mangal credit fincorp ltd Management discussions

MCFL has a diversified portfolio across MSME, SME, Small Business, Individual and Retail customers. The company specializes in SME lending both secured and unsecured, Loan Against Property, Gold Loan and Personal loan. The total Asset Under Management for Financial Year 2022 stood at 16,043 Lakhs and CRAR was of 57.93% as on March 31, 2022 which reflects the strong capitalization position of the company.

Global Economy Scenario

The global economy was recovering from the impact of successive waves of the COVID-19 pandemic by early 2022, aided by large policy stimulus and expanding coverage of vaccination, when the war in Ukraine jolted the upturn. The gains achieved through concerted fiscal and monetary policy interventions during the pandemic period (2020 and 2021) were undermined by the impact of the war. A generalised surge in global inflation triggered monetary policy actions by central banks in the form of successive interest rate increases and the pulling back of liquidity, leading to tightening of financial conditions and together with other factors, a toll on growth which slowed from 6.2 per cent in 2021 to 3.4 per cent in 2022, according to the International Monetary Fund (IMF).By the end of the year, the global economy regained poise global inflation surged to 8.7 per cent from 4.7 per cent in 2021, overshooting targets in the majority of countries through the year.

Global growth is expected to slow down in 2023 and may remain subdued in the medium run shadowed by high inflation, the adverse effects of geo-economic fragmentation operating through restrictions on movements of trade, labour, capital and diffusion of technology, and potential amplification of financial sector vulnerabilities. As per the IMF s World Economic Outlook (WEO) released in April 2023, global growth for 2023 at 2.8 per cent is likely to be followed by the medium-term growth plateauing at 3.0 percent.

Domestic Economy Scenario

The Indian economy exhibited robust resilience in 2022-23 amidst a global turmoil following the war in Ukraine, and recorded a growth of 7.0 per cent, the highest among major economies in the world. A sustained recovery in discretionary spending, particularly in contact intensive services, restoration of consumer confidence, high festival season spending after two consecutive years of COVID-19 induced isolation and the government s thrust on capex provided impetus to the growth momentum. In the second half of the year, however, the pace of year-on-year growth moderated because of unfavourable base effects, weakening private consumption demand caused by high inflation, slowdown in export growth and sustained input cost pressures. Sound macroeconomic fundamentals, a resilient financial system reflected in healthy balance sheets of banks and non-banking financial companies (NBFCs), and a deleveraged corporate sector imparted resilience to counter the adverse global spillovers.

Inflation in India

CPI headline inflation in India remained above the upper tolerance level of 6 per cent for 10 successive months since January 2022, before moderating during November-December on seasonal easing in food prices. Inflation picked up again in January-February 2023 before easing to 5.7 per cent in March 2023. The pick-up in headline inflation during the year was broad-based resulting from pass-through of higher global commodity prices (crude oil, metals and food prices) and adverse domestic weather conditions. After reaching a peak in April 2022 following the war in Ukraine, inflation eased with gradual improvement in global supply conditions, record domestic food production, targeted supply side measures undertaken by the government including excise duty cuts on petrol and diesel along with lower import duties and imposition of export restrictions on some inflation sensitive agricultural items. Cumulative tightening of policy repo rate by 250 basis points (bps) during May 2022- February 2023 also aided in containing price pressures in the second half of 2022-23. Government data showed that inflation surged sharply to 1 15-month high peak of 7.44% in July 2023, driven by high food and vegetable prices.

India: GDP Expectation in FY 23-24

Domestic economic activity does face challenges from an uninspiring global outlook going forward, but resilient domestic macroeconomic and financial conditions, expected dividends from past reforms and new growth opportunities from global geo-economic shifts place India at an advantageous position. Taking into account softer global commodity and food prices, good rabi crop prospects, sustained buoyancy in contact-intensive services, the government s continued thrust on capex, higher capacity utilisation in manufacturing, double digit credit growth, receding drag on purchasing power from high inflation and rising optimism among businesses and consumers, real GDP growth for 2023-24 is projected at 6.5 per cent with risks evenly balanced

Overall Credit Growth and NBFC Sector

The broad-based expansion in bank credit has been facilitated by healthier balance sheets of despite the increase in commodity prices and rise in interest rates, corporate investments have picked up in the recent period. The agriculture sector credit growth was supported by various measures taken by the government and the Reserve Bank. The micro and small industries/medium industries credit growth benefitted from the guarantee cover under the Emergency Credit Line Guarantee Scheme (ECLGS). Credit growth to large industries posted a turnaround during the year - led by capital-intensive industries such as infrastructure, supported by the government s higher capex spending. However, it moderated by the end of the year. The infrastructure credit growth was led by roads sector, which continued to post decent credit growth over a high base. Commodity-intensive industries such as metals recovered during the year. Within services, bank credit to non-banking financial companies (NBFCs) consolidated with increased credit off take during 2022-23 whereas the trade sector credit growth reflected a return of positive sentiment in business activities. Retail loans posted a sustained rise, outperforming overall credit growth, aided by housing and vehicle loans. Further, the share of personal loans and services sector in the incremental non-food credit rose gradually during the year, indicating an improvement in credit demand conditions in these sectors. The credit-to-GDP gap narrowed considerably from its previous peak, reflecting the improved credit demand in the economy in the face of rising capacity utilisation in the manufacturing sector. increased credit off take during 2022-23. Return of consumer optimism and improvement in business outlook during the year could help sustain credit growth ahead.

NBFCs: Stronger balance sheets, better asset quality underpins growth.

NBFCs have demonstrated an innovative and resilient streak over the years, adapting efficiently, even during the Covid-19 pandemic, to an evolving credit landscape. Today, they are stronger, more resilient, and well placed to tap growth opportunities. NBFCs had steadily increased their market share till recent years, with AUM accounting for as much as 18% of the overall credit pie in March 2019, up from 12% in March 2008. Several challenges over the past three fiscals lowered their share to 16% in fiscal 2022, with banks making bigger growth strides. However, NBFC growth is expected to pick up from here on, which should help sustain their ~16% AUM share. Increase in NBFCs AUM from just 3.6 lakh crore in March 2008 to almost 27 lakh crore in March 2022, and expected to increase further, indicates the importance of the sector to overall credit delivery in the economy.

NBFCs are stronger and more resilient today, and better positioned in almost all operationally critical parameters. On the capital front, NBFCs have raised almost 70,000 crore of equity in the past 3.5 years, which has materially improved gearing. The subdued business landscape in the past three fiscals also contributed to the better gearing. Provisioning levels also increased in the past couple of years, as NBFCs created management overlays to provide for uncertainty pertaining to the pandemic. Overall, the sector has stronger balance sheets. The receding asset quality pressures are another positive. Asset quality metrics are expected to improve from here on across segments.

While NBFCs have seen decadal low growth in fiscals 2020 and 2021, they are expected to ride on the tailwinds of improved macroeconomic fundamentals and strengthened balance sheets and expand 13-14% in fiscal 2024. Growth will likely be relatively broad-based across retail segments, although the share of non-traditional segments such as unsecured loans and MSME finance is expected to increase in incremental disbursements. Nevertheless, competition from banks in the primary segments of home loans and vehicle finance remains intense, and NBFCs could concede share to banks, especially in the salaried home loans and new vehicle finance space. Indeed, the rising rate scenario is limiting the competitiveness for NBFCs in traditional segments. The improved balance sheets of NBFCs and abating of asset quality concerns will also support this growth trajectory.

MSME/SME Sector

The MSME sector contributes about one-third of the countrys GDP and about half of the countrys exports. MSMEs are now spread all over the country and are playing a vital role in the manufacturing, trading, and services sectors. MSMEs operate in myriad sectors: from food processing to drones; From Khadi to trendy apparel, from coir to testing lab. MSME employees more than 111 million people across different geographies and sectors. Out of over 64 million MSMEs in India, it is said that only 14 per cent have access to credit.

The total demand for debt-based finance by MSMEs was pegged was approximately $1,544 billion. Overall, 47 per cent of the debt demand was estimated to be un-addressable as it comes from enterprises which are not financially viable or prefer financing from informal sources. The remaining debt demand was left to be $819 million, of which only $289 billion demand was currently fulfilled through formal credit lenders such as private banks, public banks, and non-banking financial companies (NBFCs). The remaining unfulfilled demand of $530 billion provides a large whitespace for lenders in this segment, of which $120 billion demand belongs to small ticket loan segment with a ticket size of less than $1 million.

NBFC saw credit demand crossing 2x for the same period. This can be attributed to the efforts on the part of government and financial sector to develop and implement multiple support mechanisms, and an evolving digital public infrastructure for the MSME sector. MSME disbursements by amount in FY23-Q2 for PSB, PVT and NBFC grew by 21%, 25% and 34%, respectively compared to FY22-Q2.

Total MSME credit exposure (excluding default cases ~ 1.2 Lakh Cr in doubtful category and ~ 1.3 Lakh Cr beyond 720 DPD/Loss category) was at 22.9 Lakh Cr as of Sep 22(FY23-Q2), reflecting a YOY growth rate of 10.6%. With this edition of Pulse, the new definition for Delinquency rates (90+ DPD) is being introduced and excludes legacy accounts with DPD beyond 720 days or reported as loss/doubtful. Delinquency Rate was 3.0% for Sep 22 (FY23-Q2), down from 4.4% same time last year (FY22-Q2). Delinquency rates dropped YoY across all the three lender categories (PSBs, PVT and NBFCs); the highest drop in PVT Segment (i.e., from 2.8% in FY 22-Q2 to 1.5% in FY 23-Q2).

Gold Loan Sector in India

Gold maintains a special consideration among Indian households as the primary sign of financial wellbeing and the abundance of gold assets is considered as indication of the high social stature of families. While gold is an especially liquid asset, the affinity of the Indian population towards the metal means that people rarely sell gold assets in the times of financial hardships and instead collateralize it in exchange for short term credit. The Indian gold market is one of the largest in the world, rich in heritage, steeped in tradition and a central part of our culture and customs. While in recent years, there has been a growth in the formalization of gold loans in India, a large segment of the market is still unorganized in nature.

The gold loan disbursals have almost doubled from 46791 Cr in September 2020 to 80617 in September 2022. This figure is expected to touch one lakh crore rupees this year. It also states that India owns more than 27000 tonnes (14% of the world s gold) of which, around 5,300 tonnes is pledged. The organized gold loan market size is estimated at 6 lakh industry, out of which there is an 80:20 split between banks and NBFCs. Further, organized market is estimated to just 35% of overall Gold Loan market the remaining 65% is dominated by local jewellers, pawn dealers and money lenders (unorganised Market). As unorganized players occupy a large chunk of the market i.e., 65%, and the remaining 35% is banks and NBFCs (organized market). Customers residing in rural parts of the country are gradually switching to these NBFCs, owing to quick loan processing, systematic gold valuation, auctioning and safe keeping.

During the past two decades, gold prices in India has increased at a staggering rate. The average price per gram of gold during the year 2000 was 403 as compared to 5,500 during March 2023.

Increase in gold prices, thus incentivized customers to avail gold loans since they would be receiving more credit value for their gold than before. This period also saw a rapid phase of network expansion by gold loan NBFCs particularly in rural regions, to cater to the demand.

Future of gold loans market in India

The organized gold loan market was valued at 5.2 lakh crore in FY2022 projected to grow at 3-year CAGR of 20.9% to reach 9.2 lakh crore by FY2025. During the last financial year, gold loan companies propelled the growth in their gold loan portfolio by focusing heavily on their existing branch network and catering to the pent-up credit demand that was created as a result of the financial uncertainty post Covid. The growth in the gold loan market is expected to be propelled both by Banks and NBFCs. Growth in bank AUM is expected to be driven by their lower interest rates while NBFCs are expected to propel their growth through expansions of their branch network in areas of low gold loan penetration and through more investments in their digital products such as online and doorstep gold loan.

Financial Performance

Financial performance highlights of FY 2022-23 are, as under

( In Lakhs) Particulars	2023	2022
Total Revenue from Operation	LIGN=RIGHT>2,140	1,482
Interest Income	1,987	1,304
Interest Expense	436	178
Total Operating Expenditure	515	299
Profit Before Tax	1,101	868
Net profit after tax before OCI	791	608
Total PAT Inclusive OCI & Exceptional Item	699	711
EPS (In )	4.10	3.15
Earnings per share (Face Value 10/- each)	11,194	10,592
Networth	1,131	141
Cash and Cash Equivalents	16,043	10,482
AUM	57.93%	77.67%
CRAR	0.77X	0.19X
Interest Income to Average Loan assets	15.17%	14.01%
Total Operating Expenditure to Average AUM	3.88%	3.16%
ROA	6.04%	5.60%
GNPA	1.29%	1.31%
NNPA	0.74%	1.31%
Provision Coverage Ratio (PCR) includes	80.07%	97.46%*
*Management Provision

Gold Loan Sector in India

Being a NBFC, MCFL aims to operate within an effective risk management framework to actively manage all the material risks faced by the organization and make it resilient to shocks in a rapidly changing environment. It aims to establish a consistent approach in management of risks and strive to reach the efficient frontier of risk and return for the organization and its shareholders.

MCFL is exposed to credit, liquidity, operational, market including interest rate risk. It continues to invest in talent, processes, and emerging technologies to build advanced risk management capabilities. Over the years, sustained efforts to strengthen its risk framework have resulted in stable risk metrics and financial position of MCFL.

Credit Risk

MCFL has a strong governance framework and ensures that the Board of Directors and its committees approve risk strategies and delegate appropriate credit authorities. Its robust underwriting practices and continuous risk monitoring ensure that portfolios stay within acceptable risk levels. The company has invested in credit risk including dedicated credit underwriting team, fraud control unit, and data analytics.

Liquidity Risk

MCFL manages its liquidity risk in accordance with its Board approved Liquidity Risk Management Policy which incorporates the stipulations laid down by the RBI. The policy framework and the operational parameters are regularly reviewed by the Asset and Liability Management Committee (ALCO) setup in line with guidelines issued by the RBI, which ensures that there are no material imbalances or excessive concentrations on either side of the balance sheet. The Company follows a prudent approach for managing liquidity and ensures availability of adequate liquidity buffers to overcome mismatches in case of stressed market environment.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems, or human factors, or from external events. MCFL being in lending business, it inherits operational risk. The goal is to keep operational risk at an appropriate level relative to the characteristics of the company s businesses, the markets in which it operates and the regulatory environment.

the company has established procedures and loan approval processes that are clearly specified. The maker-checker principal, joint custody arrangements, the monitoring of exceptions, the separation of roles and responsibilities, and other factors are all part of the internal control. Additionally, a robust system of internal controls, the creation of guidelines and procedures to monitor transactions, the maintenance of necessary backup procedures, and contingency planning are all intended to reduce operational risk. To control risks associated with information technology, the company has created a set of IT and security-related guidelines that provide a governance framework for information security practices.

Operational Risk

Market risk results from changes in market variables like interest rates, foreign exchange rates, and equity prices that affect the fair value of financial instruments future cash flows. The company adheres to a cautious investment policy that directs its investment decisions in order to successfully manage market risk on its investment portfolio. Most of the company s investments in government securities, liquid and arbitrage funds, and deposits with banks and highly regarded financial institutions have been made with surplus funds. The Company adjusts the duration of its investment portfolio to strike a compromise between the twin goals of sustaining company liquidity and minimizing unfavourable fair value change.

Interest Risk

The main reason the Company is susceptible to interest rate risk is that it makes loans to clients at predetermined interest rates and for periods that may be different from those of its sources of financing, which have both fixed and changing interest rates. Interest rates are particularly sensitive to a wide range of external factors, including inflation, the RBI s monetary policies, the liberalization of India s financial industry, regional and global economic and political conditions, and other factors. The Company evaluates and reduces the interest rate risk on its balance sheet by managing assets and liabilities. The Asset Liability Management Committee implements the Company s interest rate policy, liquidity risk management policy, resource planning policy, and asset liability management policy and procedures (the ALM Policy ). Interest rate sensitivity on fixed and floating rate assets and liabilities with differing maturity profiles is measured by using the duration gap analysis to measure the impact of such interest rate movements on its balance sheet. This is computed monthly and sensitivity of the market value of equity assuming varying changes in interest rates are presented and monitored regularly.

Portfolio quality and Delinquency

The Company has put in place a strict risk management framework consisting of risk identification, risk assessment, risk treatment, monitoring and reporting. As a result, the Company s delinquencies have substantially reduced. The company was able to maintain GNPA of 1.31% compared to GNPA of 1.33% in FY21 and Net NPA of the company reduced drastically from 1.12% in FY21 to 0.54% in FY22 amidst strong risk management practices adopted by the Company. Going forward, MCFL shall continue to enhance its portfolio monitoring, database management and information report capabilities.

Credit Rating

The Company s financial discipline and prudence is reflected in the strong credit rating ascribed CRISIL Ratings Limited. The long-term credit rating of the company is CRISIL BBB / Stable on July 7, 2023 for the proposed long-term facilities which reflects the continued sound financial performance of the company.

Facility	Rating Agency	Amount	Rating	Issued on
Long Term Bank	CRISIL Ratings	75 Crores	CRISIL BBB /Stable	July 7, 2023
Facilities*
NCD	CRISIL Ratings	25 Crores	CRISIL BBB /Stable	July 7, 2023

* Previously, Long term bank facilities were IVR BBB/stable (IVR Triple B with Stable Outlook) rated by Infomerics Valuation & Ratings Private Limited on May 9, 2022. However, effectively rating withdrawn from Infomerics Valuation & Ratings Private Limited on July 12, 2023

Human Resources

People are our key pillars of strength. This belief was further strengthened as our people showed tremendous resilience and extraordinary commitment during the pandemic times to bring the Company back to its core performance. The company has adopted people practices that enable us to attract and retain talent in an increasingly competitive market; and to foster a work culture that is always committed to providing the best opportunities to employees to realize their potential. The company is committed as an equal opportunity employer. The company works on concept of Do More Earn More and rewards people for their performance and contribution which are anchored on metricized work deliverables and directly reflected in their earning potential.

MCFL has a strong orientation to learning and development. All employees, from a new joiner to a tenured one, are provided tailored learning opportunities as per their role, level, and specific focus area. In line with its business transformation strategy, the Company has made significant changes to its employee policies and practices. Performance Management is the most critical tool in the Company to drive performance and productivity & accordingly given utmost importance. This is the most important part of HR, where a manager gives his team members feedback, evaluates their work, and compensates them appropriately. Goal setting, self-assessment, managerial evaluation and review, and overall assessment with feedback are all parts of the annual performance management process. Along with its growth strategy, the Company is developing an effective human resource strategy to assist it in managing its growth.

Internal Control Systems and Its Adequacy

The Company has adopted policies and procedures for the governance of orderly and efficient conduct of its business, including adherence to the Company s policies, safeguarding its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable financial disclosures. The Company s internal control systems are commensurate with the nature of its business, the size and complexity of its operations. The internal control system is supported by an internal audit process for reviewing the design, adequacy, and efficacy of the Company s internal controls, including its systems and processes and compliance with regulations and procedures. Internal Audit Reports are discussed with the Management and are reviewed by the Audit Committee of the Board, which also reviews the adequacy and effectiveness of the internal controls in the Company.

Fullfillment of the RBI S Norms and Standards

The company thrive hard to comply with various applicable RBI norms. The company is governed by Master Circular no RBI/DNBR/2016-17/44 Master Direction DNBR.PD.007/03.10.119/2016-17 dated September 1, 2016, and modified/amended from time to time. Further RBI has recently issued various circular important among them are Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs dated October 22, 2021 was issued by the RBI, which has given an implementation timeline of up to October 2022. Subject to some clarifications and detailed guidelines to be issued by the RBI, MCFL is confident of implementing these regulations on or before timeline; Prompt Corrective Action (PCA) Framework for NBFCs issued on December 14, 2021 basis analysis of financial position and performance of the company and as per the PCA framework issued by the RBI, MCFL doesn t fall into any risk threshold category.

MCFL s key regulatory ratios compared to the minimum requirements of the RBI are provided in table below

Key Regulatory Ratios	Actual as on March 31, 2023	As per RBI stipulation
CRAR Tier I	57.93%	15%
CRAR overall	57.93%	15%
ALM (Cumulative)
1-7 days	1,955.87%	(10%)
8-14 days	1,052.17%	(10%)
15-30 days	484.25%	(20%)

Cautionary Statement

Some forward-looking statements in this Management Discussion and Analysis Report may be based on various assumptions about the company s current and future business strategies as well as the environment in which it operates. Due to risk and uncertainties, actual results could significantly or materially differ from those that were indicated or inferred. These risks and uncertainties include the impact of domestic and international political and economic circumstances, the volatility of interest rates and the stock market, new rules and government initiatives that could have an impact on the Company s businesses, and the capability to carry out its business strategies. The Company does not have any obligation to amend these statements; the information provided here is current as of the date indicated. Even though the accuracy or completeness cannot be guaranteed, the Company has gathered all market data and other information from sources it believes to be dependable or from its own internal estimations.