Indiabulls Housing Finance Ltd Management Discussions

Global Economic Outlook

The global economy has entered a period of volatility. Notably, aftereffects of the COVID-19 pandemic, and Russias invasion of Ukraine have resulted in an uncertain outlook. These events have disrupted supply chains, caused shortages, and led to spikes in commodity prices. As a result, inflation reached multidecadal highs in several economies, prompting central banks to adopt aggressive tightening measures to stabilize prices and anchor inflation expectations.

Slowdown in global growth and a rise in inflation has adversely impacted many countries. The war in Ukraine has precipitated a humanitarian crisis in Eastern Europe, prompting the imposition of sanctions on Russia. Till very recently, frequent and extensive lockdowns in China, a major manufacturing hub, caused disruptions in global supply chains. While the country has opened up now, the bottlenecks in the flow of goods and services worldwide is yet to fully resolve. Given that Russia is a significant supplier of oil, gas, and metals, and Ukraine is a major exporter of wheat and corn, a decline in the supply of these essential commodities is expected to exert upward pressure on global commodity prices.

The International Monetary Fund (IMF) projects a broad- based and sharper-than-expected slowdown, accompanied by high inflation, on a global scale. According to the IMFs World Economic Outlook Update in January 2023, global growth prospects are expected to decline from 3.4% in 2022 to 2.9% in 2023. However, growth is anticipated to recover to 3.1% in 2024, which is likely to have an impact on the Indian economy as well. The trade outlook for 2023 is negatively affected by geopolitical frictions, persistent inflation, and lower global demand, which could result in a reduction in imports.

As a company, we recognize the need to closely monitor global and local developments and take appropriate measures to successfully navigate the evolving landscape.

Domestic Economy

Indias economy has displayed remarkable resilience and growth in the fiscal year 2022-2023, positioning itself as one of the fastest-growing economies globally. The growth rate of 7% was fuelled by robust private consumption and increased government focus on infrastructure development. Despite facing macroeconomic challenges on the global front and implementing tighter domestic monetary policies to address inflationary pressures, Indias growth momentum remained steady - a sign of the underlying strength of the economy.

Indias economic growth in FY23 has been primarily led by private consumption and capital formation, which have also helped generate employment. The declining urban unemployment rate and the faster net registration in the Employee Provident Fund indicate positive trends in job creation. Additionally, the worlds second-largest vaccination drive, involving more than 2

billion doses, has lifted consumer sentiments and is expected to prolong the rebound in consumption. However, for sustained job creation, private capital expenditure needs to play a more significant role and accelerate growth.

Banking and non-banking financial service sectors in India remain robust, and financial markets have evolved in an orderly manner amidst the volatility. The prolonged geopolitical tension between Russia and Ukraine adversely affected global trade and crude oil prices, leading to inflationary pressures. In response, the Reserve Bank of India (RBI) increased the policy repo rate under the liquidity adjustment facility (LAF) by 225 basis points from 4.0% to 6.25% between May 2022 and December 2022. Headline CPI inflation gradually declined from its peak of 7.8% in April 2022 to 5.7% in March 2023 and is projected to ease further.

Looking ahead, Indias economy is expected to witness a growth rate of 6.0% in FY 2023-24. The RBIs projections indicate a positive outlook with moderate inflation rates, and the governments continued focus on infrastructure development, coupled with rising private investment, provides the necessary momentum for the countrys economy to flourish. The robust GST collections and increasing forex reserves are additional indicators of the strength and stability of the Indian economy. The total gross collection for FY 2022-23 stood at ^ 18.10 Lac crore, with a 22% increase in revenue compared to the previous fiscal year. It is anticipated that GST collections will continue to grow in the coming years, contributing to economic development.

Housing Finance Industry

The housing finance industry in India is witnessing significant growth, with financial institutions contributing to a loan book growth of 24.1% between FY 2018-19 and FY 2022-23. This growth is expected to continue, with the housing loan segment projected to contribute about 13% to Indias GDP by FY 202425, while rising at a CAGR of 20.58% between FY 2021-22 and FY 2030-31, driven by affordable housing, declining property prices, attractive tax incentives, and an increase in household income. It is anticipated that the assets under management of HFCs will exhibit a growth of 10%-12% during the FY 2022-23, primarily owing to the growth of home loans. The NBFCs have a loan outstanding of R 8.9 trillion with an addressable loan market of R 21 trillion.

In FY 2021-22, there was a cumulative shortage of 9.5 Cr housing units with an aggregated loan demand of R 35 trillion. The credit growth outlook for affordable HFCs is looking robust with 9-11% growth in FY 2022-23, backed by various Government initiatives for the housing sector like PMAY, tax incentives, RERA, GST, and special financing windows. Additionally, significant regulatory measures implemented by the RBI and NHBs focus on fuelling the affordable housing sector with easy flow of credit to help bridge the demand-supply gap in the sector

Regulatory Framework

Scale Based Regulation (SBR): The Reserve Bank of India, circular DOR.CRE.REC. No.60/03.10.001/2021-22 dated October 22, 2021 on "Scale Based Regulation" issued a revised regulatory framework for NBFCs which is applicable to The Company being a NBFC category falling under upper layer. The Companies classified under NBFC-UL are required to implement a comprehensive scale based regulatory framework covering internal capital adequacy assessment process (ICAAP), complying with large exposure norms, setting limits for sensitive sector exposure, enhanced disclosure in annual report, core financial services etc.

IBH, which has been classified as NBFC-UL, has put in place a Board-approved policy for adoption of the enhanced regulatory framework applicable to NBFC-UL and implementation plan for adhering to the new set of regulations, such as policies like Large Exposures Policy, Internal Capital Adequacy Assessment Policy etc. Policies such as Compensation Policy for Key Managerial Personnel and Senior Management, Compliance Policy have already been adopted by the Company.

Operational Highlights

In the fiscal year 2022-23, the Company focused on consolidating and expanding its asset-light model. Building upon the foundation established in FY2021-22, the Company increased its disbursals by 2.5x times compared to the previous fiscal year. Currently, the Company is strategically optimizing its co-lending partnerships with eight banks and financial institutions, integrating technology for enhanced efficiency. For home loans, IBH has established partnerships with the Central Bank of India, Yes Bank, Indian Bank, Punjab & Sind Bank, RBL Bank, Bank of Baroda, and Indian Overseas Bank. For secured MSME loans, the Company has formed partnerships with RBL Bank, Central Bank of India, Canara Bank, Punjab & Sind Bank, Indian Bank, and Indian Overseas Bank.

The asset-light model has transitioned IBH to a loan origination engine with a loan book of high RoAs while ensuring asset quality. We will continue to strengthen our strategic sourcing relationships with our partner banks. We have also been investing in expanding our reach, and building up manpower as our disbursals grow.

Along with the transition to transforming IBH into a retail loan origination machine, the Company is also focused on penetrating the Tier-3 and Tier-4 towns, to cater to the credit underserved market. The Company added close to 700+ employees and opened 42 branches, mostly in Tier-2 and Tier-3 towns, during FY 2022-23.

The Company also continued with its efforts of maintaining a fortress balance sheet through the pillars of strong capital position, healthy liquidity, adequate provisioning buffer and a well-matched ALM.

The Companys capital adequacy ratio and Tier 1 ratio [standalone IBH] stood at 23.01% and 18.39% respectively, against regulatory requirement of 15% and 10% respectively.

Against a regulatory requirement of 60%, IBHs Liquidity Coverage Ratio (LCR) stood comfortably at 108% at the end of FY 2022-23. The Companys net gearing further improved to 2.2x. With the Company having shifted to an asset-light business model, the net gearing is expected to stabilize at 2.5x to 3.0x levels

Stage 2 loans are down to ^ 5,558 Cr [8% of AUM] from ^ 18,306 Cr at the end of March 2022 and R 22,041 Cr at the end of March 2021. The Company witnessed strong recoveries during FY 2022-23, and, on the back of the pick-up in the real estate sector, the Company expects this trend to continue through FY 2023-24

Financial Performance

The Companys balance sheet stood at R 74,945 Crores as at end of FY 2022-23. Total loan assets stood at ^ 67,020 Crores, and loan book stood at R 54,276 Crores.

The Companys revenues for the year ended March 31, 2023 were R 8,726 Crores and profits for the year were R 1,130 Crores. Asset quality remained stable with Gross NPAs of 2.86% and Net NPAs of 1.90% as % of total loan assets. We are now fully compliant with RBI circular on NPA recognition based on daily dpd.

The Companys net gearing at 2.2x is one of the lowest amongst its peers, in-line with its asset light business model. The Company is also one of the best capitalized amongst peers with capital adequacy ratio of 23.01%, on a standalone basis.

Granularization of Funding

During fiscal 2022-23, the Company raised ^ 1,132 Crores largely through public issues of NCDs. Retail NCD issues will now be a regular perpetual source of fund raising for the Company, and will lead to greater granularisation and retailisation of its liability franchise.

Well-matched ALM

The Company is voluntarily creating a reserve fund for repayment of its External Commercial Borrowings [ECBs] of USD 270 million due in August 2023 and Foreign Currency Convertible Bonds [FCCB] of USD 150 Mn due in FY24, by setting aside amounts to grow to accumulate the total maturity proceeds of these borrowings in a scheduled manner.

Since September 2018, we have repaid debt and securitization liabilities of R 1,52,242 crore on gross basis, and ^70,314 crore on net basis. It is worth highlighting that this achievement marks the largest debt repayment by a corporate entity in India, encompassing both financial and non-financial companies. This

is reflective of the quality of the portfolio we have built and also our approach to asset-liability management

The Company will continue to undertake such proactive management of ALM by utilizing its strong capital position and comfortable levels of liquidity to provide comfort and confidence to its bond holders and further strengthen the Companys credentials.

Credit Rating

The Company has a long-term rating of AA/Stable by both of Indias premier rating agencies CRISIL, an S&P Global Company, and ICRA, a Moodys Investors Service Company. Both the rating have been revalidated in June 2023.

Outlook

Building upon the achievements and initiatives undertaken in the past, The Company is well-prepared to take advantage of the expanding prospects in a thriving economy. We are committed to further enhancing our operational efficiency and strengthening our market presence. Our goal is to leverage the potential of both retail assets and wholesale loans to drive high RoAs, and get to mid-teen RoEs by FY25.

We remain dedicated to fostering our existing partnerships and establishing new alliances with reputable banks and financial institutions. Through expanding our co-lending network, we will augment our lending capacity, diversify our customer base, and explore new avenues for growth.

The Companys future will be characterized by a strong emphasis on institutionalization, digital transformation, strategic partnerships, and Environmental, Social, and Governance (ESG) initiatives. We are confident that our strategic actions will position us for sustained success and growth in the future

In February 2023, our Company achieved a significant milestone by successfully completing the de-promoterzation process, transitioning into a board-run, professionally managed financial institution. This achievement marks a major turning point in our organizations history. In conjunction with this transformation, we are currently engaged in a comprehensive rebranding exercise, which will underscore our steadfast commitment to our valued customers.

Risk Management

The Company has a well-defined risk governance structure which includes periodic reviews and close monitoring to enable building a sustainable business that takes care of the interests of all stakeholders. Comprehensive annual risk review exercises go towards continually updating the risk management policy. The Companys Chief Risk Officer [CRO], oversees the Companys risk management structure. The CRO reports into the Board of Directors of the Company.

The Companys Credit Committee works to identify and mitigate credit risks to the Company by formulating policies on limits on large credit exposures, asset concentrations, standards for loan collateral, loan review mechanism, pricing of loans etc. The credit committee is also responsible to frame approach and policies for customer retention, especially those customers that seek to transfer their loans out during interest rate cycles when the Companys interest rates may be misaligned higher than the best rates available from other lenders.

The Company also has a system for evaluating Grievance Redressal Mechanism and undertaking complete Root Cause Analysis (RCA) to ensure recurring grievances are avoided in future leading to improved customer service standards. On June 11, 2021, the RBI extended the provisions of the risk- based internal audit (RBIA) framework to HFCs, which were required to be implemented by June 30, 2022. The Company has implemented this framework within the organization.

Internal Control Systems and Their Adequacy

The Company has an elaborate system of internal controls commensurate with the size, scale and complexity of its operations; it also covers areas like financial reporting, fraud control, compliance with applicable laws and regulations etc. Regular internal audits are conducted to check and ensure that responsibilities are discharged effectively. The Internal Audit Department monitors and evaluates the efficacy and adequacy of internal control systems in the Company, its compliance with regulatory directives, efficacy of its operating systems, adherence to the accounting procedures and policies at all branch offices of the Company and its subsidiaries. Wherever required, the internal audit efforts are supplemented by audits conducted by specialized consultants/ audit firms. Based on the report of the Internal Auditors, process owners undertake corrective actions, in their respective areas and thereby strengthen the controls.

Material Developments in Human Resources

At IBH, we believe that our employees are our most valuable assets and we endeavour to help them realize their full potential. The Human Resource function looks after employee recruitment, training, performance management, emotional and mental well-being, financial wellness and stress management. During the year, the employee training vertical of the human resources department conducted 34 online & offline training sessions for 5,316 employees. The trainings covered various aspects such as customer relationship management, credit risk analysis, operational efficiency, fraud prevention amongst others. We believe in employee empowerment and our efforts are focused on creating a happy and healthy work environment. Our people have been and will continue to be our core strength.

As on March 31, 2023, the Company has 5,316 employees on its permanent rolls.

The Company has been focusing on making its workforce more diverse across gender, age, social and economic segments. The Company had taken objective targets for FY 2026-27 and FY 2031-32 to balance out the gender ratio amongst its employees and is actively working towards achieving the same. The Company believes in recruiting young graduates and training them towards higher positions of responsibility within the organization. Campus recruitment drives and greater engagement with colleges across the country would be another area of focus going ahead.

Cautionary statement

This document presents forward-looking projections, including anticipated future events, financial performance, and operational outcomes for Indiabulls Housing Finance. These projections are inherently forward-looking and are based on certain assumptions, which are subject to inherent risks and uncertainties.

Consequently, we urge readers to be mindful of the following disclaimer and acknowledge that this document is fully contingent upon the assumptions, qualifications, and risk factors stated in the managements discussion and analysis section of Indiabulls Housing Finance Annual Report for the fiscal year 2022-2023.