TO DIRECTORS REPORT
MANAGEMENT DISCUSSION & ANALYSIS REPORT
FOR THE FINANCIAL YEAR ENDED ON MARCH 31,2023
Regulation 34(2)(e) read with Paragraph B of Schedule V of Securities and Exchange
Board of India (Listing Obligations and Disclosures Requirements)
In terms of the provisions of Regulation 34(2) (e) of the Listing Regulations, the
Managements discussion and analysis are as follows.
GLOBAL ECONOMY OVERVIEW:
Global GDP growth rates stood at 3.4%, demonstrating a recovering trend from the
powerful blows of the disruptions caused by the pandemic and the tensed Russia-Ukraine
situation. Unwinding of the Supply chain disruption and receding dislocations to energy
and food markets have impacted positively on the overall growth, which was shadowed by
rising inflation which was, in turn, largely weakening household and business spending.
Emerging markets and developing economies are already powering ahead in many cases,
with growth rates (fourth quarter over fourth quarter) jumping from 2.8% in Calendar Year
(CY) 2022 to 4.5% this year.
With the cool down in commodity prices, global inflation in CY 2022 closed at an
estimated 8.7%. However, the downward momentum in inflation is expected to spill over in
CY 2023, with the projected inflation target being at 6.5% in CY 2023.
As a measure to counter inflation, central banks have been raising interest rates in
quick succession. To bring this shift towards tighter monetary policy is exceptionally
broad-based, as over 85% of central banks worldwide increased interest rates in CY 2022.
The Federal Reserve in the United States has taken an aggressive stance, raising its
key policy rate six times from 0% - 0.25% in March 2022 to 4.25% - 4.50% in December 2022.
The European Central Bank increased its key interest rates by a cumulative 250 basis
points between July and December 2022, while also discontinuing its net asset purchases.
As inflation peaked in late CY 2022, central banks in the developed countries are
expected to slow the pace of interest rate hikes in CY 2023.
INDIAN ECONOMY OVERVIEW:
The Indian economy has grown by 7.0% in FY23 and its growth was largely supported by
agriculture (up by 3.3%) and services (up by 6.9%). Trade, hotels, transport and
communication grew robustly by 14.2%. Manufacturing growth moderated yet remained positive
at 0.6%, reflecting a slowdown in global growth and high input costs.
Despite global headwinds, expansion benefited from strong growth in private consumption
(up by 7.3%) and in investment (up by 11.2%). The growth rate in India is stronger than in
most peer economies, reflecting relatively robust domestic consumption and lesser
dependence on global demand. Growth is expected to strengthen to 6.7% in FY25 as private
investment improves and growth accelerates in industry.
The government and the Reserve Bank of India undertook several measures to control
inflation and its impact. The government banned exports of wheat and broken rice in 2022
to tamp down domestic price fluctuation and ensure food security. The ban on exports of
broken rice was lifted in November 2022 but the ban on wheat remains. The central bank has
tightened monetary policy in a series of hikes since April 2022, raising its policy rate
by 250 basis points to 6.50% in February 2023, which is higher than the pre-pandemic rate
of 5.15%.
The budget targets to bring down fiscal deficit and current account deficit to 5.9% of
GDP and 2.2% of GDP in FY23-24 and the central government is committed to bring down
fiscal deficit below 4.5% of GDP by FY25.
INDIAN FINANCIAL SERVICE SECTOR:
Bank credit rose by 15.4% as compared to 9.7% a year ago, driven by large industries,
especially metals, petroleum, and chemical industries. Credit growth to the infrastructure
sector decelerated on the back of decline in credit to the telecom sector. The MSMEs
credit growth remained buoyant, shored up by the Emergency Line Guarantee Scheme (ECLGS)
that was extended till March 2023.
Retail loans remained the prime contributor to the overall credit increase in FY22-23.
While credit to the housing sector recorded consistent expansion, vehicle loan growth
strengthened further. Credit card loan growth was in high double digits throughout 2022-23
reflecting pent- up consumption demand.
NBFCs had steadily increased their market share till recent years, with AUM accounting
for as much as 18% of the overall credit pie in March 2019, up from 12% in March 2008.
Several challenges over the past three fiscals lowered their share to 16% in FY 2022, with
banks making bigger growth strides. However, NBFC growth is expected to pick up from here
on, which should help sustain their-16% AUM share.
Provisioning levels also increased in the past couple of years, as NBFCs created
management overlays to provide for uncertainty pertaining to the pandemic. Overall, the
NBFCs have stronger balance sheets. Rising interest rates will partially limit the
competitiveness of NBFCs in some segments. The repo rate has already been increased by 250
basis points (bps) this fiscal year, which will impact the borrowing cost for NBFCs. The
rising interest rate scenario is expected to increase the cost of borrowings of NBFCs by
100-120 bps in FY23. However, as NBFCs have the ability to pass on the higher borrowing
cost for incremental disbursements in some of their asset segments, spreads are estimated
to compress 40-60 bps.
Amid interest rate hikes and competition from banks, NBFCs are realigning portfolio
strategies for better risk adjusted returns. The disbursement trends reflect the changing
strategies of NBFCs towards non-traditional segments. The share of disbursements in
unsecured loans and MSME finance, the non-traditional segments, has increased over the
past 1.5 years.
In the first half of FY23, 35% of incremental disbursements were for unsecured loans.
MSME finance has also posted strong growth. The traditional segments, too, have seen
improvement in volumes, but remain range bound compared with previous years. This will
result in a change in segmental growth going forward. Overall, the AUM growth of NBFCs is
expected to double to 13%-14% in FY23 from 7% in FY22. Though a rise in borrowing cost
will compress spreads, improvement in asset quality metrics should lead to better credit
costs, which, in turn, should support earnings and growth prospects. Credit costs will
also benefit from the substantial management overlays created by NBFCs, which will be
dipped into.
INDIAN MSME SECTOR:
Indian MSMEs are globally competitive, and their products and services are accepted
overseas. The share of the MSME sector in manufacturing output is 33%. Around 50% of the
total MSMEs operate in rural areas and provide 45% of the total employment. About 97% of
the total employment in the MSME sector comes from the micro segment. Increasing digital
footprint of MSMEs has not only helped in providing enhanced customer experience,
operational efficiency, and workforce enhancement, but has also facilitated access to
financial services. Demand for MSME loans has accelerated and has grown to about 1.7 times
the demand of two years ago.
NBFCsaw credit demand crossing 2xfor the same period. This can be attributed to the
efforts on the part of government and financial sector to develop and implement multiple
support mechanisms, and an evolving digital public infrastructure for the MSME sector.
MSME lending by banking and non-banking finance companies (NBFCs) is grown by 14% in FY23.
Currently, banks continue to dominate 85% of MSME-lending. However, it is expected to
reverse in the future.
COMPANY OVERVIEW:
Sera Investments & Finance India Limited (the Company), has emerged as a
progressive and growth oriented Non-Banking Financial Company (NBFC) over the past few
years. The Company is primarily engaged in providing retail loans. The Company is mainly
engaged in the business of financing and investment in order to yield greater revenue for
its stakeholders. The Company is planning to expand and diversify the operational
activities in the coming years ahead in order to tap higher revenues.
DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECTTO OPERATIONAL PERFORMANCE:
Financial and operational performance forms part of the Annual Report and is presented
elsewhere in the report.
HUMAN RESOURCE MANAGEMENT:
Sera Investments & Finance India Limited believes that human resources are the
foundation on which it can achieve its aspirations and objectives and people are the
source of our competitive advantage. The Company believes in meritocracy and performance
is rewarded. Accordingly, the Company selects its human resources very judiciously,
ensuring that they conform to the Companys culture and follow its values and belief
system. The promoters constantly ensure that good governance is a priority and are
involved in the management of the company, with strategic inputs from a well-diversified
and competent board.
The core management team at Sera Investments & Finance India Limited, which
comprises an adept group of committed resources, is well- equipped to design strategies
and execute them so that the Company achieves sustainable growth.
Sera Investments & Finance India Limited is constantly looking at strengthening its
human resources at every level and ensures that its work ethic permeates to the every
employee of the Company.
INTERNAL CONTROL SYSTEM:
The Company has in place adequate internal control systems covering all its operations.
Proper accounting records high light the economy and efficiency of operations,
safeguarding of assets against unauthorised use or losses, and the reliability of
financial and operational information. Some of the significant features of internal
control system are:
• Financial and Commercial functions have been structured to provide adequate
support and control of the business.
• Risk Management policy has been adopted by the Company.
• The Company has an Internal Audit System conducted by the Internal Auditor of
the Company. Standard operating procedures and guidelines are reviewed periodically to
ensure adequate control.
To safeguard all its assets and ensure operational efficiency, the Company has put in
place a strong internal control mechanism. This ensures full compliance with laws and
regulations, accuracy in financial reporting and management information. In view of the
control deficiencies/ gaps noted, the Company has strengthened controls, reviewed policies
and upgraded technology systems. The Company is committed to remain compliant with sound
corporate governance and risk management practices.
Crucial areas based on audit plans are reviewed by the internal audit function, and
then examined and approved by the Audit Committee. Audit plans are formulated based on
risk assessment to determine the critical areas to be reviewed. The Management Committee
and Audit Committee of the Board also review the internal audit findings. Thereafter,
corrective actions are suggested and implemented by the process owner across relevant
functional areas, with the aim of continuously strengthening the internal control
framework.
OPPORTUNITIES AND THREATS:
Opportunities
• Technology is expected to play a pivotal role in taking the financial services
to the next level of growth by helping surmount challenges stemming from Indias vast
geography, which makes physical footprints in smaller locations commercially unviable.
With increasing smartphone penetration and faster data speeds, consumers are now
encouraging digitization as they find it more convenient. With the ability of the fintech
to offer differentiated solutions to meet the requirement of target customers, the market
share of NBFCs in overall systemic credit has increased from approximately 16% in FY 2017
to approximately 18% in FY 2022 and is expected to further grow at 11-12% CAGR between
FY23-FY25.
• With NBFCs facing a challenge in raising debt from banks at competitive costs,
co-lending framework allows NBFCs to cater to a large customer base by leveraging larger
balance sheets of their partners. It also enables Banks and NBFC/HFC to share the risk and
rewards throughout the lifecycle of the loans.
• Account Aggregator framework is a system for sharing financial data that has the
potential to revolutionize lending and investing by granting millions of consumers greater
access to and control over the financial records, as well as increasing potential market
for lenders and fintech firms. Traditionally, if someone needs to apply for a loan, they
would need to provide various documents such as bank statements, income tax returns and
financial statements, etc. Flowever, with the evolution of AA framework, all the data from
various financial information providers can be gathered and shared with financial
information users within a fraction of time with the consent of users. It will help users
to avail loans and get better and quicker deals on other financial products. It will also
ease the integration of MSMEs in financial systems and bring a paradigm shift from
asset-backed lending to cashflow-based lending to MSME, which will allow the underserved
MSME sector to have greater access to credit.
Threats:
• Access to funding in a timely manner and at competitive costs remains
challenging, especially for smaller and mid-sized NBFCs due to increase in interest rates.
Exposure to various industrial risks like - credit risk, interest rate volatility,
economic cycle etc.
• Our borrowing costs and our access to the debt capital markets depend
significantly on the credit ratings of India. Any adverse revisions to credit ratings for
India and other jurisdictions we operate in by international rating agencies may adversely
impact our ability to raise additional financing.
• Negative economic developments, such as rising fiscal or trade deficits, or a
default on national debt, in other emerging market countries may also affect investor
confidence and cause increased volatility in Indian securities markets and indirectly
affect the Indian economy in general. Any slowdown or perceived slowdown in the Indian
economy, or in specific sectors of the Indian economy, could adversely impact our
business, results of operations and financial condition. Our performance and the growth of
our business depend on the performance of the Indian economy and the economies of the
regional markets we currently serve. These economies could be adversely affected by
various factors, such as political and regulatory changes including adverse changes in
liberalization policies, social disturbances, religious or communal tensions, terrorist
attacks and other acts of violence or war, natural calamities, interest rates,
commodity and energy prices and various other factors. Any slowdown in these economies
could adversely affect the ability of our customers to repay our debt which, in turn,
would adversely impact our business and financial performance.
• With increasing availability of alternate data, ability to underwrite MSME
customers through alternate data and changing landscape from asset-backed financing to
cashflow-based financing, many Banks and NBFCs have started entering MSME financing.
• Unanticipated changes in laws, regulations and government policies may increase
compliance costs and may impact the viability of our current businesses or restrict our
ability to grow our businesses in the future.
RISKS MANAGEMENT AND CONCERNS:
Due to stiff competition in the finance field where the companys activities are
centred in, the overall margins are always under pressure, but maintainable with the
constant effort and good services rendered by the company. The process of risk
identification is guided by the Companys objectives, external environment, stakeholders,
among others. The process covers strategic, financial, and operational risks. Once the
risks are identified, it devises plans outlining mitigation actions for the assigned
risks.
a) Interest Rate Risk: This is the risk that implies the value of an investment will
suffer as a result of change in interest rates. Interest rate risk can be reduced by
ensuring diversification of investment maturities or can be hedged by using interest rate
derivatives.
Mitigation: While deciding on interest rate revisions, Company considers key factors
like customer profile, competitive landscape and growth objectives. It maintains close
monitoring on interest rate fluctuations and takes appropriate measures to protect its
business.
b) Asset Liability Management Risk: This is the risk faced due to a mismatch between
the maturity profile of assets and liabilities on account of a difference in lending tenor
between loans given to customers and debt raised.
Mitigation: This risk is reviewed by the Asset Liability Management Committee (ALCO) by
monitoring market-related trends. In line with the Companys Risk Management Framework,
the Committee adopts various strategies related to assets and liabilities. The ALM support
group also meets frequently to review the liquidity position. The Company always maintains
adequate liquidity assets and reserves to enable business growth and repayment of
obligations. In addition, it ensures access to funds at all times to ensure liquidity is
always available in case of unexpected events.
c) Credit Risk: This is the risk arising on account of non-repayment or loan default by
the borrower due to liquidity crisis, economic downturns, bankruptcy or other reasons.
Mitigation: Companys comprehensive and well-defined credit policy encompasses credit
approval process and guidelines for mitigating the associated risks. A robust
post-sanction monitoring process helps identify the credit portfolio trends and early
warning signals to mitigate such risks.
d) Operation Risk: This risk is about failure of processes and controls in operations,
which can also have an adverse impact on business continuity, reputation and profitability
of the Company.
Mitigation: A robust control and audit mechanism has been implemented to identify and
mitigate operational risks. The Company has a strong operating model and well-documented
Standard Operating Procedures and a good reporting framework. This ensures that
operational risks are minimised at any given point of time.
e) Regulatory Risk: A complex regulatory framework exists in the financial sector. Any
non-compliance with regulations could result in monetary losses and has the capability to
damage the Companys reputation.
Mitigation: The Company ensures strict adherence to applicable rules and regulations
owing to a strong internal control framework, robust IT systems and an expert team. It
closely monitors actions and proactively responds to changes in government policies to
keep a tab on regulatory risk.
f) Fraud Risk: We may face fraud risks such as loan fraud, identity theft, internal
fraud, and cyber fraud. These risks pose the threat of financial loss and reputation loss,
resulting from intentional deception or misrepresentation by individuals or entities,
internally or externally.
Mitigation: We have implemented a control framework to prevent, detect, investigate and
deal with fraud. A dedicated Risk Control Unit (RCU) monitors, investigates, detects, and
prevents fraud. We maintain a zero-tolerance policy towards fraud, actively raising
awareness and implementing robust controls to prevent any occurrence. Our Fraud Risk
Management reports to the Chief Risk Officer and monitors all fraud risks, while our Audit
Committee and Board of Directors monitor frauds specified by the regulator.
g) Information Security Risk: We may face data breaches, cyberattacks, and unauthorised
access, leading to compromised sensitive information and potential reputational damage.
Mitigation: We implemented information classification and appropriate controls,
utilising Data Leak Prevention (DLP) measures to prevent unauthorised data disclosures,
maintaining a Security Operations Centre (SOC) to monitor and respond to security
incidents, conducting
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