mahindra mahindra financial services ltd share price Management discussions

Mahindra & Mahindra Financial Services Limited – An overview

Mahindra & Mahindra Financial Services Limited (Mahindra Finance/MMFSL) is a subsidiary of the Mahindra Group (market capitalisation: 1.52 trillion as of 27^th April 2023), one of Indias leading business conglomerates.

MMFSL is a non-banking financial company (NBFC) that provides a range of financial products and services to individuals, rural customers, and MSMEs (micro, small, and medium enterprises) in India. Our Companys primary focus is on financing the purchase of new and pre-owned automotive vehicles, including tractors and commercial vehicles. The vision of MMFSL is to be a leading and responsible financial solutions partner of choice for Emerging India.

Our new businesses include SME lending, consumer financing and leasing, and our strategic emphasis is on the rural and semi-urban markets. We have had an opportunity to serve over 9 million customers since our inception, relying on our extensive network spread across 1,386 offices covering 27 states and seven union territories in India. Our AAA credit rating is a sign of the inherent strength of our financial position and parentage.

Economic review

Global economy

The global economy demonstrated growth driven the resilience of labour markets, robust household consumption, business investment, and a better-than-expected response to the energy crisis in Europe.

However, central banks globally were forced to raise interest rates abruptly to curb the persistently high inflation. The higher interest rate, and other headwinds like the Russia-Ukraine conflict, and the resurgence of the COVID-19 situation in China had an impact on economic growth during the year.

Although many of these factors are still relevant, the recent re-opening of China brings some respite and could trigger a rapid rebound in activity.

Outlook

According to the International Monetary Fund (IMF), global growth is predicted to bottom out at 2.8% in 2023, and then grow to 3.0% in 2024. Along with improvement in growth rate, inflation is expected to moderate from 8.7% in 2022 to 7.0% in 2023, before reaching 4.9% in 2024. IMF identifies that inflation, though moderating, has mostly been sticky. The reduction reflects severe reversal in energy and food prices, but core inflation (excluding food and energy prices) may not have peaked yet.

In summary, global growth continues to be uncertain due to a multitude of economic and geopolitical factors. The sharp policy tightening over the last year has had some impact on the global financial sector and the ability of authorities to take swift action may be tested again.

Global growth forecast (%)

Particulars	2022	2023(F)	2024(F)
World	3.4%	2.8%	3.0%
Advanced Economies	2.7%	1.3%	1.4%
- United States	2.1%	1.6%	1.1%
- Euro Area	3.5%	0.8%	1.4%
Emerging Markets and Developing economies	4.0%	3.9%	4.2%
- China	3.0%	5.2%	4.5%
- India	6.8%	5.9%	6.3%

Source: International Monetary Fund (IMF), April 2023

Indian economy

After the COVID-19 pandemic, India was quick get back on the pre-pandemic growth trajectory, surpassing the UK to become the fifth-largest in the world. As per the National Statistical Office, Indian economy grew at 7.2% in FY2023, compared to 9.1% in FY2022. Although this is still a slowdown from the previous year due to the current global scenario, the economy remained resilient due to solid domestic demand and an uptick in private consumption.

The economy underwent a gamut of wide-ranging structural and governance reforms, including

ECLGS extension, PMEGP extension, changes in the union budget, among others that strengthened its fundamentals and financial markets. Capex by the central government increased by 63.4% in the first eight months of FY2023 since the first quarter FY2022, providing an impetus to the economys growth. The rural economy is steady and improving progressively. The informal sector, disrupted due to the pandemic, is now seeing normalisation in the labour force. In Q3 FY2023, the agricultural sector displayed resilience and was supported by the pick up in rabi sowing (6.4% higher than a year ago), the progress of the north-east monsoon and above-average reservoir levels. The persistent efforts and spending by the government towards rural areas are expected to drive the upliftment of this sector. The Consumer Price Index fell from 6.44% in February 2023 to 5.66% in March 2023. Despite the moderation in the last month of the fiscal year, Indian consumers faced an average inflation of 6.6% through FY2023. In response to this, the RBI took measures by hiking the rates cumulatively by 250 basis points to 6.50% since the beginning of the rate hike cycle in May 2022.

Inflation is poised to decline.

Outlook

The enduring factors that fuel the long-term growth of the economy are still intact, with a sizeable and rapidly expanding middle-class leading the way in consumer spending. Indias domestic consumer market is experiencing rapid growth, alongside its significant industrial sector, establishing itself as an attractive investment hub for MNCs operating in manufacturing, infrastructure, and services. Moreover, India is also emerging to be a global hub for startups, attracting substantial foreign investments due to its youthful population which includes a large GenX demographic, and its technological advancements.

Source: Ministry of Statistics and Programme Implementation (MOSPI)

Indian financial services industry

Indias diversified financial services sector is undergoing rapid expansion and evolution as new companies enter the market with distinct offerings. The expansion is supported by rising income, technological innovations, and reforms by the government.

Growth drivers

Financial inclusion

Indias financial inclusion index an indicator of how well the financial services have been extended to the unbanked population stood at 56.4 in

March 2022, compared to 53.9 in March 2021. In

June 2023, RBI also launched financial inclusion dashboard named as Antardrishti, a platform that will provide insights to assess and monitor the progress of financial inclusion. The strategy for financial inclusion focuses expanding the reach of financial literacy centres to every block in the country by March 2024. As many as 25,000 post offices are set to be out with core banking solutions, increasing the accounts interoperability. Moreover, the Union Budget 2023 announced a focus on onboarding small businesses to digital financial services, further driving financial inclusion.

• Fintech

With the highest adoption rate of 87%, India is one of the fastest-growing fintech markets globally Massive investments, innovation, growing internet penetration, and the adoption of the Unified Payments Interface (UPI) have contributed to the sectors growth. According to RBI, Central Bank Digital Currencies (CBDCs) offer significant opportunities for fintech companies to create innovative solutions that can be accessible by those without internet access.

Technology/digitalisation

The digital revolution in the banking, and payment systems is creating credit demand for banks and NBFCs. Moreover, new business models in this sector are now driven by advanced technologies such as artificial intelligence and machine learning, allowing entities to handle massive data and evaluate real-time trends.

Financialisation of savings

The number of folios under equity, hybrid, index and solution-oriented schemes, wherein the maximum investment is from the retail segment, stood at about 11.5 crores as of 31^st March

2023. According to CRISIL, the financialisation of savings is likely to accelerate, with the managed funds industry anticipated to grow Assets Under Management (AUM) to 315 lakhs crores by FY2027 from 135 lakhs crores in FY2022.

Growing penetration of financial products

India already has the second-highest number of smartphone users globally and has the second-largest internet user market. With the number of mobile and internet users on the rise, these products are now more accessible and convenient to customers, propelling industry growth.

• Rising income

Rising incomes drive demand for financial services across all income brackets in India, including insurance and retail banking services. According to a forecast of high-net-worth individual (HNI) growth figures published in the latest Henley Global Citizens Report, the number of dollar . millionaires and billionaires in India will grow by 80% over the next 10 years, compared to just 20% in the US and 10% in France, Germany, Italy and the UK.

Non-banking financial companies

Overview

NBFCs have solidified their position as an integral part of the financial services system. They also complement the banking system in achieving the agenda of financial inclusion. There has been a consistent rise in the credit extended by NBFCs as a proportion of GDP, with the aggregate outstanding amount at 31.5 lakhs crores as of September 2022.

Notes:

Credit to NBFCs (% of GDP) for FY2023 (H1) is estimated based on NSOs 1st AE for FY2023 and credit by NBFCs as of September 2022. GDP refers to GDP at Current Market Prices (Base: 2011-12). Source: Reserve Bank of India (RBI)

NBFCs credit to SCBs credit ratio and their growth rates

Sources:

1. Report on Trends and Progress of Banking in India, various issues. 2. Handbook of Statistics on the Indian Economy, various issues NBFCs credit to industry registered a growth rate of 8.7% in January 2023, compared to 5.9% in January 2022, and credit to the services sector rose by 21.5% in January 2023 as against 5.7% a year ago; loans to retail increased by 21.8% y-o-y in January 2023, up from 6.9% in January 2022, while credit growth to agriculture and allied activities improved to 14.4% in January 2023 from 10.4% a year ago.

Source: RBI

Note : Numbers in the bracket correspond to sector shares in outstanding loans in Sep-22

The Micro, Small and Medium Enterprise (MSME) sector is critical to the Indian economy. However, only 39% of formal sources of credit have reached MSMEs. This enormous credit gap experienced in this sector allows NBFCs to expand significantly and provide last-mile credit delivery with the help of technology to achieve better operational efficiency and risk management. Overall, NBFCs will play a key role in supporting the socio-economic construct of the Indian economy as the opportunity for credit penetration remains high.

GNPA, NNPA and PCR

(By end March)

Performance in FY2023

After several upheavals caused by COVID-19, NBFCs have returned to normalcy. Disbursements by NBFCs (excluding Infra-NBFCs) were higher than pre-pandemic levels for three consecutive quarters of FY2023. Moreover, collection efficiency was healthy and is expected to stay robust due to improved economic activity and a favourable outlook for most sectors, assuming there are no material or global business-related disruptions.

Notes: Data are provisional. Source: Supervisory Returns, RBI

An ongoing improvement in overall health, particularly regarding asset quality and capital adequacy can also be seen. The continuous improvement in asset quality is mirrored in the declining GNPA (Gross Non-Performing Assets) ratio of NBFCs from a peak of 7.2% reached during the second wave of the pandemic in June 2021 to 5.9% in September 2022, which was close to the pre-pandemic level.

Financial position

In line with the decline in GNPAs, the capital position of NBFCs remained robust. The Capital to Risk (Weighted) Assets Ratio (CRAR) of 27.4% at the end of September 2022 fell only 20 basis points (bps) from March 2022 levels, partly due to the increase in risk-weighted assets (RWA) amidst higher lending activities. This remains well above the regulatory requirement of 15%.

According to ICRA, the profitability of NBFCs improved in FY2023 as compared to the previous year, and this improvement is expected to be an interplay of higher growth in Assets Under Management (AUM), stable Net Interest Margins (NIMs) and lower credit costs. The Return on Assets (RoA) for NBFCs has also recovered over the past half-year period (ended September).

Key regulatory developments

The regulations are becoming stringent over time, resulting in a more robust and relevant business model. A few of the regulations guiding the sector are:

Prudential norms for Income Recognition, Asset Classification and Provisioning (IRACP) on advances

As per the new norms that came into effect October 2022, an NBFC may upgrade an NPA to a ‘standard asset only if the borrower pays the entire arrears in the form of interest and principal. Additionally, there is a change in the recognition of NPAs to a daily due-date basis versus a month-end basis. These revised norms will bring parity in income recognition and asset classification practices at banks and NBFCs.

Scale-based regulation for NBFCs

Effective from October 2021, the RBI introduced scale-based regulation for NBFCs. Under the new framework, NBFCs based on their size, activity, and perceived risks were classified under layers: Base Layer (BL), Middle Layer (ML), Upper Layer (UL), and a possible Top Layer (TL). The framework will tighten regulatory oversight of the sector, with progressively tighter norms for the higher layers.

NBFCs in the BL will be non-deposit-taking NBFCs, with assets worth up to 1,000 crores. These be broadly subjected to extant regulations for

Outlook

After three years of single-digit growth, NBFCs poised to witness an 11-12% growth in AUM by the end of FY2023, according to a CRISIL report. Future growth is expected to be supported by the strong push towards digitisation, better consumer non-deposit-taking NBFCs, except for changes in governance and prudential guidelines.

NBFCs in the ML will include deposit-taking NBFCs irrespective of asset size, non-deposit-taking firms with assets worth 1,000 crores or more, and

Housing Finance Companies (HFCs). These will be regulated on the lines of systemically important non-deposit-taking NBFCs, deposit-taking NBFCs, and HFCs, as the case may be, except for changes in capital, prudential and governance guidelines.

NBFCs falling in the UL will include top-10 NBFCs as per size and NBFCs that warrant enhanced regulatory requirements based on certain parameters. These will be subject to regulations applicable to NBFCs in the ML, with additions such as the introduction of common equity Tier 1 and leverage requirements, mandatory listing and qualification of Board members. On 30^th September 2022, RBI released the list wherein 16 NBFCs were categorised under UL. For NBFCs falling in the TL (ideally vacant), while no specific regulation has been provided, they will be subjected to higher capital charges and enhanced supervisory engagement.

The Prompt Corrective Action Framework

The PCA framework applies to all deposit-taking NBFCs (NBFCs-D) and all non-deposit-taking NBFCs (NBFCs-ND) in the Middle, Upper, and Top Layers identified under RBIs Scale-Based Regulations. This excludes NBFCs not accepting/ not intending to accept public funds, government companies, primary dealers, and Housing Finance Companies (HFCs). The framework is structured as an early-intervention mechanism for lending institutions with weak financial records (lower profitability or poor asset quality). The said framework came into effect on1 ^st October 2022.

sentiment, strong auto sales and resilient housing demand. Further factors such as higher provisioning, stronger balance sheets, receding asset quality concerns and normalising funding situation could enable NBFCs to drive credit demand and improved profitability.

MMFSL Response

We maintain such provisions in the books which adequately cover requirements under both Ind AS and Income Recognition, Asset Classification and Provisioning (IRACP) norms.

As on 31^st March 2023, GNPA (IRACP) was higher by approximately 1,184 crores in comparison to GS 3 Ind AS. This has remained rangebound during the year and no additional provisioning was required on account of IRACP.

In comparison to the IRACP requirement, our Company maintains an excess provision of 1,094 crores under Ind AS.

Source: Company data, CRISIL ratings, November 2022

Automobile and vehicle financing

The automobile sector is a key driver of Indias economic growth and contributes more than 7% to Indias GDP. In 2022, India became the third-largest automobile market, surpassing Japan and Germany.

Rising middle-class income and a burgeoning young population are some factors driving strong demand in this sector.

Even amidst uncertainties regarding the supply chain last year, production has been increasing every quarter with improvement in the availability of semiconductor chips and related components. According to the Society of Indian Automobile Manufacturers (SIAM), the industry produced a total of 2,59,31,867 vehicles, including passenger

Domestic sale (in Nos.) vehicles, commercial vehicles, three-wheelers, two-wheelers, and quadricycles in FY2023, as against the 2,30,40,066 units in FY2022. Compared to the previous year, passenger cars also saw an increase from 14,67,039 to 17,47,376, utility vehicles from 14,89,219 to 20,03,718, and vans from

1,13,265 to 1,39,020 units.

Overall commercial vehicle sales stood at 9,62,468 units. Sale of Medium and Heavy Commercial Vehicles increased from 2,40,577 to 3,59,003 units, and Light Commercial Vehicles increased from 4,75,989 to 6,03,465 units, in FY2023, compared to the previous year.

Category	2020-21	2021-22	2022-23
Passenger vehicles (PVs)	27,11,457	30,69,523	38,90,114
Commercial vehicles (CVs)	5,68,559	7,16,566	9,62,468
Three-wheelers (3W)	2,19,446	2,61,385	4,88,768
Two-wheelers (2W)	1,51,20,783	1,35,70,008	1,58,62,087
Quadricycles	(12)	124	725
Total	1,86,20,233	1,76,17,606	2,12,04,162

Source: Society of Indian Automobiles Manufacturers (SIAM)

With the transition to Electric Vehicles (EVs) gaining momentum, 2W/3W/PVs should see a rise in sales contribution from EVs in the next couple of years, with supply matching the growing demand. Incentives by central and various state governments have also led to the strong growth of EVs in the 2W segment. The domestic automotive industry witnessed a healthy revival in FY2023, aided by the recovery in economic activity and increased mobility. However, while the demand sentiment for PVs, CVs and tractors has remained healthy, the 2W industry is still facing several challenges, with overall volumes still below pre-COVID levels.

Rural India remains a key market for the auto sector and the Indian tractor industry has remained resilient and has seen consistent export growth.

Notes: The numbers are from January to December for each Source: Tractor and Mechanization Association (TMA)

In the first eight months of FY2023, the industry exported 89,192 tractors compared to 85,281 units during the same period in FY2022. This growth fuelled by a healthy monsoon season, improved farm cash flows across regions, better crop realisations prices, and the governments focus on procurement.

With improving consumer sentiment, the rural market is expected to remain buoyant and be able to sustain the solid sectoral tailwinds in auto finance.

Union Budget FY2024 highlights

The automotive sector is a significant to Indias GDP and employment. The Union Budget touched upon the following critical areas for the mobility sector:

Push towards EVs

The government has nearly doubled its budgetary allocation for the Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme to promote green mobility. As per the budget document, the subsidy under the FAME scheme for FY2024 is projected at 5,172 crores, which is 78% higher than the 2022 budget. Also, the EV sector will receive an extra push due to the custom duty reduction from 21% to 13% on lithium-ion cells and viability gap funding support for battery storage systems with a capacity of 4,000 MWh.

Vehicle scrappage policy

Furthering the Vehicle Scrappage Policy of 2021, the central government has proposed additional spending on the scrapping of old government vehicles. States will also be given the support needed to discard old vehicles and old ambulances.

Push towards transport infrastructure projects and affordable housing

The significantly higher allocationof 10 lakhs crores towards capital investment and 79,000 crores towards affordable housing will push the demand commercial vehicles. In addition, the 75,000 crores allocation towards improving the first and last-mile connectivity will benefit the LCV segment.

Outlook

According to CRISIL, the NBFC vehicle finance AUM is expected to clock growth of 13-14% in FY2024, compared to the estimated 12% growth in FY2023. The market growth is expected to be driven by robust pent-up demand and new launches in cars and utility vehicles. NBFCs will likely leverage their last-mile connectivity and deep entrenchment in micro markets to focus on used-vehicle financing.

Overall, Indias vehicle financing sector remains highly dynamic and is a space where digitisation and partnerships allow industry players to gain an edge over their competition.

SME financing

Indias MSME sector accounts for almost 33% of the countrys GDP and 45% of total employment, creating nearly 120 million jobs across all industries and has been a key driver of credit offtake. Given the sectors significance for income and employment generation, RBI and the Central Government have initiated several measures to revive the sector. A few of the initiatives helping MSMEs are:

Digitised SME loans

In FY2023, RBI enabled the end-to-end digitisation of loans to MSMEs and the complete digitalisation of

Kisan Credit Card (KCC)-based loans.

Emergency Credit Line Guarantee Scheme (ECLGS)

As of 30^th November 2022, 1.2 crores MSME units availed of the ECLGS scheme. Collateral-free resources, aggregating 3.6 lakhs crores, were raised. Moreover, in the Union Budget, 9,000 crores have been allocated for revamped credit guarantee scheme for MSMEs, which will lower the cost of credit by 1%.

Lean Manufacturing Competitiveness for MSMEs

Under the MSME Competitive (Lean) Scheme, MSMEs will be assisted in reducing their manufacturing costs through proper personnel management, better space utilisation, scientific inventory management, improved process flows, reduced engineering time and so on.

MSME sector credit growth (%)

Performance in FY2023

The sector managed to sustain credit growth momentum in H1 FY2023, attributed to the recovery in domestic demand, continuing government initiatives, increased working capital requirements and favourable regulatory changes. Delinquencies towards MSME sector improved to 7.7% in September 2022 from 9.3% in March 2022.

Notes: Due to the extension of the validity of old documents for MSME classification provided by the Ministry of MSME, the MSME credit outstanding figures as per regulatory returns for previous quarters have been revised.

Source: RBI supervisory returns and staff calculations.

Outlook

According to CRISIL, the MSME sector will experience reasonable credit growth of 16-18% during the current fiscal and FY2024. The governments emphasis on self-sufficiency through the ‘Atmanirbhar Bharat initiative, and the Productivity Linked Incentive (PLI) scheme should drive demand for credit in the

MSME segment.

As economic activity picks up gradually with the support of fintech and other digital lending solutions in the sector, MSMEs demand for credit will likely increase as the sector experiences ease of doing business digitally, the penetration of the internet and affinity towards online marketplaces in India.

Housing Finance

Under the Pradhan Mantri Awas Yojana scheme for rural areas, 2.1 crores houses were completed by 6^th January 2023, as per the Economic Survey 2022-23

Further, with the government developing and constructing infrastructure mega-projects such as highways, new airports and metros, the industry is seeing a stimulation in the quantitative and qualitative growth of real estate and housing finance. In the future, the under-penetrated market and digitally enabled services will propel the affordable housing finance industry.

Performance in FY2023

According to a CRISIL report, the AUM of housing finance companies (HFCs) is expected to grow 10-12% in FY2023, compared to 8% in the previous period, driven by 15% y-o-y growth in home loans, while growth in other segments remains muted. Notably, the affordable housing space is expected to grow at a faster pace of 18-20%. The release of pent-up demand was reflected in the housing market as demand for housing loans increased. Consequently, housing inventories have declined, as witnessed by a significant reduction in inventory overhang to 33 months in Q3 FY2023 from 42 months last year.

Source: CRISIL ratings, September 2022

Outlook

Under the Union Budget FY2024, the government has proposed to enhance the PM Awas Yojana Fund by 66% to 79,000 crores, thereby giving the housing sector a boost. Accordingly, FY2024 will likely see robust sector growth due to rising income and favourable government initiatives. Despite rising interest rates and real estate prices, customer interest has remained strong, even as rates remain below earlier cycles. ICRA expects that the asset quality indicators of HFCs will not be significantly impacted by the rise in the interest rates as the nations housing market remains in an upcycle.

Mutual funds

According to the Association of Mutual Funds in

India (AMFI), the mutual fund industrys net AUM was 39.42 lakhs crores, while the average asset under management (AAUM) was 40.04 lakhs crores in March 2023, indicating investors continued faith in the markets. Of the total AUM, retail AUM across equity, hybrid and solution-oriented schemes stood at 20.35 lakhs crores. In FY2023, equity-oriented mutual funds registered a net inflow of 2 lakhs crores, while SIP inflows continued to soar.

Outlook

AMFI expects the industry to grow by 16-17% in FY2023 as the India growth story holds a lot of promise. The growth is expected to be driven by differentiated perspectives on investing and retail participation from young investors.

Insurance industry

According to RBIs Economic Survey 2022-23, India is amongst the fastest-growing insurance markets globally. Digitisation and an increase in FDI limit are likely to drive increased long-term capital flow to the insurance sector in India.

According to the Insurance Regulatory and Development Authority of India (IRDAI), Indias insurance penetration stood at 4.2% of the GDP in FY2022. In FY2023, first-year premium numbers grew by 17.9% vs. the 12.9% growth reported in FY2022. The FY2023 growth can be attributed primarily to group single premiums and a low base. Currently, private insurance companies continue to extend their lead in the individual non-single premium segment.

The general insurance industry premium grew at a healthy pace of 16% in the reporting period. The total premium for the general insurance industry in the financial year stood at 2,56,920 crores compared to 2,20,800 crores a year ago. The standalone health insurance sector grew its premium by 26% to 26,242 crores in FY2023.

Outlook

The Indian insurance industry is likely to be in the top six insurance markets globally by 2032. The growth in the non-life insurance sector is expected to be driven by demand for health coverage, with people becoming more aware of health post-COVID-19, and the strong support received from government-sponsored mass health programmes such as ‘Ayushman Bharat. Moreover, IRDAI has committed to providing Insurance for All by 2047, which would lead to a massive demand stimulation for the insurance industry in the coming years. With government initiatives, technological innovations and regulatory frameworks, the industry prospects appear robust.

Wealth advisory management

The wealth management market in India is on a sustained path of growth with the increase in high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs). Indias wealth is expected to grow by 10% per year and reach $ 5.5 trillion by 2025, thereby presenting a massive opportunity. The wealth management industry is rapidly transforming due to advancements in technology, the increasing sophistication of investors and the emergence of innovative financial offerings.

Outlook

India is expected to have 6.11 lakhs HNIs by 2025, securing its position as the fourth-largest private wealth market globally by 2028.(2) The future seems promising for wealth management as it is driven by Indias long-term economic prospects, favourable demographics, rising income levels and low penetration levels.

Business review

The business environment has sharply bounced back which was impacted due to the pandemic. At 49,541 crores, the disbursement was the highest ever, recording an increase of 80% over the previous year. The growth has been through a mix of gaining scale in our core area of rural and semi-urban markets coupled with building a presence in Emerging India by catering to mass-affluent customer segments New business verticals like SME lending (including Loan against Property), Leasing business, and Digital

Finco for small ticket personal and consumer durable loans are also being scaled up. Business growth was complemented by a strong improvement in asset quality wherein Gross Stage 3 improved from 7.7% (as of Mar-22) to 4.5% (as of Mar-23). Similarly, Gross Stage 2 improved from 14.3% as of March 2022 to 6.0% as of March 2023.

We continue to hold the leadership position in the

Tractor and Mahindra UV (utility vehicles) financing segments. Its market share has also seen improvement during this period across manufacturers. The company continues to partner with auto aggregators to generate leads in the pre-owned vehicle finance space. Quiklyz, a car-leasing solution launched in FY2022, is actively strengthening its presence in the B2B segment and is expected to grow with the rising demand for EVs expected to boost the rental and leasing market. We are now rated AAA across all credit rating agencies, and this is expected to gradually reflect in improvement in the borrowing rates and ability to access more investors.

During the year, the Company undertook a significant transformation projection (‘Udaan) to enhance its technological and digital capabilities. This coupled with . hiring new talent and motivating existing workforce through an improved incentivisation policy led to an increase in operating costs. The benefits were visible through sustained improvement momentum in disbursements, improving asset quality and robust collection efficiency. The Company continues to invest in talent retention and technology initiatives to further upgrade its capabilities to meet customer and employee expectations.

Financial Results

Rs in crores

	Consolidated		Standalone
Particulars	FY2023	FY2022	FY2023	FY2022
Total Income	12,832.40	11,400.51	11,056.09	9,718.80
Less: Finance Costs	5,094.30	4,417.37	4,576.72	3,920.18
Expenditure	4,695.64	5,347.32	3,539.56	4,314.88
Depreciation, Amortisation, and Impairment	225.96	151.99	187.23	126.83
Total Expenses	10,015.90	9,916.68	8,303.51	8,361.89
Profit before exceptional items and taxes	2,816.50	1,483.83	2,752.58	1,356.91
Share of profit of Associates & Joint Ventures	43.32	45.02	-	-
Exceptional items	(56.06)	20.57	(54.51)	-
Profit Before Tax	2,803.76	1,549.42	2,698.07	1,356.91
Less: Provision for Tax
Current Tax	498.15	411.38	486.28	348.16
Deferred Tax	234.41	(12.30)	227.47	20.00
Profit After Tax for the Year	2,071.20	1,150.34	1,984.32	988.75
Less: Profit for the year attributable to non-controlling interests	(1.20)	13.47
Profit for the Year attributable to Owners of the	2,072.40	1,136.87	1,984.32	988.75
Company
Balance of profit brought forward from earlier years	6,146.97	5,285.06	5,247.99	4,558.40
Add: Other Comprehensive Income /(Loss)	(13.35)	(3.20)	(12.92)	(2.32)
Balance available for appropriation	8,206.02	6,418.73	7,219.39	5,544.83
Less: Appropriations
Dividend paid on Equity Shares	(443.87)	(98.57)	(444.79)	(98.84)
Transfer to Statutory Reserves	(402.86)	(223.61)	(398.00)	(198.00)
Add/Less: Other Adjustments:
Gross obligation at fair value to acquire a non- controlling interest	59.41	54.40	-	-
Changes in Groups Interest	(1.35)	(3.98)	-	-
Balance carried forward to the balance sheet	7,417.35	6,146.97	6,376.60	5,247.99
Net worth	18,560.09	16,896.31	17,088.91	15,628.09

SCOT Analysis

Strengths

• Vast distribution network, especially in rural areas and small towns

• Long track record of operations with a strong position in the financing of tractors and UVs; market leader in tractor financing

• Diversified asset mix and well-diversified funding profile

• Vast knowledge of the needs of the customer segment we work with

• Diversified product range and robust collection systems

• Simplified and prompt loan request appraisal and disbursements

• Product innovation and superior delivery

• Parentage: Mahindra brand and fund-raising ability

• Strong financial position; comfortable capitalisation and liquidity profile

• High credit rating

• Long-lasting relationships across multiple OEMs

• Strong management team

Challenges

• Rising competition from banks

• Increasing cost of funding

• Retention of talent

Opportunities

• Recovery in economic activity

• Revival in rural consumption

• Digitalisation and data-driven decision making

Threats

• Future waves of the pandemic may negatively impact asset quality

• Uncertain global political environment

• Tightening regulations for NBFCs

• Impact on demand in the backdrop of sustained inflation

Business performance

Operational review

The key operational highlights on a standalone basis are:

• Total income was 11,056.09 crores in FY2023 compared to 9,718.80 crores in FY2022, an increase of 14%, primarily led by asset and disbursement growth.

• Disbursements for the FY2023 was at 49,541 crores, a growth of 80% over the previous year.

• Gross Loan Book rose to 82,770 crores in FY2023 from 64,961 crores in FY2022, an increase of 27.4%.

• Strong Capital Adequacy at 22.5%, D: E ratio of 4.39x and maintained Liquidity buffer equivalent to 3 months requirement.

• Maintained a healthy Provision Coverage Ratio (PCR) of 59.5% for Gross Stage 3 in March 2023.

• Customer base crossed 9.0 million customers.

• Employee base stood at 26,329 as on 31^st March 2023.

Financial overview

The following table presents your Companys standalone abridged financials for FY2023, including revenues, expenses, and profits.

Abridged statement of profit and lossRs in crores

Particulars	For the year ended st 31 March, 2023	For the year ended st 31 March, 2022	Change (%)
Revenue from operations	10,928.80	9,657.97	13.2
Other Income	127.29	60.83	109.3
Total Revenue	11,056.09	9,718.80	13.8
Expenses
(a) Employee benefits expenses	1,584.27	1,171.40	35.2
(b) Finance costs	4,576.72	3,920.18	16.7
(c) Depreciation, amortisation, and impairment	187.23	126.83	47.6
(d) Impairment on financial instruments	999.23	2,368.30	(57.8)
(e) Other expenses	956.06	775.18	23.3
Total Expenses	8,303.51	8,361.89	(0.7)
Profit before exceptional items and taxes	2,752.58	1,356.91	102.9
Exceptional items (net) - income / (expense)	(54.51)	-	-
Profit before tax	2,698.07	1,356.91	98.8
Tax expense	(713.75)	(368.16)	93.9
Profit for the year	1,984.32	988.75	100.7

Key Ratios

Particulars	For the year ended 31st March 2023	For the year ended 31st March 2022
PBT/Total Income	24.4%	14.0%
PBT/Total Assets	2.8%	1.8%
RONW (Avg. Net Worth)	12.1%	6.5%
Debt/ Equity	4.39:1	3.57:1
Capital Adequacy	22.5%	27.8%
Tier I Capital	19.9%	24.3%
Tier II Capital	2.6%	3.5%
Book Value (in )	138.3	126.5
NIM (Gross Spread)	7.6%	7.6%

Analysis of Profit & Loss

• Revenue from operations during FY2023 increased by 13% over the previous year. This was primarily due to the average loan book in FY2023 being higher than the previous year. Disbursements improved with each passing quarter resulting in the closing loan book being higher by 27% over the previous year.

• Net interest income grew by 11% over the previous year. During the current year, your Companys credit rating had been upgraded resulting in an ‘AAA rating across all credit rating agencies.

• NIMs for the current year at 7.6% was similar to previous year. The Company has enhanced the lending rate during the second half to price in the effect of an increase in borrowing cost.

• The cost-to-income ratio for the year increased during the year to 42.1% as compared to 35.8% in FY2022. This was owing to increased activity as the volume picked up post-pandemic. In addition, your

Company has invested in new collection-related processes, upgrading its IT infrastructure, and bringing in new talent. Operating Expenses have increased 32% y-o-y in FY2023 due to continued investments in future growth-oriented areas. Your Company continues to use digital initiatives which shall result in cost optimisation over the medium term.

• The profit before tax for FY2023 was higher by around 99% at 2,698 crores as against

1,357 crores in FY2022. Your Company, however, continued to maintain a robust provision coverage of 59.5% in FY2023 vis-a-vis 58.1% in FY2022.

• Profit After Tax (PAT) for the year stoodat 1,984 crores, up by around 101% compared to 989 crores in FY2022.

• Return on Equity (RoE) for the year stood at 12.1% against 6.5% in FY2022. Return on Assets (ROA) for the year stood at 2.3% compared to 1.3% for the previous year.

Risk management

Considering how volatility in the operating environment can have an unprecedented impact on global businesses, our Company is adopting a more proactive risk management and mitigation framework. The Risk Management Committee assists the Board in overseeing various risks, including reviewing and analysing risk exposures related to our Company. The Risk Management Committee regularly reviews risk management measures and thereafter by the Board. Periodic diligence is performed and recommendations for corrective actions and process changes are thereafter implemented.

Risk management process

The risk management system is integral to all major functions within our Company. The process includes these key elements:

• A strategy that is driven by objectives and principles

• Assignment of responsibilities

• ‘ATMA (Avoid-Transfer-Mitigate-Assume) risk management framework approach and reporting cycle to identify, assess, mitigate, monitor, and report the risks that our Company is or may be exposed to

• A combination of top-down and bottom-up approaches to the risk assessment and management process

• A risk-monitoring plan that outlines the review, challenge, and oversight activities

• Outside-In reporting procedures which ensure risk information is actively monitored, managed, and appropriately communicated at all levels within the Company

• Developing risk appetite statements with the strategic planning process, then monitoring and reporting on these statements

The risk management framework is based on assessing risks through analysis and understanding of the underlying risks before undertaking any transactions and changing or implementing processes and systems. This risk management mechanism is supported by regular review, control, self-assessment, and monitoring of key risk indicators. The key risks are the following:

Credit risk

Credit risk is defined as the possibility of losses associated with a diminution in the credit quality of borrowers or counterparties. In MMFSLs portfolio, losses stem from outright default due to the inability or unwillingness of a customer or counterparty to meet commitments concerning lending, trading, settlement and other financial transactions. Alternatively, losses result from a reduction in portfolio value arising from actual or perceived deterioration in credit quality. Approach: The effective management of risk is a critical component of comprehensive risk management and is essential for the long-term success of the organisation. Credit risk management encompasses the identification, measurement, monitoring and control of credit risk exposures.

• The stringent credit appraisal system and post-disbursement monitoring ensure high-quality loan assets with a low probability of default.

• A borrower credit rating framework is adopted to avoid the limitations associated with a simplistic and broad classification of loans/exposures into ‘good or a ‘bad category. For each proposal, the ratings are assigned and high-risk applications are recommended to the higher level of credit approvers.

Liquidity risk

Liquidity risk refers to the inability of a company to either meet its financial obligations, including debt servicing, or its inability to raise funds from external sources at optimal pricing.

Approach: We continue to have a comprehensive

Liquidity Risk Management (LRM) framework that is governed by the Liquidity Risk Management Policy and Procedures approved by the Board. The Asset Liability Committee (ALCO) of the Board and Asset Liability Management Committee (ALMCO) oversee the implementation and ensure adherence to the risk tolerance/limits set as per the LRM framework.

Further, to minimise any impact of any external shock, our Company maintains a liquidity buffer to the tune covering the next three months obligations, which is reviewed by both ALCO and ALMCO at regular intervals. Our Company has a well-diversified lender with no undue concentration on funding sources. The concentration of borrowing through various sources is also monitored to ensure a diversified borrowing mix

Interest rate risk

This refers to the fluctuations in interest which could adversely affect borrowing cost, interest income and net interest margins of Companies in the financial sector. Approach: The ALCO and ALMCO regularly review the sensitivity analysis, which projects our Companys vulnerability to changes in the interest rates. The LRM framework has defined a judicious borrowing that allows the company to manage interest costs. It also has defined a judicious investment mix, which allows us to optimise returns. Prudential limits on borrowing and investments ensure the company does not take any undue risks. All these policies and review mechanisms assist in making necessary realignments to lending and borrowing decisions to mitigate any interest rate risks.

Operational risk

Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems or external events, including legal and reputational risks.

Approach: The Operational Risk Management Policy has been designed and implemented to put in place the governance structure around the risk. A robust risk management approach defined under the policy helps in mitigating operational risks. This approach guides the requirement of defining roles and responsibilities, segregation of duties and delegation of powers. The new product/process approval framework has been designed and implemented to identify the risks in new products/processes and implement the risk mitigants. a

Business risk

Being an NBFC, we are exposed to various external risks, which directly affect sustainability and profitability. The most prominent risks are industry risk and competition risk. Our customers also have their earning linked to agri-output and its prices.

Timely and spatial distribution of monsoon and other climatic factors plays an important role in earning and repayment capability of our customers. The volatile macroeconomic scenario and sector-specific imbalances can result in loan asset impairment. Approach: A dedicated team evaluates the trends in the economy and various other sectors. In line with market trends, our Company has developed tailor-made products and is reviewing new growth engines like SME, digital finance, and leasing to deepen market penetration and de-risk the business from over-dependence on core, that is vehicle finance. Driven by a nimble-footed sales force, a wide range of products, continuous efforts to improve turnaround time and a customer-friendly culture, we are efficiently staying ahead of the curve.

Compliance risk

It is the risk arising out of legal or regulatory

. actions consequent to failure to comply with applicable statutes, regulations, directions, standards and guidelines.

Approach: Our Company fully complies with all the periodic guidelines issued by the RBI and other regulators and adheres strictly to Capital Adequacy, Fair Practice Codes, RBI Reporting, Asset Classification and Provisioning Norms, etc., to ensure zero-tolerance on the non-compliance aspect. Stringent review systems to ensure compliance with the statutory guidelines and norms of the NBFC industry are also in place.

Vide the notification RBI/2021-22/112 DOR.CRE REC.No.60/03.10.001/2021-22 dated 22nd October,

2021, the regulator has brought about a revised scale-based regulatory framework for NBFCs. The regulatory framework classifies NBFCs under four layers (Base, Middle, Upper and Top) based on their size, activity and perceived riskiness. MMFSL has been classified under the Upper Layer. Appropriate processes and systems have been put in place to comply with the requirements prescribed for Upper Layer NBFCs. Internal Capital Adequacy Assessment Process and Stress Testing have been implemented as part of scale-based regulation with the adoption of appropriate risk assessment methodologies.

Human capital risk

This is the risk of undesired attrition of good performers and critically skilled employees in the evolving environment.

Approach: Our Company strives to have contemporary, employee-friendly policies and people-oriented culture. MMFSL mitigates the risk of attrition by ensuring continuous analysis and action planning in all areas to improve our people practices constantly. Each year, the organisation does a comprehensive study of identifying employee pain areas and implements solutions around the identified areas. compensation our Company paid is comparable with other companies of our class and size, and regular benchmarking is done to understand the variances.

Regular connections by business managers and HR ensures that employee concerns are addressed proactively to reduce regrettable attrition. We also actively invest in training and upskilling our workforce. The Company continuously invests in training and upskilling its workforce to meet the evolving expectation of our stakeholders.

Information technology risk

With the rise of technology-dependent services, it is critical to keep any technology and cyber risk under check and keep them to an acceptable level.

Approach: We treat IT risks using a multipronged approach that includes periodic testing of internal controls, conducting periodic simulations and drills to check readiness, using backups that are enabled with ransomware protection, and continuous threat hunting and monitoring using AI and ML-enabled technology solutions. The Company also uses multiple cyber security tools for vigilant monitoring, audit logging, suspicious activity reporting, and prevention of unauthorised access. The Company also uses secure and multi-factor authentication for system resources, conducts continuous data replication at periodic intervals with a fall-back DR site and holds cyber risk insurance to minimise the impact.

Pandemic risk

The COVID-19 pandemic has had an unprecedented impact on societies and economies worldwide. This event has also impacted us at different levels.

. addition, the pandemics impact increased political and macroeconomic risks.

Approach: Our conservative capital structure policies ensure that our Company always remain adequately capitalised. The liquidity chest ensures that such pandemic shocks can be absorbed without impacting our credit rating and debt servicing capability. Our reach ensures we are always connected with our customers during challenging times. Our Business Continuity Plans and processes ensure the business keeps running with adequate security measures.

Market risk

Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as market implied volatilities, that may lead to a reduction in earnings, economic value, or both.

Approach: Our Company is safeguarded against any market risk owing to the prudent approach of continuously maintaining and monitoring market-linked securities, as per internal and regulatory guidelines.

Climate risk

The risk from climate change may involve environmental degradation, rising sea levels, and shift in weather patterns that threaten food production, the impact of which are global in scope and unprecedented in scale. The risk from climate change may also entail irregular weather conditions, such as sporadic monsoon, which significantly affects the economic growth in the Indian context. Climate change may also involve the risk of economic losses caused by physical damage to property and assets from extreme weather conditions and natural calamities. Our carbon footprint also poses a risk in terms of our decreased rating on the ESG front.

Approach: Our Company has been working towards identifying frameworks to assess and keep track of the progression of seasons and climate change and how the adverse impact of such climate change on the business can be reduced. This involves identifying and mapping sustainability and climate change risks for inclusion in the risk register. With new-age emission norms being rolled out and the changing preferences of consumers for green vehicles, our Company is focusing on financing environment-friendly CNG and electric vehicles.

Human resources

At MMFSL, our employees form the bedrock of all our initiatives. Based on this deeply rooted philosophy, we adapt our HR policies to deliver an employee-centric approach.

We believe in providing a positive work environment that fosters growth and learning. Our unwavering commitment to creating an inclusive workplace has seen us take significant strides to implement best-in-class practices that promote diversity, equity, and inclusion. We strive to create an environment that respects and appreciates the unique contributions of each employee. We prioritise building diverse teams and ensure that every voice is heard, valued, and taken into consideration when making decisions that shape our Companys future.

To keep our sales team motivated and engaged, we designed market-driven business rewards that were immensely appreciated by our employees and managers and helped boost the overall performance of the organisation.

In our commitment to overall well-being, growth, and job satisfaction, we go beyond the traditional employee policies and benefits. The policies are designed to work-life balance, foster professional development, and prioritise employee health and welfare.

Harnessing the power of digitisation and being a future-ready organisation are the key priority areas for us. In todays rapidly evolving digital landscape, Mahindra Finance recognises the tremendous potential of digitisation in driving innovation, efficiency, and Through our digital learning platforms, we empower employees to engage in continuous learning, regardless of their location or schedule.

Creating a culture of continuous learning and of nurturing talent to meet the present and future needs of the business is at the core of our people development philosophy at Mahindra Finance. We are committed to continuously evolving our practices, listening to our employees, and working collaboratively to foster a workplace where everyone can flourish and contribute their best.

Achievements

We have been certified as a Great Place to Work for 2023 by the Great Place to Work Institute. We are honoured to receive this certification and remain committed to continuously improving our workplace practices and experiences. In addition, Mahindra Finance has been recognised among:

• Indias Best Companies to Work for 2023: Top 100

• Best in Industry: NBFC

We have also received the ‘Best Place to Work in India title from AmbitionBox and were awarded the ‘Happiest Workplace for Women title by India Today.

Information Technology

The way customers engage with businesses is dynamic and is undergoing a significant transformation, prompting digital leaders to take swift action provide effective solutions that cater to present and future scenarios. Digital has shifted from being just a business channel to becoming the core of the business itself. Achieving seamless remote customer service, doorstep product delivery, and digital sales requires overcoming obstacles related to processes and mindset. We are enabling our employees, customers, and other stakeholders by offering them robust digital alternatives through a redesigned unified app customer acquisition, underwriting, and collection. These tools shall compliment the reliance placed physical appraisal and building customer relationship at local level. Shifting from conducting business digitally to becoming digitally-led businesses, has become an integral part of our organisational strategy.

Enhancing digital reach

With our focus on mobile technology, our mobile app has become a pivotal channel for customer service, brand loyalty, customer retention, new customer acquisition, and revenue generation. The MF Customer app, available in 11 languages, enables customers to manage loan accounts, make EMI payments, apply for vehicle loans, and access additional services. In

FY2023, app users increased by 40%, reaching 8.7 lakh users, while collections from the app doubled.

We are also developing a dealer app to provide key business information to our partners and salespeople across India..

Leveraging technology

Our digital ambitions have expanded across various lines of segments and products, including auto loans, pre-owned car loans, leasing, and SMEs. The introduction of OneApp empowers our feet-on-street employees with decision-making capabilities through digital intervention, enhancing their collection efficiency and transforming our business digitally. We introduced Used Car Digi Loans, a comprehensive digital journey in collaboration with leading brands in the used car industry, Car & Bike and Rupyy. This integrated journey provides customers with personalised loan offers from Mahindra Finance, enabling quicker purchasing decisions. Partners gain real-time visibility of application status and sanctioned loan offers, facilitating prompt vehicle delivery and enhancing customer satisfaction.

We prioritise enhancing our core operations by adopting cloud-based loan origination and management systems, leveraging advanced API platforms for scalable transactions. Digitalisation has accelerated loan processing while maintaining rigorous checks. Additionally, we harness the power of data sciences and artificial intelligence, utilising business intelligence dashboards and machine learning models for strategic initiatives in areas such as lending, retention, and business expansion.

We lead the way among NBFCs globally with our end-to-end digital process for issuing Fixed Deposit (FD) advice to customers, channel partners, and platform integration. Our innovative solutions include chatbot platforms, WhatsApp integration, and enhanced availability through DR systems. We prioritise security compliance, standardised CKYC processes using Azure cognitive services, and leverage robotic process automation to optimise FD operations while ensuring regulatory compliance. We prioritise risk minimisation by aligning our risk management processes with ISO 27001:2013 and COSO framework. This includes conducting periodic risk assessments, employing a defence-in-depth strategy, and utilising technology, monitoring, and audits to mitigate risks. We leverage manual and automated technologies to treat identified risks. Additionally, we are actively adopting data privacy practices in alignment with upcoming government initiatives on data privacy.

Internal control

We have established an adequate internal control mechanism to safeguard all our assets and ensure operational excellence. The mechanism also meticulously records all transaction details and ensures regulatory compliance. We have multiple policy frameworks to ensure adequate controls on business processes. Further, Risk and Control dashboards have been defined and are periodically updated for all important operational processes. At periodic intervals, the management team and statutory auditors ensure that the defined controls are operative. The Mahindra Group has a dedicated team of internal auditors to conduct an internal audit.

Every year, this team defines the audit agenda for the year, which is implemented after approval from the

Audit Committee. Reputed audit firms also ensure that all transactions are correctly authorised and reported following the relevant regulatory framework. The reports are reviewed by the Audit Committee of the Board. Wherever necessary, internal control systems are strengthened, and corrective actions are initiated.

Cautionary statement

Certain statements in the Management Discussion and Analysis describing the Companys objectives, and predictions may be ‘forward-looking statements within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward-looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates, new regulations and Government policies that may impact the Companys business as well as its ability to implement the strategy. The Company does not undertake to update these statements.