L&T Finance Holdings Ltd Management Discussions.

MACRO ECONOMIC REVIEW

Its been over a year since the COVID-19 pandemic caused volatility and chaos across the globe. There was a strong initial knee-jerk reaction as the pandemics impact on society and economy started unfolding gradually. However, this was soon replaced with a gleam of hope as most economies put up a brave front in what seemed like a classic live experiment of human flexibility and adaptability.

‘From slowdown to lockdown, is one of the simplest ways to explain what India, one of the emerging economies of the world, went through in the first half of CY2020. The Government imposed a strict lockdown to contain the virus, which resulted in sudden halt of economic activities. Thus, bringing the economy to a near standstill. The impact of the lockdown was felt across sectors as demand and exports, trade and travel plummeted sharply. The National Statistical Offices (NSO) provisional estimate of GDP for FY21 projects the Indian economy to register its first-ever contraction in the past four decades at 7.3%. With an adverse impact on the economy, the investment rate fell to a decades low, primarily due to drag in private investment. Consumer demand remained muted with severe stress on the household balance sheets due to high unemployment. The Government scaled up its spending significantly to mitigate short term adversities rising from the pandemic.

On the sectoral level, the industrial and service sectors faced severe ramifications due to the disruptions caused by the virus-containing lockdown. However, despite preceding events, FY21 was also a classic live experiment of flexibility, adaptability & resilience. The agriculture and allied sectors stood their ground strong, emerging with a hint of optimism backed by a favourable monsoon in CY2020. A robust Kharif and Rabi season, adequate reservoir level, enhanced procurement by the Government and rich fiscal spending on schemes like The Mahatma Gandhi National Rural Employment Guarantee Act 2005 (MGNREGA) and Pradhan Mantri Kisan, assisted agricultural growth further. Contrarily, despite a robust recovery witnessed in H2FY21, the industrial sector registered a second successive annual contraction in FY21 – dragged down by mining & quarrying, manufacturing and construction. Contact-sensitive services sector bore the major brunt of the pandemic and is witnessing its first-ever degrowth in a decade.

To address the adversities arising from the pandemic led economic disruptions, calibrated and prudent fiscal and monetary support was extended by the policy makers. The Central Government announced Rs29.87 Lakhs Cr (15% of GDP) Aatmanirbhar Bharat package to support the economys most distressed segments. The RBI provided monetary support by slashing the policy rates to its record low levels along with both conventional and unconventional liquidity measures to support credit creation. As part of the relief package, it also allowed borrowers to halt repayment of loans between March and August 2020 without impacting their credit history. In addition to the stress in asset quality across most lenders (banks as well as NBFCs), the moratorium also resulted in liquidity concerns for lenders, mostly for NBFCs. Well governed NBFCs with strong parentage remained buoyant throughout FY21, thanks to their strong capital buffers and also on the back of timely policy moves in the form of TLTRO 2.0 and special liquidity scheme for NBFCs under Aatmanirbhar Bharat package.

Just while the economy was fathoming the repercussions of the pandemic, financial markets faced another major setback on April 24, 2020. One of the mutual fund houses closed six of its debt schemes citing a credit risk. Consequently, many liquid and short-term debt funds witnessed a sudden fall in their Net Asset Values (NAVs), as yields across the money market and debt papers spiked. The appetite for various debt securities further declined amid thin volumes created by the COVID-19 pandemic. This was when the RBI stepped in to control the crisis with a special liquidity facility of Rs500 Bn for the mutual fund industry.

Subsequent to the Government-imposed lockdown, financial markets nosedived as investor sentiments were rattled. However, proactive and timely measures announced by the Government and RBI helped revive confidence amongst investors resulting in sustained foreign capital inflows. This helped markets regain its pre-pandemic levels. Financial markets remained buoyant thereafter, supported first by easy monetary conditions, and later from optimism arising out of the vaccine rollout. Additionally, most organisations realigned their strategies to focus on cost optimisation and building stress absorption capacity through raising capital and increasing provision on balance sheet. On the fiscal front, the pandemic weighed heavily on the Governments revenues. And yet, the Government had to scale up expenditures to prevent the economy from caving in. The Government resorted to higher market borrowings to take care of the fiscal deficit in FY21 that was upscaled to 9.3% of GDP from the budgeted 3.5%.

OUTLOOK FOR FY22

World over, the support from the governments and the central banks, has brightened the global growth outlook for CY2021. As per the International Monetary Funds projection, the global economy is anticipated to expand by 6% in CY2021, on a lower base of estimated 3.3% degrowth in CY2020. With massive vaccination drives underway, risks to recovery are likely to abate, thus leading to a gain in the momentum of economic activities in H2CY2021.

But with the second wave of COVID-19 and the emergence of newer virus variants have made India the new hotspot of infections – adding uncertainty to the anticipation of a smooth recovery.

Various multilateral organisations and rating agencies have projected the Indian economy to grow at around 9%. The economic growth is likely to be aided by a very low statistical base, mass vaccination drive and a supportive fiscal stance. In India, commercial and business activities are expected to gather pace in H2FY22 of FY22 as by then majority of the population is likely to be inoculated by then.

Economic Growth Projections
IMF 12.5%
World Bank 8.3%
RBI 9.5%
OECD 9.9%
Fitch 9.5%
Moody 9.3%
S&P 9.5%

Retail inflation might rear its ugly head yet again in the coming months. Although the food inflation is likely to moderate with expectations of bumper harvest, the core inflation has remained stubbornly elevated for the past few months. Recently, commodity prices started rising faster across the globe in response to the COVID-19 vaccine rollouts and resumption of economic activities. Broad-based escalation in cost-push pressures in services and manufacturing prices could further impart upward pressure. Expectations of demand normalisation, production cut by the Organisation of the Petroleum Exporting Countries (OPEC) and allies, and higher taxes on petroleum products are likely to further surge the fuel prices.

On the positive side, a favourable monsoon outlook, minimum support price hikes coupled with enhanced procurement will support rural cash flows in FY22. Moreover,

Projections are as per the latest available data the Central Government has remained committed to providing further impetus to the economy through the Union Budget 2021-22. Additionally, it has also proposed a sharp increase in capital expenditure of the magnitude of Rs5.54 Tln. Collectively, these have the potential to create a plethora of fresh investment opportunities and eventually support economic growth.

POSSIBLE THREATS

Despite the optimism surrounding the ongoing vaccination drive, the recent resurgence in the countrys COVID-19 infections has raised the threat of fresh pandemic restrictions. As of May 2021, many states had enforced complete lockdown thus, posing a risk to a smooth economic recovery. The RBI expects that gross Non-Performing Asset (NPAs) of Scheduled Commercial Banks (SCBs) might rise to 13.5% under the baseline stress scenario. It is also estimated to further escalate to 14.8% under a severe stress scenario by September 2021. The banks would, thus, need to make higher provisions to cover the stressed assets. This in turn could impair the credit available for investment spending. Similarly, the RBI expects asset quality of NBFCs to deteriorate further due to disruption of business operations caused by the pandemic. On the fiscal front, both the Centre and the State Governments are expected to run higher fiscal deficits to fuel the economic recovery. In the absence of imposition of fresh taxes by the Government, the revenue inflows will depend on the uptick in economic activities. A deluge of market borrowings by the General Government could push up the cost of borrowing. Thus, impacting the sovereign credit rating outlook if the growth does not pan out as anticipated. Your Company is committed to addressing these changes bolstered by its strengths in market position, agile execution capabilities, robust early warning systems and extensive use of analytics for risk mitigation and resource allocation. It will ensure to take advantage of the tailwinds that may emerge during the course of the year.

FY21 IN PERSPECTIVE

STRENGTHS

During FY21, your Company addressed the challenges posed by the COVID-19 pandemic with enhanced focus on protecting the balance sheet and strengthening the business franchise.

Strong business fundamentals with businesses (Rural Finance, Housing Finance and Infrastructure Finance) aligned to sectors (Agriculture and Allied sector, Construction sector and Infrastructure sector) which are the key growth engines for the economy, have helped in strengthening your Companys position and facing the impact of the pandemic and lockdown. The majority of the profitability metrics have shown improvement on a QoQ basis on the back of strengths that your Company has built. The strengths have not only helped dealing with short-term issues arising out of the pandemic but are a foundation for growth over the medium and long term. The specific focus for the year was on the following areas:

A) Leveraged Business Strengths

The outbreak of COVID–19 and subsequent lockdowns disrupted business activity levels, bringing it to a standstill in April 2020 with closure of branches and point of sales. With phased unlocking, the recovery was led by the Rural Finance and Infrastructure Finance businesses. During FY21, your Company increased/ maintained its market share through superior service proposition, analytics-driven business selection, robust underwriting, regular monitoring and end-to-end digital solution across Farm Equipment Finance, Two-Wheeler Finance, Micro Loans and Renewable Sector Finance.

Your Company retained a cautious outlook on the Micro Loans, Loan Against Property (LAP) and Real Estate Finance business. The focus was on maintaining the asset quality of the existing book while also accessing and analysing the data for fresh underwriting post COVID-19. Business activities were driven by analytics led inputs, based on collection efficiencies, for each segment.

Key achievements which underline business strengths in FY21

Rural Finance: Increased disbursement throughout the year, reached all time high disbursement of Rs6,026 Cr in Q4FY21 (up by 36% YoY) Infra Finance: Proved strength and sustainability of LTFH churn model with excellent disbursement and sell down momentum. Cumulative disbursements over the last 5 years have been ~Rs59,000 Cr, while book has grown by only ~Rs4,000 Cr Mutual Fund: AUM increased by 33% YoY from Rs54,937 Cr in FY20 to Rs72,874 Cr in FY21. Focus on high quality products led to growth in Debt AUM by 29%. Equity AUM grew by 44% Increase in Retailisation (Rural + Retail housing) to 43% in FY21 from 26% and 40% in FY16 and FY20, respectively

B) Strong Collection Framework

The first half of the year saw collections being impacted with lockdowns and two moratoriums till August 31, 2020. The stringent lockdown disrupted the collection rhythm and significantly affected the ability to physically collect from customers. With gradual unlocking of economy, collections gained traction from Q3FY21 onwards. During this period, the agri sector remained relatively less impacted on account of favourable sowing, rainfall and good reservoir levels.

Your Company ramped up the collections infrastructure – increasing on-field collections workforce, rebalancing the sales and collection teams within products and as well as further improved on digital framework. Collection prioritisation and resource allocation through data and analytics using the propensity to pay model as well as enhancing of digital collections infrastructure and continued focus on ‘0DPD customers drove the collection strategy.

Collection efficiencies for most businesses reached pre-Covid levels by Q3FY21 with unlocking of economy and enhanced collections focus. Overall collections in FY21 were higher by 33% (for focused businesses) vis-a-vis FY20 levels despite Q1FY21 collections being adversely impacted. Rural businesses led by Farm Equipment Finance and Two-Wheeler Finance saw collections efficiency reaching pre-Covid levels sooner; collection efficiency (CE) for Farm and Two-Wheeler stood at 91.5% and 98.4%, respectively, in Q4FY21. The Micro Loans segment which still heavily depends on physical cash collections returned to normalcy during Q4FY21. In the Infra business, Renewables segment remained relatively resilient to COVID-19 with favourable regulatory interventions. Toll road collections in Q4FY21 for your Companys projects averaged at 113% of Q4FY20 levels. On the Housing front, Real Estate segment saw escrow collections surpassing pre-Covid levels in Q3FY21 and in Q4FY21, were at 121% of Q4FY20 levels. Collections in SENP segment were lower due to COVID-19 and restricted movement in urban centers.

C) Well Established Liability Franchise

The early part of the year saw stretched liquidity conditions due to the pandemic which was further exacerbated with moratorium on repayments on lending and closure of some schemes by a Mutual Fund house. Your Company weathered the market turbulence on the back of robust liability franchise, conservative ALM policies and continues to be buoyant. As a policy, your Company (consolidated) maintains cumulative positive liquidity gaps up to one year in its Asset and Liability Management (ALM) and positive liquidity gap under stress scenario for one month. At the onset of the pandemic, your Company further shored up its liquidity buffers. Your Company proactively maintained enhanced levels of liquid assets as a precaution against any likely disruption in funding due to moratorium and the tight liquidity constraints in Q1FY21.

With easing of market liquidity in Q2FY21, your Company reduced additional liquidity buffers from a high of Rs11,794 Cr at the end of April 2020 down to Rs8,660 Cr at the end of September 2020, leading to reduction of negative carry. During Q3FY21 and Q4FY21, your Company demonstrated its strength in lowering weighted average cost of borrowing (WAC). This was done through raising long-term low-cost borrowing, prepayment of high-cost borrowing and renegotiation of interest rates leading to a reduction in Quarterly WAC from 8.43% in Q4FY20 to 7.65% in Q4FY21 (the lowest ever ). Your Company focused on raising long-term funding to take advantage of low interest rate environment as well as aggressively used PSL borrowing (Rs3,525 Cr in FY21) to reduce WAC.

Mode of funds
NCD-Pvt. Placement (Rs Cr) Term Loans - PSL Rs ( Cr) Term Loans - Non PSL (Rs Cr) ECBs (Rs Cr) Total (Rs Cr)
Q1FY21 2,500 50 1,000 - 3,550
Period Q2FY21 4,233 50 - 378 4,661
Q3FY21 2,780 1,100 - 368 4,248
Q4FY21 825 2,325 20 - 3,170
Total-FY21 10,338 3,525 1,020 746 15,629

To summarise, your Company was able to raise desired amount of liquidity in H1FY21 and reduced the cost substantially when market liquidity became comfortable. This gives your Company the confidence in its ability to raise desired quantum of funds at lower cost and longer tenor.

Moreover, your Company seamlessly adopted the regulatory framework which saw the Liquidity Coverage Ratio (LCR) guidelines come into effect from December 2020. As of March 2021, the applicable LTFH lending subsidiaries were compliant with LCR requirements. In order to further strengthen the liquidity risk management at LTFH, early warning indicators under the Contingency Funding Plan (CFP) were adopted. It helps your Company tap resources timely during a liquidity crisis event. These early warning indicators monitor critical parameters at both Company and macro-economic level.

With the resurgence of second wave of COVID-19 cases and the imposed state level restrictions, your Company shored up liquidity in March 2021 and maintained it at Rs19,719 Cr (including undrawn lines) as on March 31, 2021. This included pure liquid assets of Rs10,122 Cr. Your Company periodically undertakes liquidity stress testing under various scenarios for a survival period of 30 days to assess its liquidity levels. Your Company maintained positive liquidity levels even under stress scenario. The NBFC sector, in general, witnessed continued pressure on account of the pandemic throughout the year. However, your Companys AAA rating was reaffirmed by all four rating agencies – CRISIL, CARE, India Ratings and ICRA – post the onset of COVID-19, reflecting a resilient balance sheet.

D) Improved Asset Quality and Provisions

Amid the pandemic, your Company proactively created additional provisions keeping potential impact of COVID-19 in mind. By Q2FY21, LTFH was carrying Rs1,757 Cr (1.95%) of provisions on standard book, of which Rs1,203 Cr of provision was towards Rural book (4.47% of standard Rural book) and Rs518 Cr was towards Housing book (1.94% of standard Housing book).

With collection efficiency returning to pre-Covid level by Q4FY21, your Company recognised and provided towards COVID-19 related stress. Your Company continues to carry Rs1,033 Cr of additional provisions for future economic uncertainties (including second COVID-19 wave). Out of these provisions: Rs710 Cr of provision is towards Micro Loans book (6.19% of standard Micro Loans book) Rs323 Cr of provision is towards Housing book (1.40% of standard Housing book) In addition to carrying additional provisions, your Company witnessed improvement in asset quality with GS3 at 4.97% in Q4FY21 as compared to 5.36% in Q4FY20. There was also a reduction in NS3 from 2.28% in Q4FY20 to 1.57% in Q4FY21 lowest levels since FY16 and increase in PCR from 59% to 69%.

E) Strengthened Balance Sheet

The pandemic tested the robustness and efficacy of the business model – your Company showed QoQ improvement in financial performance on key operating parameters during the year. While on the asset side your Company showed a strong YoY improvement in GS3, NS3 and provisioning covers, it further strengthened the balance sheet through capital raised during Q4FY21, reducing leverage to below 5x and is ready with capital for growth. A sustainable business model backed by L&T parentage has enabled your Company to raise Rs~3,000 Cr in Equity Capital through the issue of Right Shares, which was successfully oversubscribed by 15%. Capital Adequacy ratio and Tier I Capital are well above regulatory requirements at 23.80% and 18.79%, respectively Debt/Equity reduced from 6.39x in FY20 to 4.72x in FY21 Your Company has built a strong capital base and continues to mitigate any adverse impact of the COVID-19 wave in the short term but is well-positioned to benefit from the economic rebound expected over the next few years.

Going ahead in FY22, your Company – complemented by its raised capital – plans to build on its strengths and lessons learnt during FY21. This will help your Company maintain the leadership position in focused segments. It will continue to observe for developing macro conditions to manage risks while taking advantage of market growth opportunities when things normalise.

MERGER OF OPERATING LENDING ENTITIES

In line with the strategy of Right Structure laid down in FY16, your Company has tried to simplify the corporate structure further through consolidation of subsidiaries. LTFH, in the past four years, has merged four of its subsidiaries, which not only led to optimal utilisation of capital and management bandwidth, but also brought operational efficiencies.

In FY20, with a view to operate all the focused lending businesses through one legal entity, your Company commenced the merger of the wholly-owned lending entities, L&T Infrastructure Finance Company Limited and L&T Housing Finance Limited, with L&T Finance Limited. The aforesaid merger became effective on April 12, 2021 post receipt of necessary regulatory approvals.

The merger is expected to result into stakeholder value creation with: Enhanced governance and controls enabling better utilisation of management bandwidth Superior cash flow synergies enabling efficient ALM as well as optimising cost of funds on the back of a strengthened and well diversified balance sheet Simplification of structure leading to ease of doing business under unified book

MORATORIUM 1.0 AND 2.0

As per RBI guidelines, your Company offered the option of moratorium to customers for installments falling due between March 1, 2020 and August 31, 2020 across businesses.

Product LTFS Moratorium Policy 1.0 LTFS Moratorium Policy 2.0
Micro Loans Moratorium for 3 installments by default as per MFIN framework
Farm Equipment Finance, Two-Wheeler Finance & Consumer Loans Moratorium for 3 installments by default where no mandate of central clearance existed Moratorium grant only upon receiving specific request (Opt-in)
For others, grant only upon receiving specific request (Opt-in) on a month-on-month basis A month at a time decision on moratorium for retail customers
HL & LAP Similar to Farm Equipment Finance; additionally, Opt-out option provided for no mandate customers
Real Estate Finance Case by case decision upon receiving specific customer request
Infrastructure Finance Case by case decision upon receiving specific customer request, additionally, subject to consensus among co-lenders

Customer engagement remained a key priority as your Company reached out to customers through various channels to educate them on the financial implications of the moratorium. With the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, RBI announced various measures from time to time. RBI on August 6, 2020, decided to provide a window under the Prudential Framework to enable the lenders to implement a resolution plan for corporate as well as personal loans to individual borrowers.

Further, in view of the uncertainties created by the resurgence of the COVID-19 pandemic, RBI also extended the facility for restructuring to existing individual, small businesses loans and MSMEs vide circular dated May 5, 2021. These measures undertaken by RBI enabled us to implement a resolution plan for loan repayment by corporates, individuals and small businesses affected by COVID-19 pandemic.

The efforts taken by RBI will clearly strengthen the Indian economy and will provide an impetus to individuals and MSMEs to scale up their business without worrying about financial destitution.

Further, Emergency Credit Line Guarantee Scheme scheme (ECLGS) was announced by the Government to help borrowers for augmentation of Working Capital. The Government, from time to time, extended the benefit of ECLGS to various sectors of the economy.

EMPLOYEE HEALTH AND SAFETY

With the onset of the pandemic, Work from Home was immediately put into effect in the organisation. To ensure smooth transition, initiatives like sanitizing all branches and offices and connecting with employees daily to check on their health as well as the health of their families were introduced. Your Company takes cognizance of the changing business landscape and workforce in delivering various benefits to its employees. Your Company constantly innovates and evolves its benefits programs to meet the needs of its workforce. It offers various policies for employee health and insurance which include: Group Mediclaim Policy - Hospitalisation cover for employees and their families Group Term Life Insurance - Insurance cover in the event of death of the employee while in service Group Personal Accident Insurance - Insurance cover in an unfortunate event of any accident leading to loss in earning capacity of an employee or death of employee. In addition, your Company also launched various initiatives and provided specific employee benefits during COVID-19: COVID-19 Domiciliary Policy - Coverage of COVID-19 treatment expenses during home quarantine for employees and their families Online Health Care Facility - Doctor on Call Service - An app based medical consultation in association with Practo, a renowned healthcare provider One-time grant of Rs500 for purchase of masks and hand sanitizers for the field staff

Face shields to field staff

Salary advance of Rs10,000 to the frontline staff to take care of initial medical expenses Company sponsored vaccination drives through tie-ups with hospitals for employees and their family members across locations Reimbursement towards cost of vaccination upto a certain amount Online health & wellness session for employees

To provide care and assistance for the family in case of unfortunate demise of employee due to COVID-19, your Company was amongst the first to take the following initiatives: One-time ex-gratia payment of Rs2 Lakhs to support the family Continuation of payment of monthly salary to the nominee for a period of 2 years Childrens education assistance up to graduation Spouses education assistance for pursuing vocational/ professional education up to graduation for enhancing employability

Around 2,500 employees have been diagnosed with COVID-19 since the advent of the pandemic. A daily tracker was instituted to check on the health of the employees who tested positive for COVID-19 and shared with senior management team and relevant stakeholders. This ensured provision of necessary support to the employees at the right time. The leadership team quickly provided directions and reacted by showing care and generosity to the employees and treating them like family. Care is at the heart of your Companys employee philosophy, and it will continue to bring about more initiatives to keep its people safe and healthy. Your Company follows the practice of periodic town halls, conducted by senior business leaders. Your Company increased the frequency of the same in the past year, to keep employees aligned to your Companys priorities and connected with their teams.

In order to fulfill its social responsibility, your Company continues to provide the products and services necessary to maintain social infrastructure while carrying out thorough preventive measures against infection. Your Company implements timely and appropriate information disclosure to fulfil accountability to all its employees and stakeholders.

ESG

ESG performance is becoming increasingly critical for success of an organisation. In fact, the COVID-19 pandemic has reinforced the importance of ESG highlighting the need for an organisation to serve all its stakeholders – employees, communities, customers, shareholders and environment and providing assurance.

Your Company recognised the importance of ESG way ahead and started its journey by establishing the Sustainability Task Force in 2018. It also came out with its first Sustainability Report in FY19 covering the environmental, social and economic performance spanning across its various businesses and areas of presence, and in subsequent years continued to strengthen the ESG disclosures based on globally recognised standards such as Global Reporting Initiative (GRI). Further, the testimony to your Boards commitment towards ESG is reflected in the step taken towards extending the remit of the Corporate Social Responsibility Committee of your Company to include ESG parameters and the Committee being reconstituted as Corporate Social Responsibility and ESG Committee.

Your Companys focused lending business comprising Rural, Housing and Infrastructure Finance, are not only aligned with the sectors that are growth engines of India but are also naturally aligned to ESG through presence in lending to renewables, farmers and women micro-entrepreneurs. In fact by virtue of being the largest financier of renewables, your Company is contributing towards the goal of carbon neutrality. Additionally, the CSR thrust areas are focused on creating sustainable rural livelihoods through digital financial inclusion and literacy. These help your Company contribute effectively towards various environmental and social issues. Corporate Governance practices of your Company aim to harmonise the interests and expectations of various stakeholder groups. These practices are built on the foundation of Assurance and at all times emphasis your Companys core principles of Pride, Integrity, Discipline and Ambition. A strong and effective governance ensures that business contributes positively to its stakeholders and remains sustainable.

Your Company is always driven by the sharp focus on implementing best practices and complying with the applicable regulatory requirements. Testimony to this approach can be seen in the fact that your Company has separate offices of Chairman (Independent Director) and Managing Director since June 2017 and true to the spirit of diversity, your Board has two women Independent Directors in the total strength of nine since 2018.

Various sustainability initiatives have been taken by your Company which are in line with and connected to the strategy roadmap of LTFH 2.0, some of which are listed below:

Establishing targets (both long term and short term) for generation and distribution of financial and non-financial value Committed to the effort towards decarbonisation and net zero emissions, taking long-term targets towards sustainable financing in its infrastructure lending portfolio that focusses towards financing renewables (solar and wind) projects Defining an exclusion list of businesses that your Company will not finance Taking initiatives to reduce your Companys Scope 1, 2 and 3 emissions (direct and indirect emissions) within the office operations Introduction of several technological solutions to save electricity and increase efficiency – usage of energy-efficient equipment such as sensor-based lighting in office locations, Variable Frequency Drives (VFDs) for air-handling units, substituting the existing conventional lighting with Light-emitting Diodes (LEDs), and restricting usage of air-conditioners only during operational hours Compliance with the E-Waste Management and Handling Rules and recycling 100% of generated e-waste through registered recyclers Sewage [RP1] Treatment Plant available enabling the usage of wastewater for gardening and air-conditioning Conducting regular awareness programmes for employees to bring in a sense of responsibility regarding the potential impact created on the planet

FINANCIAL UPDATE

Your Companys Operating Profit Margin during FY21 was at 10.93% as compared to 18.91% in FY20. Net Profit Margin stood at 6.74% as against 11.69% in FY20.

The profitability was impacted largely due to the incremental provisions taken to strengthen the balance sheet on account of the COVID-19 pandemic.

OUR BUSINESSES

RURAL FINANCE

Rural Finance business of your Company saw a book growth of 9% YoY while disbursements were down 15% YoY at Rs15,914 Cr during FY21. This was achieved due to your Companys determined efforts backed by strong digital and analytics capabilities, despite the complete halt of business activities during the early months of lockdown. Your Company followed a collections-led disbursement strategy and gradually started doing business in locations where collection efficiencies had restored to normal.

Farm segment relatively resisted the impact of COVID-19 and started gaining back the traction from May 2020 itself. This was on account of resumption of rural activities and improved Rabi crop harvesting, enhanced water reservoir levels and positive macro indicators for farm business. Positive farm sentiments kept demand robust; with ~9 Lakh tractors being sold during FY21. Manufacturers overcame the early setback of supply chain issues due to lockdown in months of April and May and kept growing with the increased demand.

With a disbursement of Rs4,477 Cr of Farm Loans in FY21, your Company witnessed a 17% YoY growth, making it the leading Farm Equipment Financier and further cementing its position in the market.

Your Company adopted the top dealer strategy and increased business with top dealers with the help of strengthened trade advances proposition. For FY21, 76% of your Companys total Farm business was generated from trade advances conversion. Your Company maintained business controls with prudent product calls with Loan-to-value (LTV) well within 70% level. Your Company observed significant improvement in collections from May 2020 onwards while the industry took time to return to normalcy. Further, your Company also improved the collection efficiency and surpassed the pre-Covid levels for every month since June 2020. The regular collection efficiency in March 2021 stood at 91.5%.

Strategy

Increase penetration of repeat customers with refinance, Kisan Suvidha and used tractor offerings Prudent calls taken to increase market share in specific geographies while maintaining asset quality Analytics driven scheme offerings and trained manpower at dealerships helped drive top dealer strategy and increase counter share Enhanced portfolio quality by leveraging analytics along with on-ground collection efforts

Two-Wheeler demand was severely impacted due to widespread COVID-19 cases and nationwide lockdown at the beginning of FY21. The industry grappled with sluggish demand reflecting the impact of the lockdown and closure of point of sales, upward price revision post implementation of BS VI and rising fuel prices. The demand in urban areas was impacted to a greater extent with stricter lockdown norms and closure of dealerships. Decline in manufacturing activity post-Covid affected rural demand, although to a lesser degree than urban. However, the demand gradually picked-up momentum from Q2FY21 with the rise in preference of personal vehicles over public transport. During FY21, the demand for motorcycles was better than scooters reflecting better rural income sentiments.

LTFH disbursed Rs4,436 Cr worth of Two-Wheeler loans in FY21, a 9% YoY de-growth owing to challenging market conditions. Your Company gained market share by using analytics to increase counter share with top dealers while maintaining LTV within 70% range and tightened credit norms. Your Company reported a regular collection efficiency of 98.4% in March 2021. Collection efficiency reached pre-Covid levels owing to enhanced call center capacity, on-field strength and use of analytics for collections.

Strategy

Driving growth with focus on unfinanced high creditworthy customers and existing customers with excellent repayment history Leverage best in industry Turnaround Time (TAT) as a key service proposition Focus on capturing higher counter share at top dealers Introduce innovative products to target unfinanced high creditworthy customers Usage of Propensity to Pay model for collection prioritisation

MICRO LOANS

The industry was adversely affected with the onset of COVID-19 with moratorium, nationwide lockdown, localised lockdowns as well as elections in some states. Operations such as field visits and cash collections were affected. A number of regulatory measures such as refinance support from RBI to NABARD, One-Time Restructuring and liquidity support to smaller MFIs, among others, were undertaken to mitigate the impact of the pandemic. Your Companys main focus remained on collections and credit quality rather than portfolio growth. While disbursements picked up gradually Q2FY21 onwards, disbursements for the year remained much lower than the pre-Covid levels. Overall collection efficiency picked up QoQ, however, remaining lower than the pre-Covid levels.

The pandemic resulted in a significant impact on the earning capacity of this customer segment. Your Company executed analytics driven plans for both collections and disbursements, drawn down for individual branches, based on collection volumes. As part of the actions, your Company undertook close to NIL disbursements during Q1FY21 as a large proportion of customers were under moratorium. Incremental unwavering attention on collections during Q2FY21 translated into improved collections efficiencies which was coupled with focused disbursements for existing good customers. New business sourcing was also initiated for branches with higher collection efficiency.

The end of moratorium in August 2020, conjoined with improved liquidity position for customers resulted in increased collection efficiencies during Q3FY21. The disbursements were also normalized by end-Q3FY21 based on analysis of repayment behavior post moratorium. Your Company disbursed Rs6,613 Cr of loans, benefiting 16 Lakh+ women during FY21.

Your Company enhanced the collections infrastructure as well as strengthened the higher bucket collections team. Overall collection efficiencies improved on a quarterly basis and reached 99% by Q4FY21. The collection efficiency as on March 31, 2021 stood at 99.1%.

Strategy

Leverage customer base to increase the proportion of repeat customers Sourcing led by data analytics and credit appraisal Diversify through focus on under-penetrated/new geographies and unleveraged customers Strengthen collection vertical with rigorous on-field efforts to restore collection back to pre-Covid levels

CONSUMER LOANS

The consumer loans industry stood at over Rs6 Lakhs Cr and grew by 15% during FY21, buoyed by revival in market sentiments and lower interest rates offered by lenders. Your Company commenced Consumer Loans financing business in Q3FY20 with the aim to provide personal loan to existing customer base with a proven track record of timely payments. The Consumer Loans business uses analytics to create a pool of eligible customers from strong database of existing customers. These eligible customers with excellent repayment history are provided with a seamless end-to-end digital service proposition. With eligibility and credit check in place, disbursed amount directly reaches the customers bank account. During the year, in the backdrop of COVID-19, your

Company leveraged its strong customer database to steadily build a quality portfolio. As of FY21, the book stood at Rs490 Cr with over 42,000 customers.

Strategy

Provide an end-to-end digital platform with 100% paperless journey and fast turnaround time Harness analytics capabilities towards creating bureau-based underwriting scorecard Leverage partnerships to build additional channels of sourcing for future up-sell and cross-sell

Business Key Differentiators

Robust digital and analytics infrastructure to provide superior service proposition through quick TAT and seamless customer experience Leverage existing customer database for cross-sell and up-sell Use of data analytics and collection-led disbursement strategy to ensure responsible growth

HOUSING FINANCE

Home Loan growth declined in H1FY21 owing to the COVID-19 restrictions. However, it recovered at the end of FY21 supported by the Governments push for the sector and attractive incentives by the developers. Housing Finance business saw disbursement of Rs2,607 Cr of loans during FY21. This was down by 68% YoY while book growth was (11%) YoY. Your Company restricted disbursements in the LAP business and focused on existing projects for disbursements in Real Estate segment.

HOME LOAN

The Home Loan portfolio growth of Housing Finance Companies (HFCs) and NBFCs declined marginally in the H1FY21 due to the pandemic. Industry recovery post lockdown was driven by consistent policy support from the Government and regulators coupled with historically low interest on home loan and attractive schemes offered by the builders.

On one hand, the salaried segment remained relatively immune to the lockdown-induced disruptions. The self-employed segment, on the other hand, faced severe brunt due to slowdown in business activities. Your Company focuses on the Home Loan market through its presence in 17 locations across India. A digital lending model coupled with paperless sanction of home loan to salaried customers, led to a unique offering that helped in quick turnaround of proposals. The model also enabled your Company to reduce face-to-face meetings and frequent visits by customers to the branches.

Your Company disbursed Rs1,402 Cr worth of Home Loan in FY21 (down by 46% YoY) with the focus on sourcing salaried customer profiles. The contribution of Home Loan, as a part of total Retail housing disbursements, increased from 82% in FY20 to 85% in FY21. The share of salaried customers to the Home Loan disbursements increased from 61% in FY20 to 92% in FY21.

LOAN AGAINST

PROPERTY (LAP)

An adverse business environment for MSME segment coupled with the COVID-19 related lockdown affected the cashflow and liquidity position of the LAP segment. Consistent policy support from Government is expected to drive growth in this segment.

Your Company continued its cautious approach towards this segment and restricted the disbursements only to existing customers. Due to this, LAP disbursements witnessed a de-growth of 59% from Rs591 Cr in FY20 to Rs243 Cr in FY21.

Strategy for Home Loan & LAP

Digital-lending model for Home Loan to provide best-in-class TAT

Growing up volumes through use of data analytics Focus on arresting early-bucket delinquency through dynamic alignment of credit and collection policies

REAL ESTATE FINANCE

The Real Estate sector started stabilising by FY20 after market developments like implementation of new regulatory framework such as Real Estate Regulatory Authority (RERA) and Goods and Services Tax (GST) reforms and demonetisation. This saw improvement in both residential and commercial space, with absorption outpacing new supply, thus leading to a decline in unsold residential inventory. Overall sales and supply remained highly subdued during the H1FY21, given the COVID-19 induced nationwide lockdown. Top developers drove the demand in this period through enhanced usage of digital platforms to engage with customers. Additionally, they also offered financial benefits, discounts and easy payment options. H2FY21 brought in buoyant sales owing to historically low home loan rates, pent up demand and support from select State Governments through stamp duty reductions. Gradual recovery was also witnessed in commercial absorption and new launches post the unlocking phase. Commercial office leasing rentals remained stable despite rental negotiations and discounts on renewals sought by occupiers.

Given the challenging market environment, your Company deployed calibrated approach towards fresh disbursements. During the year, your Company did not initiate underwriting to new project or developer and continued focusing on close monitoring of the existing portfolio. Your Company disbursed Rs962 Cr (down by 80%) while book was down 13% YoY.

Even though sales improved reasonably across the industry as well as for your Companys portfolio, your Company will be very selective for undertaking new sanctions. In the meantime, entire focus is shifted on project management, to ensure project progression as per plan. Improvement in housing sales and continued support to developers in construction progress have together facilitated strong uptick in escrow collections which surpassed YoY levels since Q3FY21.

Strategy

Continue lending to select chosen developers with focus on financial closure for project completion Continue Construction Funding (CF) support to maintain portfolio quality and ensure completion of funded projects Rigorous portfolio monitoring for identification and implementation of corrective action plan, if any

Business Key Differentiators

Using knowledge repository of the L&T Group to appropriately identify developers and projects Adopting digital-lending model for Home Loan to provide best-in-class TAT

Comprehensive and robust early warning signals framework Strong structuring/underwriting capability with focus on project completion

INFRASTRUCTURE FINANCE

The slowdown in the economy due to pandemic, impacted the overall infrastructure sector. Construction activities came to a halt, there were delays in payments from few off-takers and suspension of toll operations affected the infrastructure developers. However, the regulators took cognizance of this force majeure event, appropriately considered and implemented measures to compensate and/or facilitate the infrastructure project development. Infrastructure investment continues to be the key area of attention for the Indian Government. The Union Budget 2021-22 laid special emphasis on infrastructure sector, particularly on roads and renewables – your Companys focused sectors. With the enhanced outlay of Rs1.18 Tln for the Ministry of Road Transport and Highways, the allocation is ~32% higher than previous year, and augurs well for the sector. Allocation for NHAI increased by 17% (YoY) to Rs573.5 Bn. The Budget has placed prominence on monetising operating public infrastructure assets, foreign participation through InVIT route. Under renewables, an additional capital infusion of ~Rs1,000 Cr to Solar Energy Corporation of India Limited (SECI) and ~Rs1,500 Cr to Indian Renewable Energy Development Agency Limited (IREDA) are being done. Your Company decided to pay special attention towards its core strength areas in Infrastructure Finance. This strategic choice of sectors has been advantageous especially in the challenging COVID-19 scenario. Your Companys emphasis will continue to be on Infrastructure Finance – both greenfield and operational.

INFRA FINANCE

LTFH continues to be one of the leading players in

Infrastructure Finance business (special focus on Renewable, Road and Transmission) with disbursements assisted by continued momentum in sell-down. Your Company continues concentrating on projects with strong sponsors and off-takers with proven track record. Your Company disbursed Rs9,803 Cr in FY21 (down by 5%) while book was down 4% YoY.

Renewables: Industrys overall energy consumption turned positive since Q3FY21 with Renewables continuing to drive growth, underpinned by ‘must run status granted to operational renewable projects. Under the Discom package, more than Rs75,000 Cr has been disbursed to Discoms from over Rs1,36,000 Cr sanctioned – improving cashflows for these entities. In terms of your Companys portfolio, operational projects are being paid on time and most of the Discoms have also remitted payments.

Roads: The National Highways Authority of India (NHAI) granted a relief to the operational toll projects in the form of extension in concession period till the time collections achieve 90% of the average daily fee. Your Companys annuity projects are receiving timely payments from the NHAI. Lockdown imposed by the Government along with suspension of toll operations impacted the cash flows of toll projects across the country. Post gradual lifting of the lockdown and subsequent improvement in economic activity, toll collection for LTFH portfolio surpassed YoY level since Q3FY21 – reaching ~113% in Q4FY21.

Strategy

Continue focusing on financing greenfield and operational projects in Renewables, Roads and Transmission Focus on strong corporates and developers backed by global private equity players in Renewables and Road sector Conservative underwriting by considering cash flow volatility, offering appropriate tenor-based loans on project cash flow Focus on sell-down of both fund-based and non-fund-based exposures to various investors, thereby enabling churn of portfolio Continuous monitoring of portfolio to control credit costs Focus on early warning signals to identify risks and cash flow stress

INFRA DEBT FUND

The policy and regulatory framework for Infrastructure Debt Funds (IDF) announced by the Government of India (GoI) and the Reserve Bank of India (RBI), respectively, were targeted at providing an innovative solution to the asset-liability mismatch and group exposure issues faced by the banking system in India.

In FY21, through the subsidiary IDF, your Company continued to make significant progress towards achieving all the objectives indicated by GoI & RBI. Your Company also improved the viability of projects by providing long-tenor and low-cost structured refinance solutions. With significant overall market share and 0% impaired assets in FY21, your Company continues to be one of the leaders in refinancing of operational renewable energy projects in India.

Consequent to the merger of its sponsor, L&T Infrastructure Finance Company Limited with L&T Finance Limited, RBI has advised your Company to take steps to convert to an NBFC – Investment and Credit Company (NBFC – ICC) from an IDF – NBFC. Accordingly, your Company has commenced the process of such conversion. Bond issuances by your Company continue to be rated AAA by rating agencies CRISIL, CARE and ICRA. Redeemable preference shares issued continue to be rated AAA by CRISIL.

MUTUAL FUNDS

FY21 was an extremely volatile year for the mutual fund industry, starting with a significant impact on both the equity and fixed income side.

In continuation with the steep correction in markets in March 2020, and despite the one-sided run up from April 2020 to February 2021, there was a significant fear in the investors mind about equity based mutual funds throughout the year. This translated into a sharp decline in overall sales and resulted into significant redemption for equity based mutual funds. The fixed income segment was hit by the closure of a few schemes by a specific Mutual Fund house in April 2020 which led to investors flight towards safety. Investors preferred to redeem their investments in credit-oriented funds and re-invested them in bank deposits or high-quality AAA funds.

In response to these market developments, your Company undertook awareness campaigns and engaged with distributors and investors through web-enabled platforms. The objective was to emphasize focus on continued investment planning rather than churning assets due to one-off market events.

On the equity side, your Company also highlighted the steps taken towards proactive portfolio management, during such events. The portfolios were realigned more towards large cap category, which reflected positively with a broad market recovery during FY21. Your Company focused on enhancing its digital assets like ‘Digital Dost for distribution partners and has also launched a new mobile app to enhance the existing B2C connect. Your Companys AUM in FY21 increased from Rs54,937 Cr in FY20 to Rs72,874 Cr. The focus on high quality products led to significant growth in Debt AUM (excluding liquid/ overnight) which increased by 29% to Rs24,792 Cr. The equity AUM grew by 44% to Rs40,374 Cr and the equity proportion to total AUM now stands at 55%. The arbitrage segment also garnered significant flows on account of good fund track record. The AUM proportion of retail investors for your Company stands at 66%, compared to industry average of 54%, showcasing continued focus on retailisation.

Strategy

Continued engagement with distributors and investors Focus on hybrid schemes, large-cap equity schemes and high-quality medium to long term debt schemes Enhanced B2B and B2C reach through digital and web-based platforms

Business Key Differentiators

Retail-focused platform and granular distribution capabilities True to label style of fund management

POWER OF DIGITAL AND DATA ANALYTICS

Your Company has undergone a huge transformation in the last few years from being spread across multiple businesses to building distinctive positions in select businesses. Your Company has steadily and successfully grown its businesses from strength to strength with focus on delivering sustainable top quartile Return on Equity (ROE) with best-in-industry TAT in key products. Digital, IT & Analytics have been the core tools in this ingenious journey. Your Company has adopted this differentiated approach since 2016, realising that successfully reaching out to Rural India, beyond the metros, required a comprehensive and integrated digital roadmap. Thus, going beyond the prevailing lending practices, your Company adopted an end-to-end digital journey that has helped it achieve ‘scale and reach today.

Building effective digital processes and controls across the value chain helps the business deliver sustainable cost savings while benefitting customers. Your Company has evolved to own seamless processes by employing:

1) Smart Sourcing with Digital-first Approach:

Your Company focused on sourcing smart solutions in line with the changing eco system. Your Company established leading industry loan sanction time and disbursement TAT through:

Strengthened assisted sourcing process with digital enablement

Elimination of manual data entry and physical document verification by leveraging digital technologies like liveliness matching with Optical Character Recognition (OCR) as eKYC, and image-based mandate, among others, facilitating ready access to digitally validated documents with high recency Leveraged partner driven ecosystem and collaborations for process automations to drive growth – Digio, Hyperverge, and Karza, among others

Allowed 100% disbursements to the bank account of the customer Shifted to autonomous flows by establishing direct connect to customers through your Companys enriched and intuitive channel and self-help platform

Built on its capability to identify good customers and enable complete journey through few clicks, launched Consumer Loans piloting with TW loyalty program – a 100% paperless and fastest digital journey and simplification driving TOUCH FREE (Zero call center assistance) conversion.

2) Greater Understanding of Customers for Credit Decisioning: Adopted 100% automated underwriting process with analytics-driven decision making to prioritise customer use cases and to establish greater understanding of customers for credit decisioning by:

Hyper segmentation and profiling Behavioural analysis

Analysis of social behaviour on various digital channels Using alternate data sources like credit bureau and income tax statements, among others Taking help of Artificial Intelligence like liveliness matching and fuzzy logic to curb fraud Ability developed to underwrite customers who do not have any credit track record A thriving ecosystem of partners for getting customer financial data including banking services providers, strategic partners for niche areas and specialised offerings partners have made this possible.

3) Focus on Strengthening Collections:

Smartening the collections process and promoting shift to cashless economy with digital payments

Proactive monitoring of loans with Early Warning Signals Disproportionate focus on digital collections, eliminating the inefficiencies of cash Smarter management of bank mandates, figuring out the operational accounts

Touch-free collections with digital repayment options including e-mandate/e-NACH, payment gateway, net banking (NEFT, IMPS), wallet, and debit card Consolidated service to integrate with multiple payment enablers including Airtel, Paytm, PayU, ItzCash, Pay nearby, CC Avenue

4) Shift to Self-servicing:

Developed self-servicing capabilities with sharp focus on establishing an omni-channel connect offering greater customer convenience and retention

Leveraged mobile app channels to establish direct connect with customers, thereby reduced customer acquisition cost Employed chat-bots for seamless servicing Reminders and engagement via SMS and WhatsApp in local languages An impressive 10x growth was witnessed in interactions for all retail products on the self-help platform from around 10,000 interactions in July 2020 to almost 1,00,000 interactions in February 2021.

Your Company looks to continue leveraging the power of data analytics, build strategic competitive advantage, improve productivity and enhance performance with end-to-end digital proposition.

HUMAN RESOURCES

As a financial services provider, people are the greatest resource and the core strength to your Companys business. Your Company has consistently adapted, evolved and improved its human resource practices to match up the ever-changing workplace DNA. The pandemic forced everything to be maintained virtually. With 75% of your Companys people in frontline roles (required to be out in the field for regular work), the focus on health and safety was always vital. And the pandemic only underlined it further. Prioritising the safety and health of employees and their families was imperative for your Company. And so, your Company undertook multiple measures, ensuring access to preventive and curative healthcare and safety features for its people and their families.

In addition to the above, your Company continued its focus on developing people talent internally to ensure a strongly engaged, motivated and capable workforce, to help take the growth forward.

1. Policies and Programs for Employee Growth & Development, Appreciation and Satisfaction:

Capability Building: Your Companys talent strategy is performance-oriented and aligned with organisational goals. It encourages employees who have demonstrated the right capability, attitude and the desire to ‘Step Up. As a part of your Companys strategy to groom future-ready talent, it encourages cross-functional movements and upskills them through ‘Education, Exposure & Experience.

Rewarding Performance: Every measurable effort/ milestone achieved by an employee deserves utmost appreciation and respect. It is imperative that the top performers exemplify your Companys culture, live its values, and draw inspiration from them. Therefore, to felicitate these value champions, your Company has established STAR Awards, one of the biggest annual recognition platforms. This felicitation and awarding event propagates your Companys values and recognises employees who live by it. This year, the STAR Awards program was conducted and broadcasted on an interactive virtual medium. The event honoured employees for their stellar contributions, thereby encouraging them to keep performing extraordinarily. Additionally, in recognition of the outstanding and exceptional contributions of the employees throughout the year, an online Wall of Fame, Reward & Recognition platform was also instituted. Together, these practices serve to acknowledge your Companys gratitude to its biggest asset – its people – for their unstinted support and contributions while also motivating them.

2. Initiatives towards Building Future Leaders, Succession Planning:

Succession Planning is an important part of your Companys talent strategy. It helps de-risk any ‘vacancy risk associated with critical roles, thus ensuring business continuity.

The objectives of Succession Planning include: Ensuring availability of sufficient people of the right calibre to take over certain roles within the organisation, as and when the current incumbent moves on Ensuring sustenance and supporting the future growth requirements through right capabilities Ensuring development of high-potential talent within your Company through career paths aligned with the business succession needs The identified successors form a high-potential talent pool for your Company who need to be guided and developed further for taking up future succession roles ensuring a robust talent pipeline at all times.