Indian Infotech and Software Ltd Management Discussions

The Management Discussion and Analysis Report for the year ended 31^st March, 2024 as stipulated under Regulation34(2) read with Schedule V of SEBI (LODR) Regulations 2015 have been included in consonance with the Code of Corporate Governance as approved by The Securities and Exchange Board of India (SEBI). Investors are cautioned that these discussions contain certain forward looking statements that involve risk and uncertainties including those risks which are inherent in the Companys growth and strategy. The company undertakes no obligation to publicly update or revise any of the opinions or forward-looking statements expressed in this report consequent to new information or developments, events or otherwise.

The operational performance and future outlook of the business has been reviewed by the management based on current resources and future development of the Company.

ECONOMIC OVERVIEW OF FINANCE INDUSTRY:

Macroeconomic Overview

Financial year 2023 began on a mixed note. On the positive side, after wreaking havoc for almost two years, the impact of the COVID-19 pandemic on lives and livelihoods started receding. This was aided by a mass immunisation programme and the advent of a less virulent variant called omicron. However, the flip side was the impact of inflationary trends, supply chain disruptions emanating from China, and the start of the Russia-Ukraine conflict impacting commodity prices.

In FY2023, the Indian economy faced multiple challenges. The countrys retail inflation indicator, consumer price inflation (CPI) inched above the RBIs tolerance range in January 2022. It remained above the target range for almost twelve months before retracting within the upper tolerance of 6% in November 2022. Rising international crude prices coupled with domestic weather conditions like excessive heat and unseasonal rains kept food prices high, fuelling retail inflation. The Government cut excise and customs duties and restricted exports to cool off inflation. The RBI, like other central banks, raised the monetary policy rates and reduced excess systemic liquidity. Major areas of concern for the economy were elevated commodity prices leading to a depreciation of the Indian rupee, higher retail inflation (both core and food inflation) leading to the RBI raising interest rates and rationalising systemic liquidity, and a rising current account deficit (CAD).

The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Schemefor MSMEs, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by Government and private sector, India is undoubtedly one of the worlds most vibrant capital markets.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

The robust economic growth, which the RBI Governor predicts will push Indias growth rate to 7.2 percent in the current financial year, is expected to fuel strong credit demand and support the NBFC sectors profitability. This growth, coupled with current regulatory measures, will help mitigate the risk of rising credit costs on profitability.

NBFCs have demonstrated strong financial health, similar to the banking sector. As of the end of March 2024, the gross nonperforming assets (GNPAs) of both scheduled commercial banks (SCBs) and NBFCs were below 3 per cent of total advances. Provisional data shows that the GNPA ratio for NBFCs stood at 2.5 per cent at the end of March 2024.

Capital adequacy for NBFCs remained comfortable, and asset quality improved as of the end of September 2023. Profitability indicators, such as Return on Assets (RoA) and net interest margin (NIM), remained strong, and the cost-to-income ratio improved. This sustained robust credit growth was supported by a strong demand for retail credit.

Between September 2022 and September 2023, the NBFC sector experienced a significant upward trend in credit growth, with gross advances increasing by 20.8 per cent compared to 10.8 per cent the previous year. This growth was predominantly driven by a substantial rise in personal loans, which grew by 32.5 per cent, and lending to the agriculture industry, which saw a 43.7 per cent increase. Over the past four years, the personal loans category surged by a compound annual growth rate (CAGR) of 33 per cent, significantly outpacing the overall credit growth of nearly 15 per cent CAGR.

NBFCs Credit to GDP Ratio

NBFCs have consolidated their position in recent years, as reflected in a gradual rise in their credit intensity (credit to Gross Domestic Product (GDP) ratio) as well as the relative importance in credit provision vis-a-vis scheduled commercial banks (SCBs). As of March 2023, NBFCs credit to GDP ratio stood at 12.6 per cent and the sector has grown to become 18.7 per cent of banking sector assets as of March 2023 as compared to 13 per cent ten years ago (March 2013)

Exposure to NBFCs

NBFCs primarily rely on borrowings from markets and banks to finance their operations. Here is the pattern of NBFCs borrowing in terms of the secured and unsecured borrowings in the last 6 years

NBFC Borrowing Trend in the last 6 years.

(crore)

	2019	2020	2021	2022	2023	End- September 2023
Secured Borrowings	1,106,917	1,305,214	13,30,259	14,87,621	17,64,649	18,44,331
Un-Secured Borrowings	395,891	930,122	10,20,750	10,96,879	12,37,590	13,25,627
Total Borrowings	20,02,308	22,35,336	23,51,008	25,34,500	30,02,239	31,69,959

Source: RBI

As of March 2024, NBFCs were the largest net borrowers of funds from the financial system, with gross payables amounting to ?16.58 lakh crore and gross receivables at ?1.61 lakh crore. The funding mix of NBFCs has shifted significantly with the banks share increasing from 47.5 per cent in December 2018 to 55.1 per cent in March 2024. Similarly, long-term funds provided by banks and Alternative Investment Funds (AIFs) have risen from 40.7 per cent to 45.9 per cent in the same period.

Despite the potential systemic risks, the RBI has indicated that the hypothetical failure of the largest NBFC would impact only a small fraction of the banking systems Tier 1 capital, highlighting the sectors resilience and the effectiveness of regulatory measures in place.

Institutional and Regulatory Initiatives for NBFCs

The RBI has warned micro-lenders and non-bank financiers against usurious lending practices, particularly targeting small- ticket borrowers. Despite general compliance with guidelines on Key Facts Statements (KFS), some regulated entities still impose undisclosed fees and high-interest rates. The RBI Governor Shaktikanta Das emphasised that customer protection remains a top priority for the Reserve Bank, highlighting the need for transparent and fair lending practices in the microfinance sector and among non-banking financial companies (NBFCs)

The Finance Industry Development Council (FIDC), representing non-banking financial companies (NBFCs), has urged the Reserve Bank of India (RBI) to review its recent draft circular on infrastructure provisioning. NBFCs demand flexibility in supporting the sector, particularly regarding standard asset provisions during the construction phase. The draft proposes maintaining a general provision of 5 per cent of the funded outstanding for all existing and stressed exposures on a portfolio basis, a measure FIDC seeks to amend.

Recently, NBFCs have explored new avenues to access funding, diversifying their sources beyond traditional channels. Colending partnerships with banks, facilitated by the RBIs regulatory framework, have emerged as a significant source of funds for NBFCs. These collaborations enable NBFCs to leverage the low-cost funds available with banks to deliver credit to the underserved segments.

The foreign direct investment inflows into the NBFC sector have surged in recent years, driven by favourable regulatory policies and Indias robust economic growth prospects. Venture capital and private equity firms have also shown keen interest in investing in NBFCs, recognising their potential to tap into underserved markets and drive financial inclusion.

The RBI has asked NBFCs to restrict cash loans to ?20,000, according to media reports. This comes after the regulator took action against IIFL Finance for several violations including disbursal and collection of loans in cash over the statutory limit.

The RBI has adopted a hybrid regulatory approach for NBFCs, combining activity-based and entity-based regulations to safeguard financial stability and protect customers. This method leverages the strengths of both approaches to achieve a comprehensive and flexible regulatory framework, suitable for the evolving NBFC sector.

Entity-Based Regulations: Entity-based regulations offer a holistic view of overall risk exposure for specific financial institutions, addressing systemic risks arising from various activities within a single entity. These regulations are generally easier to implement and enforce, as they apply uniformly to a set of entities. But they may be less precise in targeting specific activities and slower to adapt to changes.

Activity-Based Regulations: Activity-based regulations allow for precise targeting of risky financial activities, regardless of the type of institution involved. This approach can result in a fragmented regulatory landscape, making oversight more complex, and systemic risks from multiple activities may remain undetected. To avoid regulatory arbitrage, the principle of "same risk, same activity, same regulation" is advocated but needs to be calibrated for effective yet non-stifling regulations.

Regulatory Approach: The RBI has developed a nuanced approach, recognizing the specialized activities of NBFCs, each carrying unique risks. This approach balances prudential regulations, focusing on solvency and financial stability, with conduct of business regulations, ensuring fair practices towards customers. The current regulatory landscape combines entity and activity-based approaches under these two pillars.

Key Initiatives

Peer to Peer Lending Platforms (NBFC-P2Ps):

Prudential regulations for NBFC-P2Ps are kept minimal since they do not undertake credit risk themselves, focusing on basic entry-level requirements.

• Conduct norms are stringent, comparable to other regulated financial entities, due to the trust placed by lenders on these platforms for services like KYC authentication and credit scoring.

Microfinance Sector:

The regulatory framework for microfinance loans is entity-agnostic and activity-based, targeting customer protection for vulnerable borrowers.

• The framework ensures comprehensive regulation across all regulated entities pr oviding microfinance loans.

Infrastructure Debt Fund-NBFCs (IDF-NBFCs):

The regulatory framework for IDF-NBFCs has been harmonized with other NBFCs engaged in infrastructure financing.

• Requirements like a sponsor have been withdrawn, and regulatory capital requirements and exposure norms aligned with NBFC-IFCs and NBFC-ICCs.

Regulatory Calibrations:

Despite some harmonization, significant differences remain between regulations for banks and NBFCs, especially those in the upper layer. For instance, the minimum initial capital requirement for a universal bank is ?1000 crore, compared to ?10 crore for an NBFC. Banks face stricter scrutiny for licensing and have restrictions on activities, priority sector lending requirements, and detailed branch authorization policies, unlike NBFCs. Additionally, while the regulatory capital requirement for NBFCs is higher at 15 percent compared to 9 percent for banks, it only covers credit risk, not market and operational risks as it does for banks.

SUBSIDIARY COMPANY:

As there are no subsidiaries of the Company, Investment made in Subsidiaries is NIL.

SEGMENT-WISE PERFORMANCE:

The Company operates in single reported segment with main business of Finance and Share Trading activity.

Road Ahead

The future of Non-Banking Financial Companies (NBFCs) in India is poised for significant growth and transformation. To capitalize on emerging opportunities, NBFCs need to focus on enhancing financial literacy and fostering responsible borrowing and saving behaviours. With technology becoming more integral to daily life, the risk of cyber fraud and unscrupulous activities increases. By empowering individuals with financial knowledge, NBFCs can drive sustainable and responsible economic growth, ensuring that all segments of society benefit from financial advancements.