Jio Financial Services Ltd Management Discussions

Jio Financial Services Limited (JFSL), formerly known as Reliance Strategic Investments Limited, ("the Parent", "the Company", "the Holding Company"), with Corporate Identity No. L65990MH1999PLC120918, was incorporated on July 22, 1999, in Mumbai. JFSL is a registered Systemically Important Non-Deposit taking Non Banking Financial Company, as defined under Section 45-IA of the Reserve Bank of India Act, 1934, with effect from December 31, 1999.

The Reserve Bank of India (RBI) while granting its approval for change in the shareholding pattern and control of JFSL, pursuant to the Scheme of Demerger, had stipulated that the Company shall meet eligibility criteria for Core Investment Company ("CIC") and apply to RBI for conversion to NBFC- CIC within six months of the date of the Scheme becoming effective or three months of the date of listing of its equity shares, whichever is earlier. The Company had filed the application for conversion to CIC with RBI on November 20, 2023.

As a CIC, JFSL will be a holding company and operate its financial services business through its consumer-facing subsidiaries namely, Jio Finance Limited (formerly known as Reliance Retail Finance Limited), Jio Leasing Services Limited (formerly Jio Information Aggregator Services Limited), Jio Insurance Broking Limited (formerly Reliance Retail Insurance Broking Limited), and Jio Payment Solutions Limited (formerly Reliance Payment Solutions Limited) and joint venture namely Jio Payments Bank Limited.

Macroeconomic Overview

Indias economic growth trajectory is influenced by various factors including rising domestic consumption, investment, conducive government policies, and global economic conditions. Factors such as infrastructure development, industrial growth, and policy reforms also impact the countrys growth rate.

According to National Statistical Office, under the Ministry of Statistics & Programme Implementation, Government of India, the countrys real GDP growth for FY24 is estimated at 8.2%, compared to 7.0% growth during FY23, which has been powered by strong economic momentum, robust indirect tax collection, and lower subsidies. The economy continues to grow at a healthy pace and macroeconomic indicators continue to remain conducive for the growth of the financial services industry. India is expected to be a USD 6 trillion economy by 2028, and higher domestic consumption and digitalisation are expected to fuel the economic growth.

India stands at the forefront of the digital revolution, poised to emerge as one of the worlds fastest-growing digital economies. With affordable data and widespread adoption of smart devices, emerging technologies are driving societal transformation and inclusive growth. QR payments

via UPI have already surpassed 13 billion transactions per month, and the decreasing costs of technology spurred by advancements in AI have facilitated the development of more efficient and cost-effective solutions.

The current wave of digital transformation is fuelling the economic development of the country and also aiding increasing financial inclusion through innovative digital payments solutions like UPI, formalisation of credit (with account aggregators network), and plugging revenue leakages (using direct benefit transfers, online tax platforms, and FASTag), among others.

Additionally, Indias demographic dividend, increasing savings and penetration of digitisation provides immense opportunities for JFSL. While the opportunity spectrum continues to remain attractive, we also remain observant about the recent market developments.

Industry Overview

According to RBI, NBFCs have expanded their reach, particularly in underserved regions, witnessing credit growth driven by unsecured loans and MSME lending. With capital adequacy well above the regulatory requirement, NBFCs remain well-capitalised. As Indias economic growth continues, the influence of the Digital India Mission is set to rise, with digital platforms revolutionising the delivery and accessibility of banking and financial services.

Also, in recent years, NBFCs have consistently outpaced Scheduled Commercial Banks (SCBs) in terms of credit growth by leveraging their deep understanding of regional dynamics and offering customised products and services. NBFCs also play a crucial role in accelerating financial inclusion across India. Furthermore, NBFCs ability to provide lower transaction costs, innovative products, quick decision-making backed faster turnaround, customercentric approaches, and prompt service standards differentiates them from traditional banks. Considering the reach and expanse, NBFCs, are well-suited to bridge the financing gap in a large country like India. Systemically important NBFCs have demonstrated agility, innovation, and frugality to provide formal financial services to millions of Indians. The growing importance of NBFCs is reflected in the consistent increase of their credit as a proportion to Indias GDP as well as in relation to credit extended by SCBs to the NBFC sector.

New-age NBFCs are using technology more than ever and harnessing partnership ecosystems across the value chain of lead generation, customer onboarding, underwriting, credit/loan disbursement and collection. Artificial Intelligence (AI), Machine Learning (ML) and big data have equipped lenders to capitalise individual customer insights and build alternative credit scoring models. Mobile and smartphone penetration has enabled NBFCs to tap customers having low incomes, who can use their mobile devices throughout the lending cycle of application, engagement, e-KYC and e-signature for disbursements. Robotic Process Automation (RPA) has enabled the streamlining of operational workflows resulting in increased efficiency, accuracy, and cost savings. NBFCs are also experimenting and beta testing with distributed ledger technologies for various use cases such as e-KYC, data exchange, loan disbursement and collection, and strengthening cyber security. Furthermore, NBFCs are building and testing Application Programming Interfaces (APIs) for robust connected ecosystems of various institutions and stakeholders.

Opportunities and Threats

The financial services industry in India is a vital component of the countrys surging economy, contributing significantly to its growth and development. Demand for financial services is led by favourable demographics, rising affluence, financialisation of savings and robust public digital infrastructure. Further, there has been continuous progress on digital adoption, which is visible through rapid growth of online engagement with increasing user activity across the entire funnel of smartphone-led, online usage of commerce and services.

There is a significant shift towards digitisation of the economy, which presents an untapped opportunity. The increasing digitisation is expected to further reduce cash usage in the economy as proliferation in digital infrastructure (UPI, QR, POS) continues to encourage the adoption and use of digital payments. The introduction of innovative products, increased market competition, and the growth of online distribution channels have expanded the reach and penetration of financial services across the country. This specific target market comprises of individuals and small businesses who have been underserved or have limited access to financial services. While there is immense opportunity in Tier 3 and Tier 4 cities and towns, larger cities also present opportunities as an increase in the rate of urbanisation will also lead to newer consumers of financial services.

It is important to be mindful of the escalating threats of cybersecurity that presents a formidable challenge to individuals, businesses, and governments worldwide. With the rapid advancement of technology and the increasing interconnectedness of digital systems, cyber threats have become more sophisticated and pervasive. As dependence on digital technologies continues to increase, the importance of robust cybersecurity measures cannot be overstated. Proactive efforts are needed to strengthen cybersecurity frameworks, enhance collaboration between public and private sectors, raise awareness among users, and invest in innovative technologies to mitigate the risks posed by cyber threats.

Segment- and Product-Wise Updates

The Company is engaged primarily in the business of investing & financing in India which constitutes one single reporting segment in accordance with Ind AS-108 "Operating Segments". Therefore, there are no separate business or geographical segments as reportable.

Outlook

JFSL was established with a vision to capitalise on the vast opportunities within Indias financial services sector through innovation and inclusion. Operating across lending, insurance, payments, and with plans for asset management, JFSLs strategic initiatives are focused on building a comprehensive product portfolio across promising financial services segments. Furthermore, the Companys Direct-to-Customer (D2C) approach aims to leverage the groups internal ecosystem to drive low- acquisition costs.

Born in the new digital era, JFSL is uniquely positioned to leverage emerging technologies and drive innovation in the financial services sector. Looking ahead, the Companys focus remains on expanding its digital footprint and empowering its digital infrastructure to optimise processes and elevate efficiency. JFSL firmly believes that by harnessing the power of technology, it can bridge the gap between aspiration and access, ensuring that every Indian has the necessary tools to thrive in this digital age. Therefore, JFSLs vision is rooted in the belief that digital innovation can unlock new opportunities and empower increasing number of Indians to achieve their financial goals.

Risk and Concerns

JFSLs current operations are conducted primarily in India and are subject to macroeconomic risks prevailing in India. These include risks associated with, among others, the political, economic and legal environments, and foreign currency exchange rate fluctuations. The economic environment also has a significant impact on the Companys business. The results of operations are substantially dependent upon the amount of the Companys interest income and net interest margin. Interest rates are sensitive to multiple factors beyond the Companys control, including the monetary policies of the RBI, domestic and international economic and political conditions, and inflation. The ability to pass on any increase in interest rates depends on borrowers willingness to pay higher rates and the competitive landscape in which the Company operates. The Company may borrow funds on both fixed and floating rates, and its lending products may comprise fixed and floating interest rates. The asset-liability management strategy aims to ensure that there are no excessive concentrations on either side of the balance sheet.

The Companys business and financial performance could be adversely affected by unfavourable changes in, or interpretations of existing, or the promulgation of new laws, rules and regulations applicable to the Company, and its businesses. There can be no assurance that the Government of India will not implement new regulations and policies which could require the Company to obtain approvals and licenses from the Government of India and other regulatory bodies or impose onerous requirements and conditions on the Companys operations.

Any adverse revisions to Indias credit ratings for domestic and international debt by domestic or international rating agencies may adversely affect the Companys ability to raise additional financing and other commercial terms at which such additional financing is available. This could have an adverse effect on the Companys growth plans, business and financial performance, and the price of its Equity Shares.

Internal Control Systems and their Adequacy

The Company, including its operating subsidiaries, has adequate internal controls and processes in place with respect to its financial statements which provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. These controls and processes are driven through various policies, procedures, and certifications. The processes and controls are reviewed periodically. The Company has a mechanism of testing the controls at regular intervals for their design and operating effectiveness to ascertain the reliability and authenticity of financial information. The Internal Auditors bring to the attention of the Audit Committee the deficiencies and weaknesses in the internal control systems, if any. The Audit Committee reviews and monitors the remedial actions to ensure its overall adequacy and effectiveness.

Human Capital

In its pursuit for long-term value creation, JFSL believes that harnessing a culture that promotes entrepreneurial mindset supplemented by autonomy and ownership will play a catalysing role in delivering forward-looking innovative solutions for democratising financial services for the masses. Therefore, JFSL is creating a sustainable, nimble, and forward-looking "talent intensive" organisation fostering long-term value creation for all its stakeholders, and an "enriching place to work" globally.

Towards creating an enriching place to work, JFSL values its human capital as one of the cores of its value chain in building and expanding the organisation which is underpinned by ever-evolving technology. In its journey, JFSL is building a strong team of young and high calibre professionals who can challenge the status quo and offer differentiated value through constant innovation. JFSLs work culture is anchored towards being Agile, having a Digital DNA, and ensuring Efficiency.

With a team size of 584 employees across its subsidiaries and JV in its realm, JFSL believes in investment and development of human capital with a strong focus on diversity. In case of JFL, for example, the team buildout boasts of 67% gender diversity at the CXO level, which is a testament to our commitment of providing an inclusive environment which fosters collaborative entrepreneurship. Across JFSL Group, the teams, with prudent diversity from banks, NBFCs, fintechs, and other relevant sectors, have the capability to create trailblazing solutions for overall value creation.

Enterprise Risk Management

Enterprise Risk Management (ERM) applies the principles of sound governance to the identification, measurement, monitoring and controlling of risks, and ensures that risk taking activities are in line with JFSLs strategies and risk appetite, and also cover all material risk categories applicable to the Company. The ERM function enables the achievement of the Companys strategic objectives in identifying, analysing, assessing, mitigating, monitoring, and governing any risk or potential threat to these objectives. The systematic and proactive identification of risks, and mitigation thereof, enables the Company to boost performance with effective and timely decision-making. Strategic decisions are taken after careful consideration of primary risk, secondary risk, and consequential risk.

The ERM framework encompasses all of the Companys risks, such as strategic, operational, and legal and compliance risks. Appropriate risk indicators are used to identify these risks proactively. The Company takes cognisance of risks faced by its key stakeholders and their cumulative impact while framing the risk management policies.

Discussion on Financial Performance Standalone Financials

The standalone financial results of the Company are given in the table below:

Analysis of Total Income

The standalone Total Income of the Company increased to ^ 638.06 crore in FY24, from ^ 44.84 crore in FY23, primarily due to:

a. Increase in the interest income on fixed deposits and certain money market instruments to ^ 381.61 crore in FY24, as compared to ^ 38.34 crore in FY23, which was transferred to the Company as a result of the demerger of the Company from Reliance Industries Limited.

b. Increase in certain realised and unrealised gains on certain money market instruments, classified as Fair Value through Profit and Loss Account (FVTPL) to ^ 254.76 crore in FY24, as compared to ^ 3.02 crore in FY23, resulting out of the treasury activities undertaken by the Company on certain money market instruments transferred to the Company as a result of the demerger.

Analysis of Total Expenses

The standalone Total Expense of the Company, excluding impairment, increased to ^ 117.06 crore in FY24, from ^ 5.56 crore in FY23, primarily due to:

a. Increase in staff costs to ^ 42.73 crore in FY24, as compared to NIL in FY23, reflects the costs of employees hired by the Company during FY24. The total number of Employees in the Company stood at 60, at the end of FY24.

b. Increase on other operating expenses (including finance cost) to ^ 74.33 crore in FY24, as compared to ^ 5.56 crore in FY23, representing the first year of business operations post the demerger.

Analysis of Balance Sheet

* Includes ^ 6,353.28 crore as share capital pending allottment

Consolidated Financials

The Consolidated financial results of the Company and its subsidiaries (the Group) are given in the table below: ^ in crore

Analysis of Total Income

The consolidated total income of the Company increased to ^ 1,854.68 crore in FY24, from ^ 44.84 crore in FY23, primarily ndue to:

a. Increase in the interest income in consolidated profit and loss account, and interest income on fixed deposits in the wholly-owned subsidiaries, to ^ 937.74 crore in FY24, as compared to ^ 38.34 crore in FY23.

b. Dividend income amounting to ^ 216.85 crore on shares held by a subsidiary transferred pursuant to the demerger of the Company.

c. Fees and commission income of ^ 151.66 crore in FY24, representing fee income of the subsidiaries primarily in the insurance broking and the payment aggregator businesses.

d. Increase in certain realised and unrealised gains in the standalone profit and loss account and certain money market instruments together amounting to ^ 547.63 crore in FY24, as compared to ^ 3.02 crore in FY23, resulting out of the treasury activities undertaken by the Company and its subsidiaries on certain money market instruments transferred to the Company and its subsidiaries as a result of the demerger.

Analysis of Total Expenses

The consolidated total expense, excluding employee benefits expenses and impairment, increased to ^ 209.22 crore in

FY24, compared to ^ 5.56 crore in FY23, primarily due to:

a. Staff costs of ^ 116.04 crore, reflecting the costs of employees of the Company and its subsidiaries in FY24. At a consolidated level, the total number of employees in the Company stood at 584 as of March 31st, 2024. The Company has invested in manpower to enable the business development of Jio Financial Services group.

b. Increase in other operating expenses (including finance cost) to ^ 209.22 crore in FY24, as compared to ^ 5.56 crore in FY23, representing the first year of business operations post the demerger.

Analysis of Balance Sheet

ESG Initiatives

Navigating Forward: JFSL Commitment to Sustainability and Inclusive Growth in FY24

JFSL has embarked on an exciting journey in FY24. Alongside establishing its focus on key business metrics, JFSL is equally passionate about creating a sustainable future through its Environmental, Social and Governance (ESG) approach. The Company aims to build value not just for its customers but also for its communities, and all its stakeholders. JFSL is enthusiastic about the positive impact it can make together!

JFSL and its subsidiaries are deeply committed to upholding the ESG principles at the core of its operations. As part of its core ethos, JFSL has prioritised on engaging with stakeholders to promote societal progress and environmental sustainability.

The overarching ESG objective of JFSL is to operate with ethical integrity and establish transparent and fair relationships with all stakeholders. The Company has strengthened its objective through robust ESG governance framework, encompassing board-level oversight and wide-ranging policies. This includes the establishment of a dedicated board- level ESG Committee chaired by an Independent Director. The ESG Committees mandate includes weaving sustainability into the purpose of the organisation and establish an ESG Governance framework setting goals, oversee sustainability initiatives and ensure transparent and comprehensive ESG disclosures. These ESG policies are readily accessible on our corporate website.

At its core, JFSL is driven by an underlying passion for creating a better world for all. During FY24, the Company and its subsidiaries allocated T 9.33 crore towards approved CSR initiatives.

In its pursuit of ESG excellence, JFSL has meticulously identified and prioritised material focus areas through a rigorous assessment process. This strategic endeavour has culminated in the formulation of an all-embracing roadmap toward sustainable business practices. JFSLs material focus areas encompass critical themes such as Climate Change, Financial Inclusion, Diversity & Inclusion (D&I), Digitisation, Data Privacy and Security, and Governance & Transparency.

Since climate change is a significant material focus area for JFSL, despite commencing its operations in the middle of the year, JFSL has been deliberate about its efforts towards climate change and has diligently measured and publicly disclosed its GHG emissions, energy consumption, water usage, and waste management practices.

JFSL and its subsidiaries are dedicated to democratising finance and digitisation, ensuring that financial products are inclusive and accessible to all. The Company has pledged to achieve this by providing affordable financial products and fostering financial inclusion through responsible business practices and strategic partnerships, leveraging cutting-edge digital technologies. During FY24, JFSL organised financial inclusion camps in deserving areas to raise awareness and provide access to essential financial services.

As a human capital-oriented company, JFSL acknowledges that the expertise and dedication of its 584 skilled employees are paramount to its success. The Company invests in developing employees skills to foster a supportive and innovative environment combined with the adoption of best-in-class practices. This fuels operational excellence, fosters sustainable growth, and solidifies JFSLs standing as a premier employer.

JFSL leverages D&I as a strategic advantage, enriching its workforce and driving employee engagement for increased efficiency, supported by JFSLs dedicated Diversity, Equity & Inclusion Policy. JFSLs commitment is evidenced by achieving a 27% representation of female employees within nine months of operation while ensuring 100% of JFSLs employees are trained on Prevention of Sexual Harassment (POSH) at workplace and human rights policy.

Being in the financial services business, risk management is at the centre of the Companys strategy. At JFSL, robust risk management protocols are meticulously designed to safeguard the investments and data of the Companys valued stakeholders and ensure the continuity and sustainability of its financial operations.

JFSL highly values open and transparent communication with regulators and key stakeholders. In line with this commitment to transparency and accountability, JFSL has released its inaugural Business Responsibility Sustainability Report (BRSR), accompanied by reasonable assurance on core BRSR indicators. For further details, refer Business Responsibility Sustainability Report available on the website of the Company and can be accessed at www.jfs.in/brsr-report-23-24.pdf

To summarise, JFSL takes great pride in its unwavering dedication to ESG principles. The Company believe that its commitment to creating positive societal and environmental impacts is a business imperative. The focus on inclusive growth initiatives, financial empowerment, and responsible practices is all about making a meaningful difference to JFSLs stakeholders and to the communities the Company serves. JFSL is committed to long-term success and making positive contributions to society and the environment, and it is committed to continue this journey with its valued stakeholders.