured by mortgages, other collateral, gold, or backed by cash flows to consumers who were underserved by banks. Our Companys success in retail lending may be ascribed to our broad distribution network, cutting-edge technical solutions, a loyal customer base, various co-lending agreements, and a 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 largest share of retail and PSL-compliant loans are of significant value in the current environment where our Company can sell down these loans to raise long-term resources. The share of loans sold down was 26.3% of the total AUM as of March 31, 2023. Also, co-lending off-book stood at 11.7% of total AUM as of March 31, 2023.

Average Interest Spread on balance sheet assets for FY 2022-23 increased to 7.8%.

Our Companys AUM mix is well spread out with 81.0% comprising secured loans and 19.0% unsecured loans. IIFL currently has 4,000+ branches, primarily for gold, home finance and microfinance businesses. Return ratios for FY

2022-23 reached the highest level with RoA at 3.3% and

RoE at 19.9%. Consolidated net profit margin for FY 2022-

23 reached 19.0% from 17.0% in FY 2021-22. Net Interest Income mainly increased due to volume growth.

Focusingontheretailportfolio,ourCompanyhasundertaken prudent risk management and sufficient provisioning to maintain asset class and growth across segments. With technological advancements, fintech innovations, digital delivery, and paperless loan processing, we have surpassed industry standards. Right from customer onboarding to loan disbursement, entire journey has been digitized for loan against property, digital loans and personal loans. Our Company has created an end-to-end loan process through WhatsApp to provide the borrowers with a seamless borrowing experience. This includes customer onboarding, digital application, loan approval, disbursement, and collection.

Disclosure of accounting treatment

There was no deviation in following the treatments prescribed in any of Accounting Standards (AS) in the preparation of the financial statements of our Company.

SEGMENT OVERVIEW Gold loan

Treated as one of the most auspicious metals, Indians are passionate about gold. People across social classes in India tend to buy gold products like jewellery, coins, bars, especially for festive occasions. Interestingly, the selling of gold is not much of a popular idea. Rather pledging the same, now-a-days, is one of the most attractive options to procure short-term loans. According to World Gold Council, India has the second largest gold jewellery customers after

China. Indian households cumulatively occupy a significant crunch of global gold stock that is 27,000 metric tons. In CY 2022, the value of Indian gold jewellery demand was up by 4% to 2.73 Trillion, from 2.61 Trillion in CY 2021. Though, from the weightage point of view, the intake was 2% down in CY 2022 than in CY 2021. Also, in CY 2022 the traded volume of gold subdued by 797.3 tons than CY 2021, However, robust demand of 220 tons, alone in the fourth quarter of CY 2022, registered the highest fourth quarter figures since the year 2000. This indicates a resilient market and unsatiable demand for gold.

The gold loan Assets Under Management (AUM) of the NBFCs is most likely to rise by 15% in FY 2023-24. This is majorly backed by the buoyancy in the gold prices and limited borrowing avenue for select customer segments, strong presence, well-established network, faster processing, and the ability to serve non-bankable customers.

(Source: https://www.financialexpress.com/industry/expect-gold-loan-aum-to-grow-15-in-fy24-muthoot-finance-md/3100668/ https://gjepc.org/news_detail.php?news=india-s-gold-jewellery-demand-slips-2-to-600-4-tonnes-in-2022-gold-imports-plunge-27-#:~:text=Q4%20 2022%20demand%20of%20220,demonetisation%20at%20such%20 high%20prices.%E2%80%9D, https://www.outlookindia.com/business/ at-611-tonnes-india-is-second-largest-gold-jewellery-consumer-in-world-says-wgc-report-news-254989, https://timesofindia.indiatimes.com/blogs/spreading-light/indian-family-gold-holdings-boon-or-bane/)

Business overview

Our Company specializes in providing loans against gold jewellery to small business owners, merchants, dealers, farmers, and salaried individuals at competitive rates, with minimal paperwork and a quick response time. Its verification procedure is overseen by experienced officers who are qualified and educated in asset quality processes. The ornaments are kept safe in fireproof and burglary-proof vaults at gold loan branches that are under 24X7 electronic surveillance.

FY 2022-23 under review

IIFL is possibly second largest lender in gold loan market, having a pan-India presence. Our gold loans have grown at a CAGR of 39% over the past 5 years. Our Company prioritizes expansion along with strong collections and resolutions, resulting in negligible losses. The business gold loan AUM grew by 28% for the year ended March 31, 2023. As a part of continued digital expansion, IIFL introduced digital gold loans for top-up and online renewal of gold loans. We had earlier launched a technology-backed initiative called ‘Gold Loan at home in a few cities in FY 2022-23. Additionally, we collaborated with several banks for co-lending of gold loans, which saw significant traction during the year.

Outlook

The gold loan industry is experiencing increased demand from small businesses due to lenders becoming risk-averse and reducing their focus on collateralized loans. This presents a massive opportunity for the untapped gold loan industry in India, with only 35% of the overall gold loan market in India being serviced by formal segments in FY 2021-22. According to CRISIL Research, the gold loan AUM is expected to witness a growth rate of 12-18% between CY 2022-2024, owing to its secured nature and minimum risk of default. With our advanced technological infrastructure, robust online platforms, and paperless loan processing, our Company is well-positioned to capitalize on the opportunities, that will arise in the gold loan sector going forward.

Home loan

ThegrowthoftherealestatesectorinIndiaisoverwhelmingly backed by the incremental focus on housing ownership among the millennials. Post the sluggish pace due to COVID-19 pandemic, the sector is gradually witnessing rise, especially in the affordable housing segment. Because of the lower penetration in this segment, the sector possesses unhindered opportunities of growth. Also, the increased income levels, and correction in the housing prices have improved the affordability over the years. As of CY 2022, Indias mortgage penetration stands at 13% of GDP. However, the increased demand in the housing industry is going to double the countrys home loan volume. This is achievable owing to the incremental Government thrust in the sector in the form of higher budgetary allocation under lucrative schemes like Pradhan Mantri Awas Yojana (PMAY) and Credit Linked Subsidy Scheme (CLSS). NBFCs alone had a 38% share in the home loan segment in CY 2022.

(Source: KPMG Report, https://www.aninews.in/news/business/home-loan-portfolio-of-banks-and-nbfcs-remains-strong-amid-rising-rates-report20221128132932/)

Business overview

IIFL Finance through its subsidiary IIFL Home Finance offers loans for residential property purchases, house building, home improvement, and plots. We also provide small and medium businesses with mortgage-backed loans for residential or commercial properties for a variety of purposes, including working capital, business usage, commercial property acquisition, and more. Our Companys robust foundation allows us to conduct appropriate credit background checks on applicants. It assists us in undertaking appropriate legal and technological security assessments. For large mortgage loans, our Company uses both external and internal property appraisals, including assessments by international property specialists.

FY 2022-23 under review

Our Companys focal point during the year was affordability and non-metro customers leveraging on IIFL Groups vast network. Our target customers are those individuals or finan households who have the ability to comfortably purchase or access ce microfinan products and services within their means. Our Companys home loan AUM grew by 23% to

21,800 Crore for the year ended March 31, 2023. IIFL has advanced to 99% customer onboarding and decision-making through digital platform, thereby, reducing operating and credit costs. We have initiated co-lending disbursement of over 2,746 Crore with several banks for home loans. In one of the most substantial equity investments within

Indias affordable housing finance segment, Abu Dhabi

Investment Authority has committed to pay 2,200 Crore to acquire a 20% stake in IIFL Home Finance. Our Company has also tied up with state housing boards and developers to undertake construction of green buildings.

Outlook

With rising urbanization and economic revival, backed by rising inoculation levels, the demand for real estate is picking up. The Government has also provided various liquidity measures to boost demand for this sector.

Furthermore, assignment/securitization along with co-lending are expected to provide further liquidity support and boost demand going ahead. With a focus on affordable housing projects, we are well-prepared to tap this opportunity. Simultaneously, IIFL Home Finance, continues to concentrate on sustained digital expansion, asset-liability profile management and prudent risk management framework.

MICROFINANCE

Microfinance serves as a crucial conduit for providing financial services to a demographic largely overlooked by formal banking institutions. This sector primarily focuses on extending accessible and recognized credit facilities to low-income households. Leveraging our grassroots connections, microfinance plays a pivotal role in stimulating income-generating activities and enhancing livelihoods, both in rural and urban areas. Notably, microfinance serves as a potent instrument for empowering women, who comprise the majority of our borrower base.

The recent regulatory guidelines pertaining to Non-

Banking Financial Company-Microfinance Institutions

(NBFC-MFIs) have yielded favorable implications for the industry. A key aspect of these guidelines is the equitable treatment extended to all players, leveling the playing field by eliminating the previous exclusive application of a 10% spread cap solely to NBFC-MFIs. This regulatory measure additionally grants the board the authority to establish a comprehensive policy framework that adequately assesses credit risk and aligns pricing accordingly. Moreover, the revision of the household income threshold to 300,000 significantly expands the market potential for participants the sector. (Source: MFIN Micrometer December

2022)

Business overview

Our Companys mission is to uplift communities by providing microloans for income-generating activities such as dairy cattle loans, among others. Our granular portfolio delivers high yields. The majority of our customers are women-led Self Help Groups (SHGs).

FY 2022-23 under review

IIFL Finance through the subsidiary IIFL Samasta runs the microfinance business and experienced a 59% YoY increase in AUM, amounting to 9,786 Crore in FY 2022-23, making it the second largest player in the MFI-NBFC space.

Our Company diversified into untapped regions, improved operational efficiency, and supported customers in enhancing their productivity after the COVID-19 pandemic. As of March 31, 2023, the MFI segment served over 23.5 Lakhs active customers across 19 states, with a branch network of 1,267.

Outlook

NBFC MFIs have significant potential in the post-

COVID 19 pandemic era, as MFI loans primarily support income-generating activities. The rural sector in India still lacks adequate access to credit, which presents ample opportunities for NBFC MFIs to expand into underpenetrated regions.

Digital loan

Though the MSME sector is the enabler of wealth at the grassroot levels in the country, it contributes 29% of the nations GDP in FY 2021-22. Also, the segment caters to the women and marginal entrepreneurs in the country. Almost 95% of all industrial units, that form a part of this sector, build the backbone of the economy. The Government of India (GoI) has been very proactive in encouraging the MSME segment and ensuring that large number of

MSMEs benefit from various incentive schemes like Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and Emergency Credit Line Guarantee Scheme, among others. Strengthening the MSMEs is the ch key to achieve the US$ 5 Trillion economy dream. With proper access to funding and technology infrastructure support, MSMEs have the potential to lead the development and industrialization of underdeveloped regions. Increased focus from the Government, coupled with co-lending opportunities by banks and NBFCs showcases a promising future for MSMEs in India.

(Source: https://timesofindia.indiatimes.com/blogs/voices/msmes-the-growth-engine-of-india/ https://www.investindia.gov.in/team-india-blogs/growth-imperative-msme-sector)

Business overview

IIFL Finance Limited provides a diverse range of business loans, including small-scale cash flow analysis-backed business loans. Our Company has a strong foundation in the rapidly developing, low-ticket size, high-yielding MSME sector. Our Company stands out due to our strong underwriting and credit checks done in-house, ensuring a rigorous evaluation process for loan applicants. Using technology as an enabler, we have been providing financial solutions to MSMEs, which is evidenced by the launch of instant paperless loans through WhatsApp and MyMoney App. This has resulted in faster processing times, and high levels of client satisfaction. Additionally, our Company has e-integrated with various fintech partners to ensure seamless end-to-end processes.

FY 2022-23 under review

During the year, our Company achieved operating efficiency in the digital loan processing format. We had previously partnered with leading fintech lenders to focus on both business loans and personal loans with appropriate risk-sharing arrangements. We adhere to a strong risk management framework, balancing prudent credit underwriting with instant decision-making and automated disbursements, based on analytical scorecards. The MSME loans segment achieved 33% growth in FY 2022-23. Asset quality and collection efficiency also improved.

Outlook

The unserved and underserved MSME segment in India has a significant potential for growth. Our Company is well-positioned to continue serving this expanding segment going forward, fulfilling the financing needs of small businesses in the unserved and underserved segments.

With a vision of financial inclusion, our Company plans to further invest in technological integration to provide end-to-end digital loans, enhancing overall customer experiences.

The release of the recently introduced First Loss Default Gurantee (FLDG) guidelines represents a notable milestone for players operating in the industry. These guidelines introduce a significant development by allowing unregulated entities to provide guarantees to regulated lenders in cases of borrower defaults. This regulatory framework empowers fintech lenders to cater to borrowers with lower credit scores or limited credit histories, including individuals from the blue-collar workforce, micro, small, and medium enterprises (MSMEs), students, and agricultural units, through partnerships with banks.

Moreover, the new guidelines impose stricter customer protection measures and emphasize a higher level of transparency. These requirements aim to enhance customer confidence in fintech lending operations and promote a more secure and transparent lending ecosystem.

(Source: https://www.financialexpress.com/industry/banking-finance/ rbis-new-fldg-guidelines-propel-fintech-innovation-and-financial-inclusion/3136838/, https://yourstory.com/2023/06/fldg-explained-new-rules-changes-impact-borrowers-fintechs-banks)

RISK MANAGEMENT AND GOVERNANCE

Effective risk management is essential to the success and sustainability of any business, and IIFL understands this well. By integrating risk management into all of our activities, we ensure that we optimize the risk-return equation while adhering to all applicable laws, rules, and regulations. This approach not only protects our Company from potential losses but also enhances its reputation as a reliable and responsible financial services provider. We recognize that risk management is not a one-time activity but an ongoing process that requires constant vigilance and adaptation to changing circumstances. By promoting a robust and disciplined risk management culture across all levels of the organization, we ensure that our employees are aware of the risks associated with their activities and are equipped with the knowledge and tools to manage those risks effectively.

(Read more on pages 52-55, 94-95)

HUMAN RESOURCES

Human Resources (HR) play a crucial role in developing, reinforcing, and enhancing the culture of an organization. We emphasize people-friendly policies and practices and focus on adopting the best HR policies and practices.

A strong management team at our Company attracts proficient professionals from various sectors, including

BFSI, technology, software, and start-ups. This has helped build a transparent, meritorious, and performance-driven culture in the organization.

(Read more on pages 70-75)

INTERNAL CONTROLS

Our Company employs a comprehensive internal control system supplemented by concurrent and internal audits, special audits, and regular management reviews. These internal processes ensure the existence of appropriate checks and balances and regulatory compliance at all levels. The internal audit team conducts risk-based audits of these processes to ensure that internal controls for fraud prevention, detection, reporting, and remediation are sufficient and effective.

Our Company places significant emphasis on the inspection of process controls, risk monitoring, and fraud prevention methods. Therefore, we have made substantial investments to ensure that our internal audit and control systems are appropriate and sufficient to meet our regulatory requirements and operational scale. Additionally, we strive to minimize operational risk by maintaining comprehensive internal controls, establishing rules and processes to monitor transactions, implementing necessary backup procedures, and developing contingency plans.

To mitigate risks associated with employee and consumer fraud, fire incidents, theft, and burglary, our Company adequately insures the pledged ornaments. Furthermore, we employ both on-site and off-site security surveillance measures to safeguard our branch locations. Additionally, we conduct risk-based internal audits across all branches to assess the adequacy and compliance of internal controls, systems, and procedures.

In order to benefit from expert oversight, diverse verification approaches, and optimize the return on investment from the audit process, we have engaged top-tier firms to handle the internal audit of our major businesses. For example, KPMG is responsible for auditing our NBFC, HFC, and MFI businesses. To manage various risks across multiple products and operations, our Company employs the ‘three lines of defence risk governance strategy. The line management function serves as the first line of defence, followed by the risk management and compliance functions, and finally, the audit function.

The internal audit function is an independent unit of our Company, headed by the Head-Internal Auditor and operates under the direction and supervision of the Audit Committee of the Board. To assess the efficacy of controls, compliance with controls, and adherence to internal processes and procedures, the internal audit function collaborates closely with the risk management and compliance department. For audit planning purposes, activities are evaluated - based on their inherent and control risk. The internal audit function conducts a yearly risk assessment exercise to identify the same, and the frequency of auditing these activities is determined based on the risk assessment.

Moreover, our Company is ISO/IEC 27001:2013 certified and has established robust information security protocols, highlighting our commitment to providing clients with dependable and secure technology.

I NTERNAL FINANCIAL CONTROLS

Our Company has implemented adequate internal controls for financial statements and operations, and they are operating effectively. The internal auditors scrutinized the design and effectiveness of the primary deficiencies controls and discovered no significant during their investigation. Additionally, the statutory auditors evaluated the systems and procedures and confirmed their appropriateness, stating that the internal financial controls system for financial reporting is functioning successfully.

OUTLOOK

Most sectors of the economy are experiencing growth and expansion, which necessitates financing. NBFCs are projected to register steady growth due to robust credit demand throughout the country. These NBFCs are leveraging successful co-lending partnerships, customer service expertise, and digital capabilities to meet the demand for financing. Moreover, the NBFCs Assets Under Management (AUM) growth and collection efficiency have already surpassed pre-pandemic levels, while asset quality is expected to register further improvement in the next fiscal year.

Gold loans, home loans, and microfinance loans are expected to outperform other segments. These loans, in particular, are experiencing increased demand from individuals and small businesses due to their secured nature. NBFCs are best positioned to take advantage of these opportunities due to their extensive reach. The Governments measures, such as Housing for All, Credit Linked Scheme (CLSS), and Production Linked Incentive Schemes (PLI) across sectors, as well as financial inclusion efforts, further brighten the future for these sectors.

Over the years, our Company has invested in people, processes, and technology to provide a superior customer experience. As a result, IIFL is well-positioned to take advantage of upcoming opportunities and overcome challenges by leveraging our digital infrastructure, healthy balance sheet, and growth-oriented mindset.