L&T Finance Holdings Ltd Management Discussions.

STRONG PARENTAGE

Your company is the financial services arm of L&T group, one of the leading business conglomerates in India. Larsen & Toubro is a major technology, engineering, construction, manufacturing and financial services conglomerate, with global operations and addresses critical needs in key sectors - Hydrocarbon, Infrastructure, Power, Process Industries and Defence. The rich legacy and expertise across various businesses of the parent has helped your company in many ways:

Brand strength: L&T is the majority shareholder of your Company, with a shareholding of 63.72% as on March 31, 2020. The strong legacy of parent strengthens the brand resonance of your Company with all stakeholders.

Capital support: L&T provides capital support to your Company and has infused around Rs. 3,779 Cr till FY20 (including Rs. 2,000 Cr in FY18).

Liquidity support: L&T has provided an ongoing line of credit of Rs. 2,000 Cr to your Company, which could be used in times of contingency.

Involvement through Board and various committees: L&T has representation on the Board of your Company and also on its key business committees, such as asset-liability, risk management and credit committees responsible for management of liquidity, setting up the risk management framework and evaluation of the lending proposals.

Leverage L&T ecosystem for Portfolio Management: Your Company benefits from the synergies and expertise of L&T, especially in infrastructure and real estate lending. Your Company accesses the knowledge repository of L&T ecosystem to identify strong developers, build a monitoring framework and to manage risks such as project cost, cash flow and completion timelines. Your Company also leverages on the parents strengths to identify and execute corrective actions plans.

The continuous support of the parent has ensured that your Company is able to withstand the turbulent times and stand strong like a mountain.

MACROECONOMIC ENVIRONMENT

Indias GDP growth in FY20 continued on a downward growth trajectory which had begun in Q1FY19. The nation has been facing several structural stresses such as, sluggish private investment for more than six years, significant decline in savings rate for more than seven years and highest unemployment rate in the past 45 years. A broad-based consumption breakdown further accentuated the slowdown. The COVID-19 induced lockdown/social distancing measures started in March 2020 and put 75% of the overall economic activity into standstill. It consequently hastened the downward trajectory of GDP growth in Q4FY20 to 3.1%. For FY20, Indias GDP growth declined to 4.2% as compared to 6.1% in FY19.

On the sectoral front, deceleration in industrial and services activities contributed to the slowdown in GDP while growth in agriculture & allied activities accelerated during the year on the back of bountiful monsoon rainfall. While the rains were disruptive for Kharif crops, the healthy water reservoirs augured well for Rabi crops.

The slowdown in GDP growth had an adverse impact on Government revenue collections and the COVID-19 induced lockdown further exacerbated the situation. While revenues have suffered, the government expenditures rose significantly on account of additional costs arising from the virus containment efforts and enforcing the lockdown. Thus, actual fiscal deficit of the central government widened to 4.6% of GDP in FY20 which was significantly higher than its revised fiscal deficit target of 3.8% of GDP.

Financial markets remained jittery in FY20 due to domestic economic slowdown, concerns on fiscal slippage and geopolitical tensions. Weaknesses in overall economic activity also put pressure on business growth of lenders including NBFCs. The spread of COVID-19 in March 2020, further heightened uncertainties for Q4FY20. However, triple A-rated, large-sized NBFCs were relatively better placed with liquidity, comprising liquid assets, undrawn lines from banks, and in some cases funding lines from group companies.

NAVIGATING THROUGH COVID 19

Your Company is continuously reviewing the evolving situation in the light of COVID-19 and playing a responsible role in minimising the adverse impact of the pandemic on its businesses and the stakeholders interests. Adapting to the ‘new normal of conducting business, your Company realigned the work priorities by placing highest importance on risk controls and collections.

Your Company adopted a multi-pronged approach to collections by using data analytics, digitalisation and further strengthening the credit controls. Continuous monitoring of portfolios, tightening of LTV grid, increasing customer engagement, re-purposing of sales team to focus across various stages of debtors, aggressive tracking of Infrastructure / Real Estate project performances and receivables were some of the many initiatives undertaken by your Company for greater risks controls and better collection efficiency.

Protection and preparedness of business

Ensured Business Continuity Planning (BCP) by taking proactive measures before formal lockdown announcement

Your Company started actioning initiatives 3 weeks in advance of the lockdown and simultaneously ensured that the IT infrastructure and systems were in place, tested and checked

Necessary procurement, acquisition and relocation of infrastructure were undertaken, much before regional/national lockdown started

Your Company ensured smooth running of critical functions by spreading out staff to work from different locations with specified protocol and productivity tracking mechanism

The Risk Management Committee is constantly assessing and providing directions to mitigate all kind of risks

Adequate Liquidity

Your Company strategised funding plan in discussion with Asset Liability Management Committee and shored up its liquidity

The treasury strategy involved maintaining surplus liquidity for meeting debt maturities over the coming months, under stress scenarios

Your Company maintained higher than normal liquidity, remaining comfortably placed to meet all obligations of the following months

Surplus liquidity of 15,485 Cr as on March 31, 2020 included liquid assets of Rs. 8,468 Cr, undrawn bank lines of Rs. 5,017 Cr and back up line of Rs. 2,000 Cr from the parent, L&T

Safety of Employees

A dedicated group was created for the task force to monitor the queries and requirements of all the employees under the scenario of COVID-19

Your Company postponed all meetings / events of large gatherings and issued advisory for travel (both personal and business) in order to ensure the safety of our employees Sanitisation of workplace was carried out on a daily basis 100% of the employees were enabled to work from home by providing essential infrastructure like laptop, VPN and internet connection along with appropriate security mechanisms

Your Company organised a number of interactions of the employees with the in-house medical advisor on staying fit and taking care of their health during the lockdown

Care for Customers

In order to ensure seamless customer service, your Company took proactive measures and encouraged customers to prioritise the usage of digital facility for services, payments, and inquiry

Further initiatives were ramped up for digital collection through e-wallets and other digital payments

Your Company provided relief to borrowers in terms of extending moratorium for instalments falling due between March 1, 2020 to August 31, 2020 and communicated to them via various channels

The simplicity of the process to avail the moratorium and prompt communication through various mediums was appreciated by the customers

Resumption of operations

Your Company is gradually opening up the branches, except in the containment zones as mandated by the Ministry of Home Affairs, Government of India

Disbursements of loans, which were halted post lockdown announcement, are now slowly beginning to gain momentum

Appropriate safety measures and social distancing guidelines as mandated by the Ministry of Home Affairs, Government of India are followed in each branch that is operational

Social Responsibility

Contributed Rs. 20 Cr to PM CARES fund to support the fight against COVID-19 pandemic in India Supported the Mumbai Traffic Police by providing over 5,000 hygiene kits

Employees voluntarily contributed their two days gross salary and a matching grant was provided by your Company towards the cause (over Rs. 2.2 Cr)

OUTLOOK FOR FY21

As the pandemic has spread across the globe, the adverse impact of COVID-19 has overshadowed global macroeconomic outlook. Several multilateral agencies have projected recession for the global economy in the calendar year 2020 with the IMF (International Monetary Fund) warning of the worst global recession in almost a century.

The RBI estimates real GDP growth of India to remain in negative territory in FY21. Rating agencies and economic think-tanks have significantly reduced Indias growth projections for FY21 to -2% to -5% on the back of extended lockdown, factory shutdowns, supply chain disruptions, travel restrictions, reduced discretionary spending and recessionary outlook for the global economy.

To avert steeper decline in economic growth, major countries have used a mix of monetary and fiscal tools to ensure liquidity and credit flow to their economies. In India, while the RBI has been doing the heavy lifting, various policy measures announced by the Government in its Economic Package are perceived to be more useful in the medium to long term.

The nature of lockdown observed in India is amongst the strictest in the world, considering the domestic policy space to control its negative impact is limited. The consequent steeper decline in economic activities could adversely affect credit intermediaries and financial markets. Moreover, the broad-based economic slowdown will put pressure on the asset quality of lenders.

Outlook on inflation remains subdued during FY21 due to adequate buffer stocks in cereals, good rabi harvest, record decline in global commodity prices including the crude oil prices, reduced pricing power of firms due to demand contraction and expectations of normal monsoon rains in FY21.

The COVID-19 led disruptions have severely affected the fiscal arithmetic of both Union and State Governments. It is already reflected in the large additional borrowings envisaged by both Union and State Governments along with expenditure rationalisation measures including reduction in capital expenditure. Such steep rise in government market borrowings will have hardening bias on yields and put pressure on the cost of borrowings of companies and NBFCs.

POSSIBLE THREATS

Phasing out of lockdown/social distancing measures at a slower pace coupled with relatively tepid policy response could result in deeper recession in FY21 as compared to all ‘recessions India has ever experienced.

Such deep recession will increase the perception of credit risk and the consequent risk aversion could clog the credit channels. Rating agencies expect microfinance, unsecured loans and MSME borrowers (including the loans against property segment) will continue to be severely impacted for a prolonged period due to weak credit profile of borrowers amid a gradual economic recovery.

Sharp decline in government revenue receipts due to the extended lockdown and growth slowdown coupled with rising need for fiscal support will throw a spanner in the works of both Union and State Government finances. The combined fiscal deficit of the Union and State Governments may reach 12% of GDP in FY21. This can raise the risks of a subsequent ratings outlook downgrade, given the mix of low growth and rising deficit.

FY20 IN PERSPECTIVE

Even before the COVID-19 related slowdown, FY20 was a difficult year for the economy in general and more specifically the NBFC sector. NBFCs were impacted with a demand slowdown in core sectors, liquidity issues in the market, downgrades and solvency challenges and issues arising out of over-leveraging in certain geographical areas in the Micro Loans segment.

Despite the challenges in the external environment, your Company sailed through the storm and delivered strong performance. This can be credited to your Companys underlying core strengths of focused businesses, ability to raise adequate resources at the right cost, asset resolution capabilities and group synergies. Your Companys exposure of ~ Rs. 1,700 Cr to IL&FS group is through SPVs, and with 93% of the exposure classified as green; is a testament to your Companys underwriting and asset resolution capabilities. In Micro Loans, your Companys Early Warning Signals Framework helped in seeing signs of overheating in certain areas very early while consequently limiting the exposure.

Maintained Market Leadership

We remain on the path of consistent financial performance with steady profit margins, stable asset quality and growth in focused businesses i.e. Rural Finance, Housing Finance, Infrastructure Finance and Investment Management, where it has a clear ‘Right to Win.

Your Company remains amongst the leading financiers and it not only maintained market share across businesses but also gained share in Two-Wheeler and Farm Equipment Finance segment in Q4FY20. In the Home Loans segment, the share of salaried customers increased to 64% from 48% YoY in Q4FY20. It remains market leader in Renewable Energy Financing.

Prudent ALM, Enhanced Liquidity and Strong Liability Franchise

The NBFC sector has been facing liquidity related challenges ever since August 2018 after the IL&FS crisis came to the fore. There has been a flight to safety among debt market investors, which led to drying up of these sources for NBFCs. Your Company embarked on a diversification strategy in 2018-19 and raised funds through a series of retail NCD issues, with Rs. 1,500 Cr issued in March 2019. Your Company further raised Rs. 1,000 Cr in April 2019 and Rs. 1,408 Cr in December 2019. All the issues were oversubscribed and closed within 2 days of the issue opening. Your Company also raised Rs. 3,014 Cr through External Commercial Borrowing (ECB) and Rs. 3,993 Cr through Priority Sector Loans (PSL). Your Company thus, raised Rs. 9,415 Cr through new sources during FY20.

The regulatory framework also saw tightening with the introduction of New Liquidity Risk Management guidelines in November 2019, and stringent scrutiny of Asset Liability mismatches, undertaken monthly.

Your Company continues to follow conservative practices on ALM. This has helped us to keep credit metrics strong despite severe credit crunch in the sector. We maintained positive liquidity gaps in all buckets upto one year. Even after factoring the effect of moratorium as of March 31, 2020, the one-year Positive Structural Liquidity gap was Rs. 24,549 Cr.

In light of the prevailing situation, your Company maintained higher than normal levels of liquidity of Rs. 15,485 Cr as of

March 31, 2020, including pure liquid assets of Rs. 8,468 Cr. Your Company periodically undertakes liquidity stress testing. This is done under various stress scenarios for survival period of 30 days to assess the liquidity levels. Even under the stress scenario, your Company maintained positive liquidity levels.

We raised long-term funding from broad based sources garnering more than Rs. 28,000 Cr in FY20. This was the highest ever annual long-term borrowing, demonstrating our strong liability franchise. Further, the proportion of CPs in the overall mix has fallen to an all-time low of 6%, even though the ALM allows for a higher proportion.

Your Company demonstrated effective liability management through continuous improvement in quarterly WAC, despite focusing on diversification, reduction in CP and increase in long-term borrowings.

Even under the COVID-19 lockdown situation, your Company mobilised term-borrowings of ~ Rs. 5,000 Cr in April 2020.

Highest Credit Rating

The NBFC sector, in general, continued to witness stress throughout the year. However, even in this scenario, your Companys existing ratings were reaffirmed at ‘AAA by India Ratings, CARE and ICRA. CRISIL conducted rating exercise for L&T Financial Services for the first time and assigned a highest long-term rating of ‘AAA in October 2019.

Further, India Ratings and CRISIL recently reaffirmed the AAA ratings post lockdown, during April 2020 and May 2020, respectively.

Strong Balance Sheet

Your Companys focus on building a comprehensive Early Warning Signals framework, concentration on early bucket collections and strong Stage 3 resolution efforts have helped achieve reduction in Stage 3 assets on YoY basis.

GS3, on principal outstanding basis, declined from 5.90% in FY19 to 5.36% in FY20 (NS3 reduced from 2.40% to 2.28%) In the Rural business, investment in data analytics and emphasis on a Zero DPD book helped achieve a significant reduction in NS3 from 1.34% last year to 0.89% this year, a segment benchmark

Your Company continues to be well protected on account of significant provisions built over time. With the deterioration in the risk environment during Q4FY20, we have a total additional non GS3 provision of Rs. 664 Cr. This includes:

• Rs. 209 Cr of COVID-19 provisions equivalent to 5% of the portfolio availing moratorium, as per RBI guidelines

• Rs. 105 Cr of additional special provisions

• Rs. 350 Cr of Marco Prudential Provision created in the earlier years

Overall, your Company has created Rs. 1,061 Cr of non-GS3 provisions (including standard asset provision) to deal with any challenges arising out of possible negative scenario. We remain well capitalised with strong capital adequacy ratio of 21.60%.

Portfolio Management and Early Warning Signals

Data analytics has been an integral part of Portfolio Management and Early Warning Signals. These have always underlined the risk control measures in retail segment. For Real Estate and Infra portfolio, our conservative and cashflow based underwriting to strong corporate groups along with continuous project monitoring has continued to serve us well. During these unprecedented times, in addition to the strong risk management framework, your Company took the following additional portfolio actions to deal with the current scenario:

a) Impact assessment on business-wise portfolios using stringent stress case scenario

b) Tightening of Loan to Value ratio (LTV) grid, reduction of maximum LTV offered under regular schemes to improve portfolio quality

c) Usage of analytics and bureau information to strengthen collections in adverse scenario

d) Disproportionate focus on setting up and increasing utilisation of digital payment framework for collections

e) Monitoring projects remotely with heavy use of technology and reassessment of cash flow positions in Construction Finance and Infrastructure Projects, based on current market conditions to ensure project completion

Continuation of Strategic Initiatives

Undeterred by the COVID-19 outbreak, your Company continued to make good progress on strategic initiatives. Reduced defocused book by 50% YoY from Rs. 10,365 Cr to Rs. 5,230 Cr

Completed sale of domestic Wealth Management business

Commenced the merger of lending entities in continuation of the strategy to simplify the corporate structure

FINANCIAL RATIOS

Your Companys Operating Profit Margin during FY20 was at 18.91% vs 23.50% in FY19. Net Profit margin was at 11.69% vs 16.78% in FY19.

The COVID-19 lockdown had minimal impact on the operating performance of your Company in FY20. The profitability was impacted largely due to the incremental provisions taken to strengthen the balance sheet against the after effect of the pandemic.

Rural Finance

During the year, your Company continued to strengthen its ‘Right to Win by maintaining leadership position across businesses. Through rigorous usage of analytics driven Early Warning Signals and culture of ‘Zero DPD, the asset quality showed remarkable improvement with NS3 falling to sub 1%, amongst the best in the industry. Your Company has introduced a new offering under the Consumer Loan segment targeting existing prime customers.

Key Differentiators

Ability to execute strategy on ground with required scale Identification of growth areas through macroeconomic factors and market data analysis to increase market penetration in chosen geographies

Robust Early Warning Signals with automated triggers to maintain quality of lending book

Farm Equipment Finance

While the market has de-grown by 9% with sales of 7.8 Lakh tractors during the year, your Company disbursed Rs. 3,821 Cr of Farm loans, disbursements being flat YoY. Despite subdued sales in the month of March, your Company has shown a healthy growth in book by 15% for FY20. This helped LTFH maintain its market share in the Farm Equipment Finance industry. Your Company has built rich customer base by providing tractor financing services for the last 15 years. Your Company is now extending refinancing facility to prime customers with good credit and payment history. Refinancing business contributed 13% of the total business in FY20.

Your Company further strengthened its ‘Right to Win in the business by moving to desired OEM and asset mix and by de-risking over-dependencies. Disbursement from preferred OEMs now contributes 73% of the total disbursements in FY20. In the first half of the financial year, the sector saw slowdown owing to uneven rainfall, fluctuations in reservoir level and higher inventory. Early green shoots were visible after the festive season. However, with the COVID-19 pandemic, the industry growth is expected to be negative for FY21.

Strategy

Leverage adjacencies to create market leadership Strengthen top dealers penetration through differentiated offerings

Enhance TAT proposition and ensure rapid scale through digital and analytics

Two-Wheeler Finance

In FY20, the Two-Wheeler industry saw a 18% de-growth in domestic sales due to overall economic slowdown from the beginning of the fiscal as well as the nationwide lockdown at its fag end. Through rigorous execution of digital proposition on the ground and domain expertise, your Company has been able to remain amongst the leading financiers in Two-Wheeler finance in FY20. The year also saw the Company book increase by 15%.

A new scheme, ‘Sabse Khaas Loan was introduced to target the financially prudent customers with no hypothecation and lower rate of interest as compared to credit cards. Your Company disbursed an amount of Rs. 91 Cr, benefiting over 18,000 customers.

Your Company focused on touch-free collections which accounted for 32% of the total collection in FY20. Touch-free collections aim at minimal to no contact with customers for collection of dues. With this facility, customers can seamlessly make payment digitally or by visiting nearest payment bank.

The sector witnessed many challenges due to economic slowdown. There was also procrastination of buying decisions due to expectation of discounts on account of transition to BS-VI and increase in price of Two-Wheeler due to regulatory changes. The business segment mitigated these challenges primarily by diversifying through tie-ups with other OEMs and bringing innovative products to target unfinanced creditworthy customers.

Strategy

Analytics driven selection and differentiated offerings to preferred OEMs to increase market share

Usage of analytics for collection prioritisation and contact enhancement

Build strong income proof proposition

Micro Loans

The industry has grown by ~20% YoY on the back of enhanced needs and growing aspirations of microfinance customers across the country. Disruptions on account of union protests coupled with CAA protests caused repayment issues in Assam. At the back end of the year, the disbursements as well as collections were adversely impacted due to the COVID-19 outbreak and the ongoing nationwide lockdown.

Your Company has always helped uplift the women of India by providing loan to women borrowers normally in rural and semi urban areas who depend on dairy, grocery shops and similar allied activities for earning their daily livelihood. This year, over 28 Lakh women benefited from disbursements made through various schemes.

Your Company has introduced the ‘Mid Term Renewal Product scheme (MTRP) in the month of July. This scheme aims to provide pre-approved early repeat loans for existing customers with excellent repayment history. Since its inception, the scheme has benefited over 3.8 Lakh customers. Repeat business contributed 40% to the total business in FY20.

Strategy

Increasing the proportion of our existing good profile customers and building repeat book

Reduction of association norms and tightening of exposure norms thereby strengthening credit criteria

Setting up digital payment framework like UPI, wallet, NEFT and online payment gateway to further strengthen collections

Consumer Loans

Your Company launched a pilot run of Consumer Loans in Q3FY20 and has disbursed personal loans to 11,794 active customers. The total book size of the Consumer Loans portfolio stands at Rs. 154 Cr. Your Company leveraged the strong Two-Wheeler customer base and offered personal loans to its prime customers with good payment history. The loans are provided on an end-to-end digital platform thus making it a smooth and 100% paperless journey for its customers.

Strategy

Harness analytics capabilities towards creating bureau based underwriting scorecard

Leverage partnerships to build additional channels of sourcing for future up sell and cross sell

Robust Early Warning Signals with triggers in place to maintain portfolio quality

Housing Finance

In FY20, amidst the economic slowdown accompanied by slower GDP growth, the sector faced liquidity constraints. Moreover, growth was further impacted at the end of FY20 due to COVID-19 related lockdown.

Given the challenging market environment, your Company deployed a calibrated approach in assessment of customer profiles and developer projects. This led to your Companys Housing Finance book growth to remain muted at 4%.

Your Company focuses on direct sourcing of Home Loans with emphasis on best-in-class digital offering for low-risk salaried customers. In Real Estate Finance, your Company continued focusing on lending to Category A developers as it helps in leveraging relationships to provide Home Loans. Your Companys expertise lies in close monitoring of the project and tracking Early Warning Signals for any potential stress.

Key Differentiators

Use of knowledge repository of L&T group to appropriately identify developers and projects

Digital-lending model for Home Loans to provide best-in class turnaround time (TAT)

Comprehensive and robust Early Warning Signals framework

Strong loan structuring and underwriting capability with focus on project completion

Home Loans

The Housing Loan portfolio of HFCs and NBFCs reduced due to continued funding constraints and portfolio sales during the year. This was further accentuated on account of lower disbursements in March 2020 resulting from the COVID-19 lockdown, thereby impacting the overall quarterly disbursements.

However, low mortgage penetration in India and the Governments continuous focus on ‘Housing for all through various initiatives, augurs well for the long-term growth of this segment.

Your Company focuses on the Home Loan market through its presence in 22 locations across India. Our digital lending model, leading to paperless sanction of Home Loans to salaried customers, is a unique offering that has helped in quick turnaround of proposals.

Our Home Loan book has grown from Rs. 6,243 Cr in FY19 to

Rs. 7,770 Cr in FY20, registering a growth of 24%. While Home Loan disbursements registered an overall decline of 2% from Rs. 2,661 Cr in FY19 to Rs. 2,612 Cr in FY20, the disbursements towards salaried segment grew by 23%.

In FY21, your Company will continue to focus on direct sourcing of low-risk salaried customers through developer relationships and analytics led sourcing.

Loan against Property (LAP)

An adverse business environment for MSME segment in FY20 coupled with the COVID-19 related lockdown further affected the cashflow and liquidity position of the LAP segment. Given the increasing risk perception, industry is expected to be conservative while lending in this segment.

Your Company continued its cautious approach in sourcing LAP proposals through policy tightening for assessment of self-employed profiles. Due to this, LAP disbursements witnessed a de-growth of 48% from Rs. 1,144 Cr in FY19 to Rs. 591 Cr in FY20. As a result, there was a decline in the share of LAP book of Housing Finance from 17% in FY19 to 15% in FY20.

In FY21, your Company will continue to adopt a cautious approach towards sourcing LAP business.

Strategy

Continued emphasis on increasing the share of direct sourcing through use of internal and external database for cross-selling

Leverage relationships with Real Estate developers for sourcing Home Loans with focus on salaried profiles

Cautious approach towards sourcing LAP business

Strong focus on resolving early-bucket delinquency through portfolio monitoring and dynamic alignment of credit policy

Real Estate

The Real Estate sector started stabilising in FY19, post market developments like implementation of new regulatory framework (RERA, GST reforms) and demonetisation.

Improvement in both residential and commercial space, in a limited manner, continued in FY20 with sales outpacing supply, leading to a decline in unsold inventory. There were fewer residential launches as developers focused on completion of existing projects. These releases were largely concentrated in the affordable and mid-segment, in line with the demand. In CY19, commercial office leasing witnessed an all-time high of 61.6 Mn Sq. ft., growing by more than 25% YoY.

The onset of COVID-19 pandemic and the associated lockdown, will temporarily impact the construction progress and sales velocity. The sectors pace of recovery in FY21 may be subdued.

Your Company has established a strong risk management framework and it leverages on the strong L&T knowledge ecosystem to identify top developers and incorporate best practices in project monitoring.

Your Company continues to focus on Category A and B developers with proven track record of project completion and ability to sell. Currently, 75% of our exposure is towards Category A developers. Robust underwriting with focus on project completion while maintaining strong security & cash flow cover and strong Early Warning Signals through project monitoring have been the key differentiators for your Company. Your Company is the sole lender in almost all projects financed.

In line with the economic slowdown and tightened underwriting policies, the Real Estate Finance disbursement of your Company had a de-growth of 26% from Rs. 6,633 Cr in FY19 to Rs. 4,877 Cr in FY20. Your Companys Real Estate loan book had a de-growth of 1% over the last year to stand at Rs. 14,933 Cr in FY20, whereas contribution of commercial portfolio increased from 10% in FY19 to 18% in FY20.

Your Company will continue supporting completion of existing projects and focus on selective sourcing with right loan structuring and underwriting.

Strategy

Continue lending to select developers with focus on financial closure for project completion

Review and strengthen underwriting parameters, ensuring portfolio quality

Close monitoring of projects for identification and implementation of corrective action plan

Infrastructure Finance

FY20 was impacted by tight liquidity conditions leading to a slowdown in both disbursements and sell-down activity in the market. Your Company decided to further sharpen its focus on its core strength areas in Infrastructure Finance, where it commands leadership position i.e. renewable energy, roads and transmission.

FY20 also witnessed the black swan event of COVID-19 towards the end of the fiscal year. A slowdown in the economy and nationwide lockdown imposed by the Government impacted the overall infrastructure sector. Halt in the construction activities will have a time and cost over-run impact on the under-construction infrastructure projects. For operational projects, delay in payments from few off-takers and suspension of toll operations impacted the cashflow of infrastructure developers. However, the regulators took cognizance of such a force majeure event and are appropriately considering measures to compensate and/or facilitate the infrastructure project development.

Infrastructure investment continues to be the key focus area of the Indian Government. Its focus got reiterated with announcement of the National Infrastructure Pipeline (NIP) that envisages a projected capital expenditure of Rs. 111 Lakh Cr for core infrastructure sectors from 2020 to 2025. Road sector continues to be one of the core development sectors for the Government with a planned capital expenditure of Rs. 20.3 Lakh Cr under the NIP. Further, with an aim to increase the renewable energy capacity in India to 265 GW, and share in overall consumption to 20% by 2025, the NIP emphasised a capital expenditure of Rs. 9.3 Lakh Cr for the renewable sector.

Going forward, your Companys emphasis will be on Infrastructure Finance - both greenfield and operational.

Key Differentiators

Leadership in focused infra sectors: renewables, roads and transmission

Strong credit appraisal, structuring, risk and asset- management expertise with industry-leading down- selling book

Infra Finance

Your Company has built sustainable advantages in terms of its strong underwriting ability and sell-down capabilities in its focused infrastructure financing segments. We see continued sustainable growth opportunities in these segments viz. Renewable energy, Roads and Transmission. Further, your Company also strategically entered into funding of City Gas Distribution (CGD) projects, as a step towards diversification.

In FY20, tighter liquidity conditions and increase in uncertainty due to COVID-19, led to a slowdown in both disbursements and sell-down activity. Your Company is taking appropriate measures and actions to monitor and protect its portfolio quality. Expertise and knowledge through L&T ecosystem help the Company manage its risks like measuring project costs, project cash flows and completion timelines through rigorous project monitoring.

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 consequent 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 Signal to identify risks and cash flow stress

Leverage on group strengths to identify and execute corrective action plans

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 FY20, the sixth full year of operations, through the subsidiary IDF, your Company was able 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 a significant incremental market share and 0% impaired assets, your Company continues to be one of the leaders in refinancing of operational road and renewable energy projects in India.

Strategy

Continue to focus on 4 sectors - solar power, roads & highways, wind energy and transmission.

Provide refinance solutions to projects in new sectors, geographies, promoter groups and business models

Further diversify sources of funding and optimise leverage and returns

Mutual Funds

FY20 has been a challenging year for the industry due to market volatility coupled with credit and liquidity issues in the industry.

The Mutual Fund industry in India witnessed a 11% growth in FY20, increasing the Average Assets under Management (AAUM) to Rs. 27,03,676 Cr as compared to Rs. 24,44,838 Cr in FY19, mainly on account of Index and ETF funds.

The average AUM of your Company in FY20, amounting to Rs. 71,056 Cr, remained flat as compared to Average AUM of Rs. 70,944 Cr in FY19. Increase in credit concerns in the external environment and shutting down of 6 schemes by a fund house resulted in heavy redemption from credit oriented funds across the industry. Focus on longer tenure and high-quality fixed income products led to increase in AUM of fixed income assets by 15.24% in FY20.

Key Differentiators

Superior long-term risk adjusted returns

Continued focus on retailisation of assets with diversified mix of distributors and customers

Strategy

Continued focus on building core assets to achieve the dual purpose of higher profitability and stability in overall AUM

Using data analytics to capture under-penetrated market

Broad based growth with customer-centric approach and focus on digital innovation

Higher engagement with distributors

Leveraging the digital/social channels to increase engagement with individual customers

Major Regulatory changes in FY20:

Reduced TER implemented from April 1, 2019

Tightening of investment norms in fixed income Controls on downgraded securities

Exit load introduced in liquid category with a limit of 7 days

All categories to be mark to market in FY21 with no exception of tenure of paper

DIGITAL AND DATA ANALYTICS

Over the last few years, your Company has established a culture of using a strong data analytics-based algorithmic platform which resulted in completely transforming LTFH in a way such that technology orchestrates all the processes. This is at the core of our ‘Right to Win framework in all the focused businesses.

The use of data intelligence has led to robust business processes thus leading to a multi-fold improvement in ‘Scale, ‘Cost Effectiveness and ‘Customer Experience.

This power of digital and data analytics has enabled your Company to optimise customer acquisition, credit cost, collection cost, productivity, cost of service, as well as designing value proposition for higher customer wallet share apart from the usual cross-selling of products or customer acquisition initiatives. It has also helped your Company establish seamless fraud detection and loan disbursements processes to new customer segments through its assisted Mobile App technology, bringing about ‘Anytime Anywhere banking to its users. Data analytics-based approach has helped your Company increase / maintain market share as well as enhance customer value while maintaining asset quality and operational efficiency.

Leverage Digital and Data Analytics to create Long-Term Customer Value

Your Company is taking sustained efforts towards digitalisation of processes. Paperless on-boarding and verification process of customers have been introduced using e-KYC, e-sign, e-stamping, thus ensuring better turnaround time (TAT) and reduction of costs.

Digitalisation has improved customer interface by providing access to quick, hassle free loans, customised products and transparent disbursements thus leading to improved customer satisfaction and stronger relationships.

Analytics are deployed not only during the customer acquisition process but also during collections by bucketing customers according to their propensity to pay. Data from the credit bureau reports, credit history of the customer, demography, exposure to other lenders, regional influences (climate, political disturbances) etc. are analysed to detect and predict early warning signals at both individual and geographical level. The ability of our digital platforms to guide businesses was well exhibited in successive lockdowns during COVID-19 where it helped your Company reach out to a large number of customers. Your Company enabled digital repayment alternatives for all its Rural, Home loans and LAP customers by associating with numerous payment partners. Starting from NIL digital repayments in Micro Loans in February 2020, consistent efforts from your Company translated into over 31,000 digital repayment transactions in May 2020. The total number of digital repayment transactions have seen a 3 fold increase from about 38,000 in April 2019 to over 1,25,000 repayments in May 2020

Digital Ecosystem - Bringing in Agility and Efficiency

Our thrust on technology enables us to provide financial services at the doorstep of individual customers. Adoption of mobile-based platform and automated processes has led to a reduction in TAT for loan sanctioning and disbursement. Few more offerings that come along with it are: Implementation of straight-through-processing to speed up transaction turnaround time Migration from lengthy, manual, time-consuming, human judgement-based underwriting process to extensively using analytics and technology to provide instant, real-time approvals Increased integration of third-party providers to drive operational and cost efficiency and augment capabilities Training of front-line collectors to represent organisational values and maintain a customer-centric approach Your Company is using the power of data analytics, and digitalisation to build strategic competitive advantage, improve productivity and enhance performance.

HUMAN RESOURCES

Business landscape across the world is marked by fast evolving dynamics. These demand agile responses while keeping the long term focus intact. Your Company is led by highly experienced and successful business leaders with proven track record of delivering sustainable growth in demanding business environment.

As of March 31, 2020, your Company had a headcount of 23,761.

Culture Based on Values

Competing on the strength of our people, all of us are bonded together by core values of Pride, Integrity, Discipline and Ambition. We thrive in this climate of ‘Right People for Right Culture. Your Company has consciously built an entrepreneurial and empowering culture of ‘Results, Not Reasons. Our culture emphasises on having a workforce that is diverse, agile, eager to learn and driven to succeed. We have modeled ourselves as a learning organisation by focusing on ‘Stretch - Learn and Grow.

Capability Building

Consistent with our ambition, our talent strategy is performance-oriented and in alignment with our organisational goals. Your Company encourages employees who have demonstrated the right capability, attitude, and the desire to ‘Step Up. As a part of our strategy to groom future-ready talent, we encourage cross-functional movements and up-skill them through ‘Education, Exposure and Experience.

Performance Management

Your Company believes that performance management is an ongoing and continuous communication/interaction process between supervisors/managers and employees, carried out throughout the year. Our performance management process aligns to the goals of each employee with that of the organisation. In addition to the goal setting process, your Company believes that managers and senior leaders play an immensely important role in ensuring sustained high performance of their respective teams. This conscious way of managing performance is built into our ‘Leading Performance Program. The Program helps in realignment of understanding about key performance drivers, performance management at different levels and the cultural anchors on which sustainable performance is based.

Another critical aspect of performance management that our organisation focuses on is the linkage between performance and rewards which is clearly communicated to all employees on an ongoing basis. All employees have a clarity about how a certain level of performance would result in both monetary and non-monetary rewards. The hard work and success of our people regarding performance are rewarded by a structured forward-looking and market competitive compensation management. This compensation management also rewards value creation for our various stakeholders.

Employee Benefits and Welfare

We strongly believe that taking care of our employees is of utmost importance. In line with our policy of Employee Care, we keep assessing the evolving needs of our employees and work towards offering the best-in-class benefit programs. Your Company provides all full-time employees with a wide range of benefits. These include gratuity, health care coverage, insurance (medical, accident and life), parental leave, leave encashment, ESOPs, pensions and provident fund. All employees are eligible to participate in the Matching Grant Scheme (MGS). This is a wealth creation opportunity in which the organisation matches (subject to limits) the investment made by the employee in any of the L&T Mutual Fund schemes. Your Company places great significance on safety and well-being of its employees. We ensure ergonomic workplace design, proper sanitation facility and regular health check-ups.

Your Company is an equal opportunity employer. We have adapted meritocracy as the norm which helps us build a forward-looking organisation that can deal with the ever-changing business landscape.

RISK MANAGEMENT

Your Company, in pursuit of its business objectives, is exposed to certain risks such as credit risk, market risk, liquidity risk and operational risk. These risks have the potential of impacting the financial strength, operations and reputation of your Company. Keeping this in mind, your Company has a Board-approved Risk Management Framework in place. The effectiveness of this framework is supervised periodically by the Risk Management Committee (RMC). The hallmark of your Companys Risk Management function can be attributed to its independence from the business units with the convergence only at the MD & CEO level, to provide guidance during challenges, underscore oversight and balance the risk/reward decisions.

Your Company employs an Enterprise Risk Management Framework across the organisation and in all risk types underpinned by risk culture. The Risk Management framework includes Risk Appetite Statement, Risk Limits framework, Risk Dashboards and Early Warning Signals.

Your Companys risk appetite sets out the desired forward-looking risk profile and provides an objective base to guide strategic decision-making. This helps ensure that planned business activities provide an optimised balance of return for the risk assumed, while remaining within acceptable risk level. The RMC reviews your Companys risk appetite on a quarterly basis to make sure it remains fit for purpose.

Your Company conducts stress tests to assess the resilience of Balance Sheet. This also helps provide insights to the Management to understand the nature and extent of any vulnerabilities, quantify the impact and develop plausible business-as-usual mitigating actions. The market witnessed substantial turbulence in the previous year, stemming from multiple sources impacting the industry. However, as your Company fundamentally has been built on the principle of sound risk management practices, it has successfully weathered the market turbulence and continues to remain resilient.

On a periodic basis, your Companys Risk Management function commissions an external independent firm to review the Companys approach to risk appetite which helps ensure that we remain in line with market best practices. Your Company is currently in the process of further upgrading its risk framework with the help of an external firm. The key objective of this review exercise is to enhance the effectiveness of stress testing program for assessment of capital strength and earning volatility. This is done through a rigorous examination of your Companys resilience to external macroeconomic shocks. The focused strategy of building an effective risk culture and framework has helped your Company stay ahead as one of the leading NBFCs with highest credit rating of AAA.

With the objective of growing sustainably, your Company has put in place an effective Risk Management framework comprising:

Risk Management strategies and policies: A well-defined risk appetite statement covering company-wide overall risk limits, dovetailed with detailed individual/sector/ group limits, covering multiple risk dimensions.

Effective Risk Management processes and procedures Robust internal control systems supported by continual information gathering

Appropriate and independent Risk Management structures with clearly defined risk metrics for continuous monitoring by RMC

Credit Risk

Your Company implemented a comprehensive underwriting framework to guide individual businesses to optimum credit decisions. This is backed by clearly defined risk limits across various parameters including products, sector, geography and counterparty. Further, effective review mechanism with state-of-the-art early warning signals are in place to promptly identify potentially weak credit with a high emphasis on maintaining "Zero DPD". Your Company has been able to ensure stable asset quality through volatile times in the difficult lending environment further exacerbated by COVID-19 pandemic, by stringently adhering to the aforementioned prudent risk norms and institutionalised processes.

Your Company has a conservative and prudent provisioning policy. As per the recent RBI notification on acceptance of IND AS for regulatory reporting, it computes provision as per IND AS 109 as well as per extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP). If the impairment allowance in aggregate, under Ind AS 109, is lower than the provisioning required under IRACP (including standard asset provisioning), the difference is appropriated from net profit or loss after tax to a separate ‘Impairment Reserve. Your Company has taken incremental provisions to strengthen the balance sheet against the after effect of the pandemic.

Operational Risk

Your Company has an effective and proactive Operational Risk framework which is overseen by the Operational Risk Management Committee. The team monitors operational risks and incidents to ensure that each process and system continues to be robust. Periodic process walk-throughs are conducted to check controls. They also help identify redundancies in processes which can be weeded out to enable your Company to stay competitive in a fast-moving digital environment.

Market/Liquidity Risk

Your Company is safeguarded against any market or liquidity risk owing to prudent approach of continuously maintaining a positive liquidity gap on a cumulative basis in all the time-buckets up to 1 year. Along with this, maintaining an adequate liquidity buffer at consolidated and at each lending entity level further safeguards your Company. Such conservative and prudent liquidity risk management measures and practices adopted by your Companys Management demonstrates the robustness of our asset-liability management during the COVID-19 related stress. Your Company continues to maintain a positive interest rate sensitivity gap over a one-year horizon, as a mitigant against interest rate risk in balance sheet. Regular liquidity and interest rate stress testing, which takes into account various stress scenarios, has helped your Companys management to calibrate its response to the evolving market conditions related to liquidity and interest rate changes.

IT Security Risk

Your Company has laid out processes to identify, monitor and mitigate IT Security Risks. Pursuant to the security gap and vulnerability assessments carried out on a continuous basis, your Company has established a secure IT platform to run the business safely. Cyber Security is integrated in the IT Security policies and procedures to mitigate the risk.

In addition to the IT Infrastructure with multiple layers of security and in-depth defense by design, your Company has defined Early Warning Signals to detect and respond to cyber threats. There is a process for regular review of access to protect from insider threats and frauds. Employee education programs are also conducted on dealing with security risks and cyber threats. The office IT security protocols have been further upgraded with secure access from outside to systems through a regularly monitored VPN access, as a result of the work-from-home environment during the lockdown.

Note: For details on internal control systems and their adequacy please refer the Boards Report.

CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) is an integral part of your Companys philosophy. The governance of social footprint is administered through a Board-level CSR Committee. The CSR Committee formulates the guiding CSR policy and stipulates a framework for its effective functioning. The policy outlines the activities to be undertaken by your Company for creating sustainable value for communities.

CSR Vision

We aspire for an inclusive social transformation of the rural communities we serve, by nurturing and creating opportunities for sustainable livelihoods for them.

CSR Mission

Our mission is to reach marginalised farmers and women micro entrepreneurs in the rural communities that we serve and work towards rejuvenating their eco-systems, thereby creating sustainable livelihoods and enabling financial inclusion.

Alignment with Sustainable Development Goals (SDGs)

The Sustainable Development Goals are the blueprints to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environment degradation, prosperity, peace and justice. LTFS ensures that all their projects are in alignment with the SDGs so that they can contribute in a more sustainable manner.

CSR Approach

Accountability and assurance are ingrained in the ethos of your Company. The same transcends with CSR as well, wherein a project-based accountability approach is adopted to emphasise the long-term sustainability of CSR projects. To ensure utmost transparency and accountability of each rupee spent on CSR intervention, impact assessments are conducted by third parties.

CSR Thrust Areas

Your Companys CSR activities are spread across the following thematic areas:

Digital Financial Inclusion for Rural Women Empowerment Integrated Water Resource Management Disaster Relief Road Safety

a. Digital Sakhi: Empowering Rural Women through Digital Finance

Your Companys flagship CSR Programme - ‘Digital Sakhi - aligns itself to Government of Indias vision of creating a Digital India where the focus on financial literacy has been on digital modes of payments. However, we believe that financial literacy should be complemented by livelihood creation to ascertain interest and participation of communities in the Programme. This Programme focuses on the Sustainable Development Goal (SDG) 5 - Gender Equality with Digital Finance as an enabler. It is premised on the ‘Theory of Change of building a network of Digital Sakhis who can educate, influence, and help their communities access the digital finance fabric effectively.

Beyond providing pathways to formal finance access by rural women in communities, the programme allows women to pursue a path of entrepreneurship and sustain their livelihoods. Digital Sakhis play the role of trusted advisors not just to women, but also to the larger rural

b. Jalvaibhav: Integrated Water Resource Management (IWRM)

Your Company has a mission of reaching out to marginalised farmers in rural communities. We strive towards strengthening the ecosystem of these farmers by creating opportunities for sustainable livelihoods. Keeping this in mind, your Company has been implementing the IWRM Project - Jalvaibhav - in the rural areas of Maharashtras Marathwada region, since FY16. The Programme was initiated in 12 villages of Dharur block in Beed district.

Post interaction with the stakeholders (farmers and key opinion leaders) through block-level stakeholder workshops, your Company has been working on supply side watershed interventions as well as addressing challenges of climate change in agriculture.community. In FY20, Digital Sakhis reached out to 4.75+ Lakh community members through door-to-door dissemination of digital financial literacy modules.

Amidst COVID- 19 Digital Sakhis across all project locations played an active role in helping the fellow villagers with necessary online payments. They launched various awareness initiatives and worked to ensure that various government benefits reach migrant and agricultural labourers, differently-abled people, widows and senior citizens. Women entrepreneurs of the ‘Digital Sakhi programme were also involved in large-scale production of face masks which were then distributed within the communities where they reside.

In FY20, Jalvaibhav was scaled up to add six other districts, Osmanabad, Latur, Solapur, Aurangabad, Jalna and Buldhana, in and around the Marathwada region. The programme now covers 122 villages and has managed to reach out to 60,000 farmers.

c. Disaster Relief

Relief and Rehabilitation is an important component of your Companys CSR policy. L&T group contributed Rs. 150 Cr to the PM Cares Fund to support the nation in its fight against COVID-19, of which Rs. 20 Cr was contributed by your Company. Furthermore, understanding that police were at the forefront of fighting the pandemic along with health practitioners, LTFH deployed its CSR funds and distributed over 5,000 hygiene kits to Mumbai Traffic Police (MTP) considering their vulnerability to infection and high-risk exposure. Recently, Odisha, Kerala, Bihar, Karnataka, Assam, and Maharashtra suffered from one of the most frightful floods in their history. Our employees tirelessly dedicated themselves to provide relief packages to the affected people. A total of 71,996 beneficiaries were reached out in FY20.

d. Road Safety

Every year, thousands of lives are lost on the roads nationwide, and therefore, it is becoming increasingly important to teach our children about road safety. This is crucial as they are the countrys future responsible citizens. A Road Safety module was developed which reached out to 3,869 students from 22 BMC schools in FY20. In addition to this, your Company also partnered with Mumbai Traffic Police to provide livelihood support to 20 young traffic wardens.

Boondein (Employee Volunteering Initiative)

Through Boondein, your Company attempts to create a culture of sharing. Here, the employees directly work towards a social change by building capacities of the lesser-privileged communities. Employees often volunteer in your Companys Disaster Relief efforts, thereby augmenting the impact on the ground.1,500+ employee volunteers 80,600+ volunteering hours 72,100+ beneficiaries