Indiabulls Housing Finance Ltd Management Discussions

Global Economic Outlook

The global economy showed resilience with economic growth holding steady. The aftermath of the pandemic had triggered supply-chain disruptions, and Russias war on Ukraine resulted in global energy and food supply issues. The high inflation triggered by these events, prompted many economies to tighten monetary policies by raising interest rates.

The Israel-Gaza conflict could exacerbate commodity prices. Sustained strikes in the Red Sea and the ongoing conflict in Ukraine has the potential of causing more supply shocks that would be detrimental to the global economy and result in increases in the price of food, energy, and transportation. More geopolitical unrest might hinder cross-border supplies of petroleum, food, and fertiliser, increasing price volatility and harming consumer and corporate confidence.

According to the IMFs World Economic Outlook Update in April 2024, growth for 2024 and 2025 will hold steady around 3.2%, with median headline inflation declining from 2.8% at the end of 2024 to 2.4% at the end of 2025.

Domestic Economy

The Indian economy continued its strong performance in 2023-24, with a GDP growth rate of 8.2%. This growth was driven by increased investments and government spending on infrastructure projects. Despite facing global economic challenges and a decline in net exports due to reduced global trade, Indias economy remained resilient.

Private consumption and capital formation were the key drivers of Indias economic growth in FY24. The job market scenario saw major improvement with both rural and urban areas witnessing decrease in unemployment rates. Private sector spending will be crucial for sustained economic growth and job creation.

Despite signs of the economy improving in the aftermath of the Covid-19 pandemic and the Russia Ukraine War, the Reserve Bank of India (RBI) maintained a prudent outlook and kept the policy repo rate unchanged at 6.5% and proposed that domestic monetary policy efforts must continue to keep inflation in check. Headline CPI inflation rose from 4.3% in May 2023, to 4.8% in June 2023, due to price pressure in food items, particularly tomatoes. Considering these factors, the RBI predicted that CPI inflation would rise up to 5.4% for the fiscal year 2024-25.

Looking ahead, Indias economy is expected to witness a steady growth rate with the IMF raising Indias GDP forecast to 7% for FY 2024-25. As a result of increased private investment and increased government spending on infrastructure development, the countrys economy is expected to grow robustly, according to the RBIs predictions.

Housing Finance Industry

The housing finance industry has experienced robust growth in recent years, with market expanding at a CAGR of 12% between

FY 19 and FY 23, despite facing significant challenges from four major external events in recent years: (i) demonetization, (ii) the implementation of GST, (iii) the collapse of several large NBFCs, and (iv) the COVID-19 pandemic. The positive trend is fuelled by several factors, including increasing urbanization, rising disposable incomes, making homes more affordable, and ongoing supportive government initiatives like Housing for All. Additionally, online platforms have streamlined the loan application process, enhancing customer experience while simultaneously reducing operational expenses for lenders.

The housing finance market continued to grow in FY2022 and FY2023, even amid a 250 basis point increase in the repo rate during this period. As of March 31, 2023, outstanding individual housing loans represented 10.52% of GDP, which was still considerably lower than in developed countries. The combined housing loan portfolio of scheduled commercial banks (SCBs) and HFCs reached Rs.28.65 lakh crore by March 31, 2023 (source: NHB Annual Report 2022-23), up from Rs.25.11 lakh crore on March 31, 2022, marking a 14.1% increase. By September 30, 2023, the housing loan portfolio grew to Rs.30.26 lakh crore, showing an annualized growth rate of 11% compared to March 31, 2023 (source: NHB Annual Report on Trends and Progress of Housing in India).

Looking ahead, the housing segment presents significant opportunities for continued growth with the sector expected to grow at a CAGR of 24.1 % from 2024 to 2033. [Custom Market Insights report on India Housing Finance Market 20242033] Government programs such as the Pradhan Manti Awas Yojana (PMAY) and a favourable regulatory and tax environment are expected to further stimulate demand in this sector. The company is well positioned to capitalize on these positive market dynamics and remains committed to delivering innovative and customer centric housing finance solutions.

Regulatory Framework

The NBFC sector plays a crucial role in the Indian financial ecosystem. Enhanced regulation and oversight have been implemented to bolster the resilience of this significant sector. The RBI has introduced various measures that have been instrumental in fortifying the NBFCs and HFCs.

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.

SCL has classified as an Upper Layer NBFC for FY 2023-24, as per the latest RBI notification dated September 14, 2023, and

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.

Throughout FY 2023-24, the RBI issued a range of regulations streamlining regulatory controls and governance mechanisms. The RBI took steps to consolidate and harmonize its directives for different categories of Regulated Entities (REs) through the Master Direction - Reserve Bank of India (Non-Banking Financial Company - Scale Based Regulation) Directions, 2023, which now governs all NBFCs, including Housing Finance Companies. Additionally, the RBI introduced several new and amended regulations focusing on customer fairness and transparency, including Fair Lending Practice - Penal Charges in Loan Accounts (effective from the next financial year) and Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans. The RBI also increased the risk weight on unsecured retail loans from 100% to 125% and raised the risk weight on bank exposures to NBFCs by 25%, subject to a maximum of 100%.

Operational Highlights

In the fiscal year 2023-24, the Company focused on consolidating and expanding its asset-light model. Building upon the foundation established in FY2022-23. Currently, the Company is strategically optimizing its co-lending partnerships with ten banks and financial institutions, integrating technology for enhanced efficiency. For home loans, SCL has established partnerships with the Central Bank of India, Yes Bank, Indian Bank, Punjab & Sind Bank, RBL Bank, Bank of Baroda, Indian Overseas Bank, Canara Bank and IDBI 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 SCL 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.

The Company is also focused on penetrating the Tier-3 and Tier- 4 towns, to cater to the credit requirements of the underserved markets.

The Company also continued to maintain 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 SCL] stood at 22.73% and 21.80% respectively, against regulatory requirement of 15% and 10% respectively.

Against a regulatory requirement of 70%, SCLs Liquidity Coverage Ratio (LCR) stood comfortably at 253% at the end of FY 2023-24. The Companys gearing further improved to 1.9x. With the Company having shifted to an asset-light business model, the gearing is expected to stabilize further.

Stage 2 loans are down to R 2,330 Cr at the end March 2024 [3.6% of AUM] from R 5,558 Cr at the end of March 2023 and from R18,306 Cr at the end of March 2022. The Company witnessed strong recoveries during FY 2023-24, and, on the back of the pick-up in the real estate sector, the Company expects this trend to continue through FY 2024-25.

Financial Performance

The Companys balance sheet stood at R 73,066 Crores as at end of FY 2023-24. Total loan assets stood at R 65,335 Crores, and loan book stood at R 53,090 Crores.

The Companys revenues for the year ended March 31, 2024 were R 8,625 Crores and profits for the year were R 1,214 Crores. Asset quality remained stable with Gross NPAs of 2.69% and Net NPAs of 1.52% as % of total loan assets. Gross and Net NPAs are lowest in 15 quarters. We are now fully compliant with RBI circular on NPA recognition based on daily dpd.

The Companys gearing at 1.9x 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 22.73%, on a standalone basis.

Granularization of Funding

During fiscal 2023-24, the Company has raised R 3,693 Crores via Right issues, raised R 2,917 Crores via Dollar bonds, raised R 681 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.

Since September 2018, we have repaid debt and securitization liabilities of ~R 1,72,000 crore on gross basis, and ~R82,000 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 CRISIL and ICRA, both the rating have been revalidated in July 2024. Moodys upgraded our international long term credit rating to B2/Stable from B3/Stable and S&P Global assigned us an international rating of B/Positive.

Outlook

Following the successful transformation from a promoter led, promoter driven company to a professionally managed, board run company in Feb 2023, our company achieved another significant milestone by undergoing a rebranding exercise. We have received the necessary clearances from all regulatory bodies and we are now officially Sammaan Capital Limited. The company has been registered as NBFC -ICC.

Moving forward, the Company will prioritize four key pillars for sustainable growth continuing institutionalization, digital transformation, strategic partnerships, and Environmental, Social, and Governance (ESG) initiatives. These strategic actions will solidify our foundation and position us for long-term success.

As we move forward, Sammaan Capital Limited remains committed to its core retail focus. We will leverage our expertise in affordable home loans and mortgage-backed loans for micro, small and medium-sized businesses (MSMEs). Our asset-light model will continue to be the catalyst for growth. We act as an efficient loan origination engine, partnering with banks and financial institutions to source loans through co-lending and sell downs. We remain dedicated to expanding our colending network which will augment our lending capacity and diversify our customer base. Going forward, we will prioritize maximizing Return on Equity (RoE) by further optimizing our asset-light strategy.

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 and 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.

Internal Control Systems and their Adequacy

Sammaan Capital maintained robust internal control systems tailored to the nature, size, and operations of our business and processes. The internal audit is conducted according to the risk- based internal audit (RBIA) framework, ensuring the quality and effectiveness of internal controls, risk management, and governance processes. An internal team performs the audits to assess the adequacy and effectiveness of internal control systems and processes across all business areas and functions. Significant audit findings are reported to the board-level Audit Committee, along with follow-up actions on a periodic basis. The Audit Committee, which consists of four directors, including three independent directors, reviews the internal audit reports and the adequacy and effectiveness of internal controls on a quarterly basis.

Material Developments in Human Resources

At Sammaan Capital, we believe that our employees are our most valuable assets and we endeavor 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 online & offline trainings covering over ~ 70% of overall employees. The trainings covered various aspects of customer relationship management, credit risk analysis, operational efficiency and fraud prevention among others. We strongly 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.

Sammaan Capital has been focusing on making its workforce more diverse across gender, age, social and economic segments. We 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. We also believe 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 discussion incorporates forward-looking statements concerning Sammaan Capital Limiteds anticipated future events, financial performance, and operational outcomes. By their nature, these statements are based on assumptions that are inherently subject to various risks and uncertainties. We encourage readers to carefully consider the following disclaimer: this discussion is contingent upon the assumptions, qualifications, and risk factors outlined in the Managements Discussion and Analysis section of Sammaan Capital Limiteds Annual Report for fiscal year 2023-2024.