Karnavati Finance Ltd Management Discussions

BACKGROUND

Karnavati Finance Limited (KFL) is a Non-Banking Finance Company (“NBFC”), holding a Certificate of Registration from the Reserve Bank of India (“RBI”). The KFL is non- deposit accepting NBFC engaged in financial services. The Company is registered with the Reserve Bank of India (RBI) as a non-deposit accepting NBFC. As per RBIs ‘Scale Based Regulations (SBR), the Company is classified as NBFC- Base Layer (NBFC-BL).

The Company is listed with the Bombay Stock Exchange. The Company is an Investment and Credit Company (ICC) and does not have any other operations of its own. The company mainly engaged in providing finance of personal loan, business loan, auto loan, education loan and mortgage loans.

Macroeconomic Overview

Despite three turbulent years which witnessed a global pandemic, supply chain disruptions, conflict in Ukraine, and elevated interest rates to counter high inflation, India emerged as the fastest growing major economy of the world. Notwithstanding conflicts in Europe and Gaza and rising tensions in West Asia, a global recession that experts thought was imminent has not occurred. Indeed, the key indicators have turned positive: inflation is falling across all major countries; unemployment has not risen as economists thought it would; and the major central banks have put an end to monetary tightening, though they have not yet begun reducing their key interest rates.

The IMFs April 2025 World Economic Outlook projects global inflation to reach 4.3% in 2025 and 3.6% in 2026, following a 5.9% rate in 2024. This steady decline in global prices is also evident in the July 2025, which notes global inflation continues to recede. Core inflation is expected to decrease more gradually, with advanced economies returning to their inflation targets sooner than emerging and developing economies.

The International Monetary Fund (IMF) projects world real GDP growth to be 3.0 percent in 2025 and 3.1 percent in 2026, an upward revision from their earlier April 2025 forecasts. This improved outlook is attributed to factors including a weaker US dollar, better financial conditions, the anticipated lower impact of tariffs, and fiscal expansion in some major economies.

Inflation Outlook

• The Reserve Bank of India (RBI) initially projected headline CPI inflation at 4.0% for FY26 (assuming normal monsoon).

• This was later revised downward:

o 3.7%, reflecting broader softening in price pressures.

o Most recently, 3.1%, based on favorable monsoon, ample foodgrain stocks, and easing food prices.

• The RBI has expressed confidence in keeping inflation below its 4% medium-term target through FY26, suggesting space to support growth.

• Recent data: July head-line inflation fell to a nearly 15-year low of 1.55%, thanks to steep declines in food prices. However, some forecasters expect inflation to gradually rise above 4% by early FY27 as base effects unwind Reuters.

Growth Forecast

• The RBIs April 2025 MPR forecast real GDP growth at 6.5% for FY26 (down 20 bps from earlier estimates), with quarter- wise growth: Q1 at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%.

• Analysts foresee a similar growth trajectory aided by monetary easing, rural demand recovery, and rising urban consumption Reuters.

Credit Growth Dynamics

• Non-food credit growth slowed materially:

o 11.2% YoY as of April 18, 2025 ? down from 15.3% a year earlier. o 12.0% YoY by March 21, 2025.

o Further cooled to 9.8% in May and around 10.2% by late June 2025.

• Sector-wise trends show broad moderation: credit to agriculture, industry, services, and personal loans all decelerated compared to prior year levels.

• Overall non-food credit growth in FY25 averaged around 11.1-11.2%, down from 20% in FY24.

• FY26 projections:

o India Ratings & Research (Ind-Ra) anticipates a rebound to 13-13.5%, driven by private capex revival, despite sluggish retail and NBFC lending

• Challenges:

o Persistent softness in NBFC and unsecured retail segments due to asset-quality caution.

o The HDFC Bank merger continues to weigh on credit growth, with industry-average bank lending around 9.5% in Q1 FY26 while HDFC banks loan growth lagged at around 6.7%

• The RBIs rate cuts and liquidity support aim to revive credit flow, particularly to MSMEs and consumer segments?critical to broader recovery.

Summary Table

Indicator	FY2025-26 Projection / Update
Headline CPI Inflation	3.1% (latest); initially 4.0%, then 3.7%
Growth (Real GDP)	6.5% (with Q-based moderation across FY)
Credit Growth	-9-11% in early FY, projected 13-13.5% overall

Key Risks & Insights:

• Inflation: Low levels give policy space, but expectations are for a gradual rise by FY27 as base effects fade.

• Growth: Still resilient at 6.5%, though global trade shocks and tariffs pose risks.

• Credit: Early slowdown likely to ease with continued monetary support, though rebalancing between sectors will be crucial.

An Industry Overviews (NBFCs):

The NBFC industry in India continued to demonstrate strong growth in FY 2025, recording nearly 20% credit growth, which was significantly higher than the 12% growth reported by scheduled commercial banks. The total assets under management (AUM) of NBFCs (including housing finance companies) stood at an estimated ?48-52 trillion, and this is expected to cross ?60 trillion by FY 2026. Importantly, NBFCs now account for about 21% of systemic credit, reflecting their expanding role in Indias financial system. Retail assets remained the backbone of NBFC portfolios, contributing nearly 58% of overall credit as of December 2024. However, the growth momentum moderated, with retail credit CAGR slowing to 16-18% in FY 2025-26, compared to over 23% in the previous fiscal. Segments such as microfinance, personal loans, credit cards, and unsecured business lending experienced some stress, with rising delinquencies. Notably, unsecured loans?once the fastest-growing product-slowed sharply, even though they still accounted for nearly 28% of NBFC retail lending. In contrast, secured lending segments like housing finance, vehicle loans, and affordable housing finance maintained steady double-digit growth.

On the funding side, NBFCs faced challenges due to reduced credit flow from banks. In Q1 FY 2025, for example, bank lending to NBFCs was just ?7,500 crore, a steep fall from ?92,000 crore in the same quarter of FY 2024. For the full year, bank loans to NBFCs grew only around 5.7%, with outstanding bank credit to the sector at about ?16.1 lakh crore. To bridge this gap, NBFCs increasingly tapped the capital markets, raising funds through bonds, securitisation, and other non-bank instruments. This diversification, while positive for resilience, also led to higher borrowing costs, which, along with tighter regulation, compressed profit margins. Profitability for the sector came under some pressure, with return metrics moderating. Average cost of funds rose by 20-40 basis points compared to the previous year, while return on managed assets (RoMA) fell by 25-45 basis points. Despite this, most NBFCs maintained double-digit returns on equity, underlining the sectors resilience. The key risks during FY 2025 were concentrated in unsecured retail lending, over-leveraged borrowers, and asset-quality pressures in microfinance. Nevertheless, overall nonperforming asset (NPA) levels remained below pre-pandemic averages, which provided comfort to regulators and rating agencies. On the regulatory front, the Reserve Bank of India (RBI) maintained close oversight of the sector through its scale-based regulation (SBR) framework. Rules around loan evergreening, prompt corrective action (PCA), and tighter monitoring of large NBFCs reflected the RBIs focus on systemic stability. These measures, though restrictive in the short term, are seen as strengthening the long-term sustainability of the sector.

A defining feature of FY 2025 was the digital and fintech transformation of NBFCs. Fintech NBFCs disbursed a record 10.9 crore personal loans worth over ?1 lakh crore during the year, indicating deepening credit penetration in underserved segments. Technology-driven underwriting, AI-based collections, and digital partnerships became mainstream, enhancing efficiency and inclusion. In addition, NBFCs began to diversify into green and sustainable finance, particularly electric vehicle (EV) loans, reflecting both policy priorities and emerging demand.

In summary, FY 2025 marked a year of resilient but cautious growth for NBFCs. While they continued to outpace banks in terms of credit expansion and broadened their systemic role, they also faced funding constraints, margin pressures, and regulatory tightening. The increasing reliance on digital lending, coupled with sectoral diversification into housing, MSME, and green finance, positions NBFCs as a critical driver of Indias credit ecosystem going into FY 2026.

The NBFC sector is an important stakeholder of the Indian financial sector. Strengthened regulation and enhanced oversight are in place to further strengthen the resilience of this key sector. Given this, we reiterate what we underscored in the previous year. We believe that NBFCs with superior capital adequacy, better margins, frugal cost and prudent risk management, and those incorporating above four key cornerstones in their business models will continue to deliver sustainable growth in the foreseeable future.

THE COMPANY

Karnavati Finance Limited (KFL) is a Non-Banking Finance Company (“NBFC”), holding a Certificate of Registration from the Reserve Bank of India (“RBI”). The KFL is non- deposit accepting NBFC engaged in financial services. The Company is registered with the Reserve Bank of India (RBI) as a non-deposit accepting NBFC. As per RBIs ‘Scale Based Regulations (SBR), the Company is classified as NBFC- Base Layer (NBFC-BL).

The Company is listed with the Bombay Stock Exchange. The Company is an Investment and Credit Company (ICC) and does not have any other operations of its own. The company mainly engaged in providing finance of

a. personal loan,

b. business loan,

c. auto loan,

d. education loan and

e. mortgage loans.

FINANCIAL PERFORMANCE

KFLs net income from operations for the financial year ended March 31, 2025 is Rs. 157.23 Lakhs as against Rs. 304.10 Lakhs in the previous year. During the year under review due to increase in non-performing assets and their provisioning requirement, the company has incurred the loss of Rs. 168.06 Lakhs.

RESOURCES AND LIQUIDITY

During the year under review, KFL has not raised any funds from the market by way of allotment of shares/bonds/ warrants/debentures, or by raising public deposits etc.

PORTFOLIO

KFLs investment portfolio stood at Rs. 2,132.02 Lakhs as on March 31, 2025. KFLs strategy for its portfolio is to focus on asset quality and asset mix to achieve good returns.

OPPORTUNITIES AND THREATS

The RBI has been continually strengthening the supervisory framework for NBFCs in order to ensure sound and healthy functioning and avoid excessive risk taking. It has issued several new guidelines in the recent past.

The uncertainties and volatility in the financial market are a continuing threat to the organizational performance. However, the twin features of foresightedness and focused analysis of the market have challenged the threat of adverse performance.

OUTLOOK

India continues to be one of the fastest growing economies in the world and this is expected to continue in financial year 2025-26, as per the latest economic survey, finance sector being the key growth sectors of the economy. The Outlook of the Company for the year ahead is to drive profitable growth. Non-Banking Financial Companies are competing with the banks in providing financial services and has been playing a complementary role with other financial institutions in the Indian Economy.

The Management of KFL is concentrating on the core area of investment and finance. Capital market is improving and KFL will explore the opportunities available in the Capital Market and other financial areas. The persistent challenges in the operating environment resulted in higher delinquency levels for the NBFCs.

RISK MANAGEMENT

As in the case of any lending entity, the entire proposition of the Company - providing finance to various segments of the economy is on the fundamentals of managing the risk rather than avoiding it. With proper operational systems in place, the Company successfully manages these risks which also help in achieving the desired outcome, while fixing responsibility and accountability. The Board is responsible for monitoring and reviewing of the risk and taking steps to mitigate the same.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUECY

The Company has an internal control system to commensurate with the size, scale and complexity of its operations and nature to ensure smooth business operation to provide reasonable assurance that all assets are safeguarded and protected from any kind of loss or misuse, transactions are authorized, recorded and reported properly and that all applicable statutes and corporate policies are duly complied with.

SUBSIDIARY COMPANY

As there are no subsidiaries of the company, investment made in subsidiaries is nil.

HUMAN RESOURCES

The Company takes pride in the commitment, competence and dedication of its employees in all areas of the business. The Company is committed to nurturing, enhancing and retaining its top talent through superior learning and organizational development. This is a critical pillar to support the organizations growth and its sustainability in the long run. The Company also has zero tolerance for harassment of women at workplace. The overall industrial relations atmosphere continued to be cordial.

SEGMENT-WISE OR PRODUCT WISE PERFORMANCE

The company operates in only single segment. Hence segment wise performance is not applicable.

CAUTIONARY STATEMENT

This report describing the companys activities, projections about future estimates, assumptions with regard to global economic conditions, government policies, etc. may contain “forward looking statements” based on the information available with the company. Forward-looking statements are based on certain assumptions and expectations of future events. These statements are subject to certain risks and uncertainties. The company cannot guarantee that these assumptions and expectations are accurate or will be realized. The actual results may be different from those expressed or implied since the companys operations are affected by the many external and internal factors, which are beyond the control of the management. Hence the company assumes no responsibility in respect of forward-looking statements that may be amended or modified in future on the basis of subsequent developments, information or events. Company follows all Mandatory Accounting Standards.