India Shelter Finance Corporation Ltd Management Discussions

GLOBAL ECONOMIC OVERVIEW

In CY 2023, the global economy exhibited remarkable resilience, with growth projections of 3.2% in CY 2024, is projected to continue at the same pace in CY 2025. Economic expansion surpassed expectations, driven by strong government and private expenditures, particularly in the US and in some of the key emerging markets. The US Federal Reserve maintained

benchmark interest rates at 5.25% to 5.50% in January after raising them eleven times since March 2022 to curb inflation. High central bank rates and reduced government spending due to high debt levels are hindering economic activity. Despite these challenges, economists are optimistic about the economic recovery, citing improved global trade and resilient consumer spending.

Outlook

The global economy in CY 2023 experienced a mix of positive developments and concerning trends. Initial worries were overshadowed by unexpectedly robust growth, fuelled by sustained spending and investments. In essence, a cautious and collaborative approach, grounded in a nuanced understanding of the economic landscape, is essential for shaping a positive future.

(Source: Organisation for Economic Cooperation & Development, United Nations Conference on Trade and Development (UNCTAD), MINT)

INDIAN ECONOMIC OVERVIEW

Indias growth is expected to remain strong, supported by macroeconomic and financial

stability. Presently, the official estimate for growth in 2023-24 stands at 7.6%, and headline inflation is anticipated to decline gradually to the medium-term target of 4% for 2024-25. Positive outlook is underpinned by entrepreneurship and initiatives to uplift vulnerable communities, which include developing niche manufacturing sectors, improving infrastructure, diversifying exports, and focussing on higher value-added products, all of which contribute to a promising future.

The Indian economy showed resilience with a growth rate of 7.6% in 2023-24, surpassing the 7% growth rate in 2022-23. This robust performance can be largely attributed to the governments economic policy agenda, which prioritised revitalising Indias growth potential. The key initiatives include increased public sector investment, the strong resilience shown by the financial sector, and significant expansion in non-food credit.

(Source: RBI, Department of Economic Affairs, January 2024 https://pib.gov.in/PressReleasePage.aspx?PRID=2010223)

The stability of the banking credit to GDP ratio at around 51% over the past five years suggests a continuation of this trend in the near future. Conversely, the housing credit to GDP ratio has seen a slight increase from 10.3% in 2019 to 12.3% in 2023 and is expected to remain stable, potentially experiencing modest growth.

Rural Indias Under Penetration and Untapped - An Opportunity of Growth for Financiers

The significant difference between rural areas contribution to GDP (47%) and their share of banking credit (8%) indicates a substantial opportunity for banks and NBFCs to expand lending in these regions. With the government focussing more on financial inclusion, increasing financial literacy, and providing greater access to smartphones and the internet in rural areas, there is potential for a notable increase in the delivery of credit services. Additionally, utilising alternative data for customer evaluation can help financiers better assess customers and serve these regions informal segments of society.

Growth and Stability of NBFC Sector

The NBFC sector in India experienced significant growth, with segments like housing finance, microfinance, and consumer finance driving the expansion. They contributed towards the economys growth, especially in meeting the credit demand of the underserved rural and semi-urban areas.

According to the RBIs annual report for 2022-23, the total assets under management (AUM) of NBFCs reached 79 Tn, representing approximately 18% of Indias gross domestic product (GDP). The RBIs Digital Lending Regulations, effective January 2023, have encouraged digital transformation among NBFCs. They are leveraging digitisation, including super apps, to enhance customer engagement and streamline operations. Innovations in underwriting, propelled by the democratisation of data and analytics, empower swift credit decisions. Acting as vital sources of

finance for Small and Medium Enterprises (SMEs) and underserved communities, NBFCs provide a diverse array of financial products with rapid turnaround times. In doing so, they facilitate economic inclusion and bolster the growth of the MSME sector.

(Source: KPMG Report on NBFCs in India, February 2024) OUTLOOK

The robust growth experienced by the Indian economy is anticipated to continue, supported by macroeconomic stability. The official estimates for 2023-24 project a 7.6% growth rate, with decreasing headline inflation. The digital revolution, supportive regulatory environment, social and economic upliftment measures, and efforts to diversify exports drive the positive outlook. Reforms implemented over the past decade establish a foundation for resilient governance, setting the stage for sustained economic growth.

(Source: Press Information Bureau - Indian Economy Estimates, February 2024, KPMG Report)

HOUSING FINANCE SECTOR OVERVIEW

Introduction to Housing Finance Market

The housing finance market serves as a vital catalyst for facilitating homeownership by offering loans and mortgages tailored to the needs and aspirations of individuals and families. Indias housing market has seen remarkable resilience, defying odds with record-high sales despite soaring prices and interest rates. The housing finance sector has thrived, with a ~ 13.5% CAGR over the past four years, buoyed by rising incomes and steady demand. Smaller districts are emerging as key players in housing loans, indicating shifting preferences. Housing Finance Companies (HFCs) are poised for future growth, driven by factors such as affordable housing initiatives, increasing per capita income and tax incentives.

Introduction to the Affordable Housing Finance Market (AHFCs)

Indias mortgage market can broadly be divided into two segments by ticket size of the housing loan at the time of disbursement - prime loans and affordable housing loans.

Affordable Housing Loans consider loans to individuals with a ticket size of less than 2.5 Mn. The former, called prime housing loans, is prominent in the metro/urban areas, and the latter generally includes houses in the outskirts of these areas and semi-urban and rural areas, i.e., defined as housing finance market focussing on low-income housing segment.

(Source: Crisil Industry Report)

Despite encountering funding challenges in the past, AHFCs have shown consistent growth, with their portfolio expanding by 27% in fiscal year 2023. While housing loans remain dominant, accounting for 74% of AHFCs total loan book as of 31 March, 2023, these companies are diversifying into non-housing segments. The non-housing portfolio primarily consists of loan against property (LAP), through which micro, small, and medium enterprises (MSMEs) and small businesses raise funds for their business and personal needs, using property as collateral.

Mortgage to GDP

Indias mortgage-to-GDP ratio has increased from 6.5% in 200809 to 12.3% in 2022-23, though it remains low as compared to other developing countries. This improvement is attributed to rising incomes, improving affordability, growing urbanisation and nuclearisation of families, emergence of Tier 2 and Tier 3 cities, ease of financing, tax incentives, and a wider reach of financiers.

Housing Shortage in India

India faces a significant housing shortage, with various challenges contributing to this issue. Urban areas in India struggle with a housing backlog, infrastructure deficits, and a large slum population, with approximately 0.9 Mn homeless individuals in urban areas and around 65 Mn people living in slums. The Tier 2 and Tier 3 cities in India are facing a significant housing shortage, mirroring the challenges seen in larger urban centres. The rapid urbanisation and population growth in these cities have intensified the demand for affordable housing. The shortage of

(Source: Crisil Industry Report, Niti Aayog)

housing units in these cities is a pressing issue, particularly for tl Economically Weaker Sections (EWS) and Lower Income Grou (LIG). According to the report of the RBI-appointed Committee ( the Development of the Housing Finance Securitisation Market September 2019, the housing shortage in India was projected surge to a staggering 100 Mn units by 2022. The total incremern demand for housing loans, required to address this entire shortag is estimated to range between 50 Tn to 60 Tn, as outlined in tl Committee report.

(Source: RBI Planning Commission)

Ticket Size Split for Housing Finance & Affordable Housing Companies

In India, the housing loan market is predominantly characterised by smaller ticket size loans in terms of volume. Loans targeting the low-income housing segments, valued less than 2.5 Mn, constitute

roughly 37% of the overall housing finance market. These loans are particularly crucial for addressing the housing shortage, especially among the EWS and LIG. As of March 2023, the affordable housing

finance market boasted outstanding loans of approximately 11.5 Tn.

(Source: Crisil Industry Report)

Loan Against Property (LAP):

Loan Against Property (LAP) is availed by mortgaging a property (residential or commercial) with the lender. LAP is a secured loan, as it provides collateral to the financier in the form of the property. The overall Loan against property segment has grown at a CAGR of 16% with the market size expanding from 5.3 Tn in 2018-19 to 9.6 Tn in 2022-23.

LAP portfolio with ticket size less than 2.5 Mn has grown at a relatively higher CAGR of 22% between 2018-19 and 2022-23 as compared to overall LAP portfolio which grew by 16% during the same period. This growth was driven by the increasing penetration of formal lending channels and greater lender confidence.

A ABOUTTHE COMPANY

India Shelter Finance Corporation Limited (referred to as India Shelter, Our Company or We) specialises in providing housing loans and loans against property, with a pan-India network spanning 15 states and 223 branches. Established in 2010, we focus on serving self-employed individuals, especially first-time home loan takers in low and middle-income segments across Tier 2 and Tier 3 cities in India.

Through digital innovations, we offer comprehensive financial solutions with a paperless approach to customer acquisition and onboarding. Our credit and risk management policies are backed by technology and data analytics, ensuring healthy asset quality. Committed to governance, we aim to serve the affordable housing finance industry by focussing on underserved customers through a blend of customer experience and technology.

INDIA SHELTER FINANCE CORPORATION LIMITEDS PERFORMANCE DURING 2023-24 Operational Performance Assets Under Management (AUM)

As of 31 March, 2024, our AUM increased to 6,084 Crs, compared to 4,359 Crs in the previous financial year, registering a growth of 40%.

Disbursements

As of 31 March, 2024, our disbursement increased to 2,646 Crs, compared to 1,964 Crs in the previous financial year, registering a growth of 35%.

(Rs in Crs)

FINANCIAL PERFORMANCE

We have achieved a robust performance in 2023-24. Total income increased 42% Y-o-Y to 861.4 Crs from 606.2 Crs. Finance cost grew 38% Y-o-Y to 287.0 Crs from 208.7 Crs. Net total income grew 44% Y-o-Y to 574.4 Crs from 397.6 Crs.

Operating expenses rose to 236.0 Crs from 181.5 Crs, as we focussed on increasing the employee base, investing in technology,

and improving brand visibility on the back of improving business momentum. Pre-provisioning operating profit grew 57% Y-o-Y to 338.4 Crs from 216.0 Crs. Asset quality improved and credit costs came in at 19.2 Crs as compared to 14.1 Crs in 2022-23.

Profit before tax came in at 319.2 Crs. After providing for income tax of 71.6 Crs, Profit after Tax came in at 247.6 Crs, up 59% Y-o-Y from 155.3 Crs in 2022-23.

Balance Sheet		(in Crs)
Particulars	2023-24	2022-23
Sources of Funds
Share Capital	53.5	43.8
Reserves & Surplus	2,245.1	1,196.8
Borrowings	3,415.1	2,988.9
Other liabilities & provisions	80.4	66.2
Total	5,794.2	4,295.6
Application of Funds
Loan Assets	5,062.4	3,609.1
Investments	157.8	46.9
Fixed Assets	29.8	24.3
Cash & Bank Balance	377.7	507.3
Other Assets	166.5	107.9
Total	5,794.2	4,295.6
P&L Summary table		(in Crs)
Particulars	2023-24	2022-23
Total Income	861.4	606.2
Finance Cost	287.0	208.7
Operating Expense	236.0	181.5
Pre-Provisioning Operating Profit	338.4	216.0
Credit Cost	19.2	14.1
Profit before Tax	319.2	202.0
Tax Expense	71.6	46.6
Profit after Tax	247.6	155.3
Basic EPS	26.3	17.7
Diluted EPS	25.2	17.4
Key Ratios
Particulars	2023-24	2022-23
Total Revenue to Average Total Assets	17.1%	16.1%
Finance Cost to Average Total Assets	5.7%	5.6%
Spread to Average Total Assets	11.4%	10.6%
Operating Expenses to Average Total Assets	4.7%	4.8%
Credit Cost to Average Total Assets	0.4%	0.4%
PBT to Average Total Assets	6.3%	5.4%
ROA (PAT to Average Total Assets)	4.9%	4.1%
Leverage (Average Total Assets to Average Net Worth)	2.9	3.2
ROE (PAT to Average Net Worth)	14.0%	13.4%
Cost to Income	41.1%	45.7%
Operating Expenses/AUM	4.5%	4.9%
CRAR	70.9%	52.7%
Book Value Per Share	215.3	142.7

Stage-3 Assets

Through our collection mechanism, we have maintained a collection efficiency of 99.5%, resulting in an improvement in dues in various buckets and NPAs. As of 31 March, 2024, the Gross stage-3 assets and Net stage-3 assets improved by 16 bps and 10 bps to 1.0% and 0.7%, respectively, compared to 1.1 % and 0.8% in the previous financial year.

Capital Adequacy Ratio (CAR)

As of 31 March, 2024, our Companys CRAR was 70.9%. This is well above the minimum required level.

Branch Network/Geographic Presence

Our expansive network of 223 branches spans 15 states across India. This strategic focus on Tier 2 and Tier 3 markets allow us to capture a significant 95% of the affordable housing market. This geographically diverse portfolio minimises AUM concentration risk, underscoring our widespread presence and commitment to building resilience through diversification.

For geographic presence and state-wise AUM please refer to page number 21.

RESOURCE MOBILISATION Net Worth

The net worth as of 31 March, 2024 was 2,298.6 Crs.

IPO

During the year under review, your Company has successfully completed the Initial public offering of 2,43,40,768 equity shares of face value of 5 each ("equity shares") of the Company for cash at a price of 493.00 per equity share of face value of 5 each including a securities premium of 488.00 per equity share (the "offer price") aggregating to 1,200 Crs (the "offer"). The offer comprises of a fresh issue of 16,227,180 equity shares of face value of 5 each by our company aggregating to 800 Crs (the "fresh issue") and an offer for sale of 81,13,588 equity shares aggregating to 400 Crs ("offer for sale"). For further information refer to Directors Report.

ESOP Allotment

Our Company issued and allotted 23,68,652 equity shares during the year pursuant to the exercise of stock options by the eligible employees of our Company under ESOP plans.

Term Loans from Banks and Financial Institutions

In FY24 we raised 1,589 Crs funds from banks and financial institutions with weighted average tenure more than 5 years. The undrawn sanctioned amount as of 31 March, 2024 is at 549 Crs and the outstanding proportion of term loans from banks and financial institutions is 56% of total borrowings.

Refinance from National Housing Bank (NHB)

Under the National Housing Bank (NHB) refinance scheme, we received a sanction of fresh refinance assistance of 350 Crs during 2023-24. We availed funds of 140 Crs during the financial year, which includes disbursements from last years sanction as

well. The outstanding proportion NHB refinance as of 31 March, 2024 is 15% as against 16% in the previous year. The undrawn sanctioned amount as of 31 March, 2024 is at 210 Crs.

Non-Convertible Debentures (NCDs)

As of 31 March, 2024, the outstanding proportion from NCDs is 1% of total borrowings.

External Commercial Borrowings (ECB)

The Company has External Commercial Borrowing (ECB) line of $30 mn from US International Development Finance Corporation (DFC). During the current year, the Company has drawn the remaining $20 mn External Commercial Borrowing (ECB) limits. Total outstanding foreign currency loan exposure in the form of External Commercial Borrowing as on March 31,2024 is 6% of total borrowings which is fully hedged by way of cross currency swaps.

Co-Lending

As part of our effort to make a difference and on tapping new initiative, we have actively implemented co-lending initiatives to establish ourselves as the preferred lender for those who are unbanked or underbanked. With a strategy to leverage distribution network and diversify, on tap sources of funds, the Company has co-lending partnership with two banks. The CoLending partnerships is gradually gaining traction and during the year company has disbursed 146 Crs of funds under co-lending partnership wherein partner bank has taken the share of 80% of the disbursed amount in its books.

Direct Assignment (DA) from Banks and Financial Institutions

During the Financial Year under review, your Company received purchase consideration of 451 Crs from transfer of LAP loan assets (Direct Assignment) pool to Banks. The Direct Assignment transactions were carried out in line with RBI guidelines on Transfer of Loan exposure of Standard Assets and assigned assets were derecognized in the books of the Company.

Human Resources

We foster a work culture that inspires and motivates our employees to deliver their best each day. We firmly believe in recognising and celebrating excellence, creating an environment that promotes healthy competition and rewarding outstanding achievements. We have established a robust Reward & Recognition Programme to achieve the same.

Employee Development & Well-Being: We prioritise the development and well-being of the employees, ensuring a healthy and balanced work environment

Employee Training & Development: 19,142 person hours of training provided in 2023-24

Employee Ownership: 294 employees are covered under ESOP programme, comprising 9% of the total employee base or 23% of the employee base excluding frontline staff

• Employment generated in Tier 2, 3 & 4 cities

• Gender Diversity: 25% women representation on the Board and 20% women at the Head Office.

Our Company has been certified for the second consecutive year with the Great Place to Work award & recognised as a Top 50 company in the BFSI sector. This achievement reflects our collaborative and supportive work environment, where everyone feels valued.

Employee Health and Safety

At India Shelter, we have set very high priorities for employee development and well-being. We foster a healthy work environment through initiatives like the India Shelter Child Scholarship Programme, health check-ups, weekly yoga classes, and a fitness community.

Training and Development Programmes

Through a range of training programmes, including our initiative Prarambh - a Leadership Journey, we focus on nurturing our employees for leadership roles. We make them future-ready for covering specialised functions like lending operations, KYC and AML, underwriting, POSH, and information technology. Additionally, we have implemented multiple policies to ensure a safe and conducive work environment, emphasising employment and labour practices.

INFORMATION TECHNOLOGY

The financial ecosystem is evolving rapidly with the advent of tech-enabled and branchless lending models. Our technology ecosystem revolves around enhancing operational efficiency and customer experience. Operating on a Software-as-a-Service (SaaS) model, our major IT services are backed by a multi-layer security suite, ensuring the safety of our information. We are one of the early adopters of the Salesforce, a customer relationship management system. It is integrated with our downstream and upstream applications, including mobile apps, loan management systems, and customer service applications, streamlining processes and enhancing convenience for customers. We have adopted a paperless approach to entire loan lifecycle complemented by tailored mobile solutions such as iSales, iCredit, iTech, iCollect and iServe, catering to different stages of the lending process. These applications optimise customer acquisition, support underwriting, facilitate collateral evaluation, assist in collections and ensure prompt customer service.

Our data-driven approach utilises extensive databases for underwriting and risk scoring. Cloud-based solutions for customer relationship management and loan management provide us with a holistic view of our customers, while digital loan management through Finnone Neo ensures regulatory compliance. Additionally, we use Microsoft D365 - Finance for accounting and vendor management, with Azure Active Directory ensuring centralised administration and authentication. Our commitment to security is further strengthened by the deployment of an Extended Detection and Response (XDR) solution for threat detection using artificial intelligence. The incorporation of information technology in our service delivery mechanisms and operating model not only promotes uniformity in our operations but also enhances efficiency and improves customer experiences.

INTERNAL CONTROL FRAMEWORK

We have a comprehensive internal control framework in place that aligns with our Companys size, scale, and complexity. The Internal Audit Department conducts thorough audits of various functional areas and operations to assess compliance with policies, procedures, and regulatory requirements. The audit observations and follow-up actions are reported to the Audit Committee quarterly. The Audit Committee reviews the internal control environments adequacy and effectiveness and oversees the implementation of audit recommendations.

The Directors are responsible for ensuring robust internal financial control systems and frameworks to provide reasonable assurance regarding reporting, operational, and compliance risks. There were no material breakdowns in controls, procedures, or systems during the reviewed year, and no significant changes in internal financial controls occurred that could materially affect them.

RISK MANAGEMENT

At India Shelter Finance Corporation, we understand that effective risk management and mitigation are essential for sustaining and growing businesses. We believe in proactively identifying risks and implementing tailored mitigation plans to reduce their impact. Our continuous review and update of risk management policies ensures that our business is well prepared to navigate potential risks successfully. Here are some key business risks that we address through our risk management processes:

Risk	Mitigation
Credit risk Credit risk refers to the possibility of a companys assets losing value because of uncertainty about whether borrowers will be able to repay loans.	We have implemented a comprehensive credit risk framework to mitigate this risk. It helps us evaluate factors such as the borrowers credit history, demographics, and income. Additionally, a rigorous credit sanction process is in place, and we continuously monitor post-disbursement to ensure a timely repayment.
Risk	Mitigation
Operational risk Operational risk is the potential loss that can arise from inadequate or failed internal processes, people, systems, or external events. Financial institutions are particularly susceptible to this risk, as it can negatively impact their reputation, financial performance, and customer relationships.	We have established robust internal control systems with clea demarcations for duties, access, authorisation, and reconciliatior procedures. Regular monitoring of procedures is conducted t uphold high standards across business processes. Staff educatio and assessment processes are also in place, including interna audit and risk containment units. These measures facilitate clea communication, monitor changes, and control business transactio risk. Additionally, the digitisation of internal processes reduce our reliance on manual work, minimising human errors throug automation and precision in operations.
Market risk Market risk stems from fluctuations in the market environment, which have the potential to either escalate the worth of liabilities or devalue the assets.	Our exposure to market risk is confined to fluctuations in interes rates. To manage this risk, we regularly assess the maturity profile an conduct stress tests to ensure sufficient mitigation.
Interest rate risk Interest rate risk is the possibility of financial loss arising from changes in interest rates, which can affect an organisations financial performance and overall value.	We evaluate the interest rate sensitivity gap and conduct regula portfolio tests. Additionally, we employ a combination of fixec and floating rate instruments to mitigate interest rate risk. We als< diversify our funding sources to reduce reliance on any single one thus lessening the impact of interest rate fluctuations. Furthermore we closely monitor and analyse interest rate trends to anticipat changes and take timely action to mitigate interest rate risk.
Forex Risk Foreign exchange risk is the possibility of loss arising for the foreign currency exposure of the Company from currency fluctuations and adverse movement in the interest rates of internation market.	The Company has External Commercial Borrowing (ECB) line of $3( mn which is fully hedged by way of cross currency swaps.
Liquidity risk Liquidity risk is the potential risk of a shortfall in cash assets or their equivalents to fulfil urgent cash requirements.	We have sufficient cash reserves to address unexpected cash needs Additionally, Asset-Liability Policy ensures that adequate cash flov and unused credit facilities are always available.
Reputation risk Reputation risk emerges from unforeseen and indirect losses due to unfavourable experiences or public perception.	We have implemented corporate governance and complianc framework to mitigate reputation risk. This framework is integratec into all aspects of our business operations.
Technology risk Technology risk is the possibility of loss arising from a system breakdown.	Our governance framework includes information technolog practices to manage technology risks.
Regulatory risk Regulatory risk is the possibility of economic or reputational loss from non-compliance with legal requirements.	We diligently adhere to rules and regulations, ensuring no violation occur.

CORPORATE SOCIAL RESPONSIBILITY

We aim to make a positive difference in society and improve the quality of life through our positive intervention in the community. We undertake key CSR initiatives with a sustainable, long-term view to benefit society at large. The scope of activities that we undertake towards the fulfilment of our CSR is in line with Schedule VII of the Companies Act, 2013, as amended from time to time, and any other applicable laws, regulations. Our key CSR objectives are identifying affordable housing, enhancing financial inclusion, supporting local communities, and addressing societal needs such as hunger, poverty, health, and rural development.

CAUTIONARY STATEMENT

This document contains forward-looking statements and information. Such statements are based on our current expectations and certain assumptions. Therefore, they are subject to certain risks and uncertainties. Should one or more of these risks or uncertainties materialise, or if underlying assumptions prove incorrect, actual results may vary. The Company does not intend to assume any obligation to update or revise these forwardlooking statements in light of developments that differ from those anticipated.