Kreon Finnancial Services Ltd Management Discussions

Indian Economic Review

Following a_ successful moon mission_ and hosting_ the G20 Summit, India is positioned to emerge from 2023 with increased stability and optimism for its growth and future prospects. The countrys attractiveness as an investment destination remains robust, given the size and scale of operations it has to offer to global companies, abundant skilled talent pool, and prowess infitechnology_and innovation. Indias Nifty 50 index, hit a new high, up 16% this year. It surpassed Hong Kongs Hang Seng index, which fell 18% stock market is now the seventh largest with a market capitalization of US$3.989 trillion. High performing sectors predicted for 2024 include banking, healthcare, and energy. Indias ease of doing business reforms centered on streamlining and digitising regulatory compliance processes throughout the entire business lifecycle, spanning from incorporation to the cessation of operations. Furthermore, the 2023 survey conducted by the United Nations Economic and Social Commission for Asia Pacific (UNESCAP) on digital and sustainable trade facilitation positioned India as a leader in global trade facilitation efforts, achieving an impressive score of 93.55% in 2023 compared to 90.32% in 2021. Indias combined exports of merchandise and services for_April-October 2023_was estimated at US$437.54 billion.

INDUSTRY STRUCTURE AND DEVELOPMENTS NBFC segment in India

NBFCs have become a trusted and dependable source of financing for a diverse array of individuals and businesses, including small and medium-scale enterprises, as well as those who have been traditionally left out of the financial system. With their extensive reach, tailored approach to assessing financial needs, and quick processing times, NBFCs have been able to cater to a wide range of borrowers debt capital requirements in a highly efficient and seamless manner. In the FY 2023-24, NBFCs have prioritized technology-driven distribution and financial inclusion, setting the stage for continued technological advancement in FY 2024-25. As of 2023, the NBFC sector has reached an impressive size of USD326 billion, underscoring its expanding influence in the financial domain. The sector has also shown resilience in terms of sound capital position, improved asset quality, adequate provisioning and higher profitability. Furthermore, the sector has leveraged digitisation to offer alternative financing options, especially to the MSMEs, which face challenges in obtaining loans from traditional banks. As of 30th September 2023, there were a total of 9,356 NBFCs registered with the Reserve Bank of India (RBI). Since the implementation of Scale Based

Regulation (SBR), NBFCs have been segregated into four layers, namely, a Base Layer (NBFC-BL), a Middle Layer (NBFC-ML), an Upper Layer (NBFC-UL) and a Top Layer (NBFC-TL), based on size, activity, and the perceived level of riskiness. As of the end of March 2024, the aggregate credit extended by Non-Banking Financial Companies (NBFCs) in India showed significant growth. The total credit extended by NBFCs reached Rs.30.8 lakh crore, marking a robust expansion driven by strong performances across various sectors, particularly personal loans and loans to the industrial sector. NBFCs co-lending AUM which is nearing Rs.1-lakh crore is also expected to grow by 35-40% in medium term. Co-lending AUM of NBFCs is estimated to be around Rs.75,000 crore as of September 2023, up from Rs.55,000 crore in March 2023. Personal loans account for a third of overall co-lending AUM across the industry, followed by housing_loans at around 20% and unsecured MSME loans and gold loans at 13% each. Secured MSME_(including loans_against property) and vehicle loans comprise the remaining 20%. The total GNPA ratio of NBFCs improved to 4.6% in September 2023, down from 5.9% in September 2022. Notably, the personal loans segment which experienced rapid growth in recent years, reported the lowest GNPA ratio at 3.6% as of September 2023. The GNPA ratio for industrial advances made by private NBFCs stood at 12.5%, representing 21.6% of the overall GNPA of the NBFC sector. The borrowing cost or cost of funds for NBFCs increased sharply by 25-50 bps (basis points) over the last quarter of fiscal 2024. It is expected that the increased cost of funds should result in some compression in net interest margins (NIMs). to 16%-18% in FY-24, on the back of the recent regulatory changes and slower expansion in certain asset classes. With the introduction of Digital lending Guidelines in 2022, RBI has emphasized the growth of Fintech market. In the FY 2023-24 more regulatory guidelines were introduced by RBI to streamline and regulate the Digital lending activities and to curtail frauds and safeguard the end users. It is expected that NBFCs would focus on diversifying their portfolio and recalibrate cost structures and funding profiles, funding avenues and strong asset liability management. It is also expected that credit demand in the sector will continue to grow as inflation subsides (already hovering around the tolerance band) and interest rates stabilize in the next 6 to 9-month cycle. The increased risk weight for NBFC loans under the new RBI regulations will raise borrowing costs for NBFCs, however, the impact could be short-term in nature as NBFCs will be able to adjust their lending rates accordingly and with the integration of technology, NBFCs with responsible lending practices, creating a positive impact, will lead the way. With the growth witnessed in the NBFC sector in the recent years and India reaching an estimate of USD7 trillion GDP by 2030, Indias financial need will rise, creating ample opportunities for NBFCs.

Fintech and digital lending segment in India

In an era defined by rapid technological advancements and unprecedented digital transformation, the financial sector finds itself at the intersection of innovation and disruption. Fintech, the convergence of finance and technology, has emerged as a catalyst for change, reshaping traditional banking, investment, and payment systems worldwide. In India, a nation renowned for its entrepreneurial zeal and technological prowess, the Fintech revolution is unfolding with remarkable vigour.

The country is experiencing rapid economic growth, with household consumption forecasted to reach Rs.224 lakh crore (US$ 3 trillion) by FY26. This growth spans across all income levels, creating significant opportunities in the financial services sector, particularly in the realm of credit. Despite the increasing demand for credit, there remains a notable disparity between supply and demand. Scheduled commercial banks have traditionally been at the forefront of meeting credit needs, but there is now a surge in the emergence of technology-driven players in the market, driving the shift towards digital lending. While digital lending in India is still in its early stages compared to traditional lending, it is rapidly expanding. It is projected that total digital lending disbursements will exceed Rs.47.4 lakh crore by 2026 up from Rs.21.6 lakh crore in FY 22, representing a CAGR of 22%. At 87%, India has the highest Fintech adoption rate among the public compared to the global average of 64%. With this, India has gained the 3rd place in digital payments only after the US and China. These opportunities, along with the favourable ecosystem, create a large growth potential for Fintechs in India.

Factors such as socio-economic conditions, demographics, technological progress, infrastructure development, and increasing credit demand are distinct to India and are fueling the expansion of digital lending in the nation. The growth of digital lending players (LendTechs) is extending across borders, encompassing a substantial segment of the overall Indian FinTech market. It is anticipated that their market share will continue to increase Infrastructure development initiatives, such as eKYC, Open Network for Digital Commerce, Open Credit Enablement Network, etc., and policy-led initiatives such as First Loss Default Guarantee (FLDG) program approval are being targeted towards the promotion of digital lending and are helping solve persistent challenges of Indian lending market. There is also a concerted attempt on the part of the government and regulators to push financial institutions to scale up green/ sustainable digital lending and financial inclusion via collaboration among FinTechs, banks, and NBFCs.

The growth of digital lending has been driven by various factors which includes:

The global financial services industry has undergone significant transformation through the adoption of emerging technologies and innovative solutions, and Indias financial services industry is no exception. Furthermore, with Indias FinTech adoption rate at 87%, significantly surpassing the global average of 64%, the pace of change has accelerated even more.

LendingTechs, which provide digital lending solutions, constitute a significant portion of the overall Indian FinTech market, accounting for 46% of the total market in FY22 and expected to rise to 60% by FY30.

OPPORTUNITIES AND THREATS Opportunities Socio-economic factors

• Increase in employment: Worker Population Ratio (WPR) as per Period Labour Survey conducted between June 2022-June 2023, increased to 59.4% in 2023 against 48.1% in 2017-18 . WPR for male in India increased from 71.2% in 2017-18 to 76.0% in 2022-23 and corresponding increase in WPR for female was from 22.0% to 35.9%.

• Improving banking access: 50 crore plus people under the formal banking system with cumulative deposits surpassing Rs.2 lakh crore.

• Higher per capital income: Indias per capita income of the population for 2024 is 2.85%.

Increasing smartphone and internet access

Indias internet penetration stood at 52.4% at the start of 2024, with an estimated 1.12 billion cellular mobile connections, translating to a mobile phone penetration of around 78% and average internet consumption stood at 24.1 GB to 28 GB per user per month.

Demographic trends

Increase in tech savvy millennial and Gen-Z customers: India had 116 million Generation Z consumers, with two out of every five urban Indian consumers aged between 15 and 55 falling into the Gen Z category.

Enabling public infrastructure

Account Aggregator (AA) Framework, Open Credit Enablement Network (OCEN), TReDS, Open Network for Digital Commerce (ONDC).

Digital trail of data and technological advancements

• Interconnected systems and platforms.

• Widespread use of Aadhar, PAN, GSTIN for audit trail.

• Cloud, Big data and analytics, AI, open APIs, automation, etc.

Rise in credit demand

• Untapped MSME market: Credit gap of Rs.25 lakh crore.

• Rising demand for small ticket loans: 85% of personal loans originations in FY22 were with a value of less than Rs.1 lakh.

• Rising gig economy: India had 7.7 million workers in gig economy and is expected to expand to 23.5 million in 2030.

Threats

While the fintech lending industry in India holds significant growth potential, it must navigate a range of threats and challenges. Addressing these threats requires robust risk management strategies, continuous innovation, adherence to regulatory requirements, and a focus on building and maintaining customer trust. By proactively managing these risks, fintech lenders can sustain their growth trajectory and contribute to the broader financial ecosystem.

BUSINESS AND FINANCIAL OVERVIEW

Kreon Finnancial Services Limited is_ an India-based non-banking finance company (NBFC). With 30 years of experience in the financial sector, the Company has emerged into a Fintech Company leveraging digital technology and expertise in the financial industry since FY 2018-19. The Company operates through two segments: Commercial Lending and Digital Lending. Through its in-house digital lending mobile application "Stucred" the Company provides instant short-term loans to college students in India. The app aims to offer financial support to students by providing quick and easy access to credit, helping them manage their educational and personal expenses without the hassle of traditional loan procedures.

The Companys financial statements have been prepared in compliance with Indian Accounting Standards (Ind AS) as per the Companies (Indian Accounting Standards) Rules, 2015, and amended by the Companies (Indian Accounting Standards) Rules, 2016, as notified under Section 133 of the Companies Act, 2013 (referred to as ‘the Act). The financial statements have been prepared following the historical cost convention, supplemented by fair value measurements as required or permitted by relevant accounting standards, along with other applicable provisions of the Companies Act 2013. Additionally, the financial statements adhere to guidelines issued by the RBI applicable to NBFCs and other accounting principles generally accepted in India.

Its brief financial performance for 2023-24 is given below:

Particulars	Year ended on 31st March 2024	Year ended on 31st March 2023
Total Income	1637.28	961.76
PBDIT	262.73	496.90
Interest and Financial Charges	95.96	45.28
Depreciation	70.50	54.05
Profit before tax	96.27	397.57
Tax expenses	33.95	(60.44)
Net Profit	62.32	458.00

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in Key Financial Ratios, alongwith detailed explanations thereof including:

Particulars	2023-24	2022-23	% Change	Reason (if more than 25% change)
Current Ratio	1.69	2.88	-41.37	Increase in short term debt and increase in write off of book debts (loans) during the year have impacted the ratio.
Debt-Equity Ratio	85.05	39.65	114.53	Increase in short term debt, increase in write off of book debts (loans), and conversion of warrants to equity during the year have impacted the ratio.
Debt Service Coverage Ratio	8.71	56.54	-84.60	Increase in short term debt and increase in write off of book debts (loans) during the year have impacted the ratio.
Return on equity ratio	2.45	29.79	-91.78	Increase in write off of book debts (loans), and conversion of warrants to equity during the year have impacted the ratio.
Net profit ratio	3.85	48.55	-92.06	Increase in write off of book debts (loans) during the year has impacted the ratio.
Return on capital employed ratio	2.96	14.87	-80.07	Increase in short term debt, increase in write off of book debts (loans), and conversion of warrants to equity during the year have impacted the ratio.
Return on Investment - Equity Instruments	-	61.32	-	-

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Our Company employs a comprehensive internal control system supplemented by concurrent and internal audits, special audits, and regular management reviews. These internal processes ensure the existence of appropriate checks and balances and regulatory compliance at all levels. The internal audit team conducts risk-based audits of these processes to ensure that internal controls for fraud prevention, detection, reporting, and remediation are sufficient and effective.

Our Company places significant emphasis on the inspection of process controls, risk monitoring, and fraud prevention methods. Therefore, we have made substantial investments to ensure that our internal audit and control systems are appropriate and sufficient to meet our regulatory requirements and operational scale. In order to benefit from expert oversight, diverse verification approaches, and optimize the return on investment from the audit process, we have engaged top-tier firms to handle the internal audit of our major businesses. M/s Darpan & Associates, Chartered Accountants the statutory auditors of the Company have audited the financial statements included in this annual report and have issued an attestation report on our internal control over financial reporting (as defined in Section 143 of Companies Act 2013). In line with companys business & presence, the Company has engaged M/s. R. Baskaran & Co., Chartered Accountants to manage and execute internal audits and towards the review of internal controls and risks in the companys operations. Your Board is of the opinion that the Internal Financial Controls, affecting the Financial Statements of your Company are adequate and are operating effectively.

RISK AND CONCERN

A company in its normal course of working takes on many risks. For a Non-Banking Finance Company the risks that are most important are operational risk, credit risk, regulatory risk, liquidity risk, competition risk and employee risk. The identification, monitoring and mitigation of these risks are integral to the success of the company. Risk Management broadly covers the above risk. The risk management framework is based on a meticulous assessment of risks through proper analysis and understanding of the underlying risks before undertaking any transactions and changing or implementing processes and systems. This risk management mechanism is supported by regular review, control, self-assessments and monitoring of key risk indicators.

Industry risk	The Company is exposed to various external risks which have a bearing on its sustainability and profitability. The volatile macroeconomic scenario and sector-specific imbalances result in loan asset impairment.
	Mitigation: Our dedicated team evaluates the trends in the economy and various other sectors. The Company possess an experience of more than 3 decades in the NBFC sector coupled with its customer reach enables it to sustain growth even in difficult financial conditions.
Operational Risk	Operational risks can result from a variety of factors, including failure to obtain proper internal authorizations, improperly documented transactions, failure of operational and information security procedures, computer systems, software or equipment, fraud, inadequate training and employee errors.
	Mitigation: We have adopted all contemporary and pro_cient operational methods and systems. Faster loan disbursement through quick credit appraisal has defined the Companys operational benchmarks. Additionally, regular internal audit provides a check on deviation arising from any contingent operational ine_ciency.
Credit Risk	The risk associated with the failure of the borrower to meet financial obligations to the lender in accordance with the agreed terms is known as Credit Risk. If any of our borrowers fail to discharge their obligations to us, it would result in financial loss.
	Mitigation: Comprehensive review exercise is conducted for credit approvals, ensuring proper documentation, carrying out extensive credit appraisal, conducting periodic reviews etc., is done as a part of credit risk mitigation. Various norms for customer identification and evaluation procedure for prospective credit proposals have been stipulated as a part of risk mitigation.
Regulatory Risk	The risk arises out of a change in laws and regulation governing our businesses. It could also arise on account of inadequate addressal of regulatory requirements or differences in interpretation of regulations vis-?-vis the regulators.
	Mitigation: All the periodic guidelines issued by the RBI are fully adhered to and complied with by the Company. We also follow stringent review systems to ensure compliance with the statutory guidelines and norms of the NBFC and Fintech lending industry. We have a team of experienced professionals reporting to Group Head – Compliance, Legal & Company Secretary which takes care of compliance with applicable laws, rules, regulations and guidelines affecting our businesses.
Liquidity Risk	Liquidity risk is the risk of not honouring liabilities to different financial and non-financial institutions. This risk can result in shortfall and cash flow and can permanently damage the credibility of a Company.
	Mitigation: Board of Directors meets regularly to review the liquidity position, based on future cash flows. As and when required the Company get its funding requirements from diverse sources, including Banks, Institutions, etc.
Competition Risk	Competition from new entrants or unorganised sector or diversification by existing financial Institutions may hamper the future growth of the Company.
	Mitigation: Fair and transparent practices help the Company gain competitive advantage over other entities. Our human resource policies and a healthy positive work environment help us attract and retain best talent on a continuous basis.
Employee Risk	The Companys success depends largely upon the quality and competence of its management team and key personnel.
	Mitigation: Attracting and retaining talented professionals is therefore a key element of the Companys strategy and a significant source of competitive advantage. While the Company has a salary and incentive structure designed to encourage employee retention. Any failure to attract and retain talented professionals, or the resignation or loss of key management personnel, may have an impact on the Companys business, its future financial performance and the results of its operations.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

Employees of the Company are not only considered to be the stakeholders in the corporate growth but also are the key drivers of its performance. The Company always endeavours to provide an environment that encourages talented professionals to perform to their fullest potential. The Company owes its success to its loyal and efficient human asset. The Company believes that, by effectively managing and developing human resources, it can achieve its vision. It imparts specialized and technical training to its employees at regular intervals, which enrich their knowledge, skill and competency to perform their job effectively and efficiently. This also encourages employees to shoulder more responsibilities and take part in the growth of the Companys business.

As on 31st March, 2024, there are 53 employees on the rolls of Company.

CAUTIONARY STATEMENT

This statement made in this section describes the Companys objectives, projections, expectation and estimations which may be ‘forward looking statements within the meaning of applicable securities laws and . regulations. Forward–looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised by the Company. Actual result could differ materially from those expressed in the statement or implied due to the influence of external factors which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments.