Niyogin Fintech Ltd Management Discussions

Global Economy

2022 began with the global economy still recovering from supply-chain disruptions caused by the COVID-19 pandemic, when it was further impacted by geopolitical tensions. This led to inflation, which remained higher than it has been in recent decades, especially for the developed economies. Central banks responded quickly by raising interest rates. This translated into a gradual decrease in inflation in the latter half of 2022. Thus, many economies reported stronger than expected recovery in the second half of the year on the back of improving domestic conditions. This was particularly evident in advanced economies, especially the United States, which reported lower than forecasted unemployment rates and an overall improvement in labour markets. With commodity prices falling further, global headline inflation is expected to reduce from 8.7% in 2022 to 7.0% in 2023, while underlying core inflation is expected to decline more slowly.

The quick action of Central banks however had an unintended side effect on global banking sector. Post years of high liquidity and low interest rates, tighter monetary policies created a challenging environment for poorly managed banks and non-banking financial intermediaries. Such institutions balance sheets grabbed attention given the large unrealized interest rate-driven losses in securities portfolios, highlighting their unpreparedness for a higher rate environment. A few regional banks in the US faced an asset-liability mismatch as they had invested their short-term deposits in long term securities. This created a liquidity crunch among the banks which resulted in US authorities to step in to restore confidence by giving blanket depositor protection.

Considering these, the International Monetary Fund (IMF) predicts the global GDP growth to decrease from 3.4% in 2022 to 2.8% in 2023, before gradually returning to 3.0% five years later, assuming that current financial sector concerns are addressed.

Sources: IMF World Economic Outlook, April 2023; IMF Global Financial Stability Report, April 2023

Indian Economy

Indias real GDP grew by 7.0% in FY2023, compared to 8.7% in FY2022. India saw a full recovery in FY2022 led by urban demand. At the start of FY2023, various estimates suggested that India was well-positioned for a rapid growth, quickly returning to its pre-pandemic growth trajectory. However, global uncertainties led to rising commodity prices, which, coupled with unfavourable weather conditions, kept food prices elevated. The governments exports restriction and RBIs repo rate hikes and rolling back of excess liquidity helped restrain inflation. The domestic retail inflation remained above RBIs upper tolerance level of 6% for ten months before falling back to the range in November 2022.

India is witnessing a K-shaped recovery as rural demand continues to lag. While urban demand grew despite inflationary pressures, rural demand took a drastic hit due to the harsh second wave of the pandemic, followed by sharp rise in product prices of staple foods. However, with inflation falling below 5% in April 2023, there is a steady revival in rural demand.

Indias economy is expected to expand by 6.5% in FY2024 driven by private consumption, primarily supported by revival in rural demand and Indias rising upper middle-income population with a growing disposable income. However, Deloitte research suggests that private investments towards capacity creation will play a critical role in meeting Indias rising demand, ensure non-inflationary growth in the long-term and provide the required momentum to achieve a sustainable domestic demand-led growth.

The Indian government in its Union Budget for FY2024 increased the capital investment outlay for the third time in a row to 10 Lakh Crores (3.3% of GDP), up 33%. This will be primarily used to crowd-in private investments, create jobs, enhance growth potential, and provide a cushion against global headwinds. Given MSMEs or Micro, Small, and Medium Enterprises are considered to be the growth engines of the Indian economy, they are expected to be key benefactors of this move.

Source: Economic Survey 2022-2023; RBI Bulletin April 2023, May

2023; Invest India; Deloitte

Indian MSME Sector

India is home to 63 Million* Micro, Small, and Medium

Enterprises (MSME), contributing 30%^# to the countrys

GDP, 40%^@ to domestic exports and creating employment opportunities for ~11 Crores of the countrys population. In an effort to ensure continued growth of MSMEs, the Government of India (GOI) has been proactive in introducing various schemes over the years.

GoI is also planning to strengthen the presence of MSMEs in the digital commerce space through initiatives like

Open Network for Digital Commerce (ONDC) which will help democratize digital commerce in India and lower the entry barriers for small retailers trying to sell online. The platform works on an interoperable system, whose network will enable the display of products and services from all e-commerce platforms in search results across all apps on the network. Consequently, the ONDC network will connect all buyers and sellers in a single network. Through ONDC, the GoI plans to increase e-commerce market penetration in India from 8% to 25% by FY2025.

Providing credit support and transforming the sector digitally have been crucial to the growth of the MSME sector, which is also evident in the governments schemes. Growth in credit to the MSME sector has been extraordinarily high, averaging more than 30.5% from

January to November 2022. This has been a boon for the credit starved sector, relieving them from their debt servicing problems while accelerating its recovery post pandemic. Despite the efforts by the government, the credit gap in the MSME sector is estimated to be 20 Trillion^#, with a lack of working capital being the primary concern. This creates a large opportunity for Fintechs like Niyogin to support MSMEs by providing credit. Niyogin has built a fully digital, distribution platform, NiyoBlu and on boarded 5,200 Chartered Accountants (as of FY2023) to get a cost-efficient and wide market access to serve MSMEs. The platform allows MSMEs to experience a fully digital way of borrowing. Niyogin is also one of the few companies with an NBFC license. This not only allows the Company to streamline the lending process through digitization but also allows them to underwrite loans.

NiyoBlu platform offers a comprehensive set of financial services beyond lending through its tie ups with various financial institutions. Therefore, by becoming a one-stop shop for all MSME needs, Niyogin has unlocked cross-selling opportunities within the same base of MSME clients.

Source: *MSME Annual Report FY2023; ^#Forty Sixth Report of the Standing Committee of Finance (17^th Lok Sabha on March 22); ^@ Disclosure data of publicly listed companies; InvestIndia; Economic

Survey 2022-2023, RBI Bulletin April 2023, May 2023

The Asia-Pacific Region (APAC), particularly emerging Asia (China, India, and Southeast Asia) is expected to be the fastest growing market, where Fintechs will help boost financial inclusion. North America, the worlds largest Fintech market, will follow APAC and continue to be an important innovation hub. Europe and Latin America will continue to have significant growth, aided by supportive authorities, while Africa is expected to skip ahead to a new financial ecosystem free of old infrastructure.

This creates a vast opportunity for Fintechs to support underserved SMEs in areas like lending and payments. It is also more lucrative to serve SMEs over individuals given the larger size of loans, broader scale, and more availability of information that enables visibility into their financial standing.

When catering SMEs, Fintechs primary goal is to unlock a cost-efficient way of product delivery by ensuring an end-to-end fully digital experience, utilizing additional distribution channels and keep exploring newer revenue streams through the same customer base.

Need for lending Fintechs to own banking licenses

Globally, lending platforms like BNPL (Buy Now Pay Later), student lending and unsecured lending performed well due to cheap capital in the past years. They issued commercial papers or went for asset securitization to fund themselves. While this worked well when interest rates were low, securing funds is expected to become increasingly difficult in the current, high interest rate environment, thereby rendering their business models unsustainable. Therefore, we are witnessing an increasing trend among lending platforms trying to either own or secure a banking license to have access to low-cost funding.

Source: World Bank – SME Finance, BCG Global Fintech Report 2023, The Economist Special Report on Digital Finance, *BDO 2023 Fintech Predictions

Indian Fintech Industry

The Indian Fintech industry is expected to increase from US$ 584 Billion in 2022 to US$ 2.1 Trillion in 2030, growing at a CAGR of 18%. Rise in per capita income, broader financial inclusivity, and greater internet penetration in deeper geographies of India will be crucial for driving future growth. Fintech industry has six major sub-segments, Lendingtech, Insurtech, Payments, Neo-banking, Investment Tech and Fintech SaaS or infrastructure. Out of these, dominance by players in the digital lending and insurtech space helped boost confidence across the Indian Fintech space.

Indian Fintech Opportunity

Sector & Sub-Sector	Market Size (2022)	Market Size (2023)	CAGR (2022 to 2030)	% Share Market Size (2030)
Overall Fintech Market	$584 Bn	$2.1 Tn	18%	-
Lendingtech	$270 Bn	$1.3 Tn	22%	60%
Insurtech	$87 Bn	$307 Bn	17%	14%
Payments	$165 Bn	$253 Bn	5%	12%
Neobanking	$48 Bn	$183 Bn	18%	9%
Investment Tech	$9.2 Bn	$74 Bn	30%	3%
Fintech SaaS	$4.6 Bn	$31 Bn	27%	1.5%

Source: Secondary Sources, INC42 Calculations

B2B Digital Lending opportunity to be most lucrative

India has the highest number of MSMEs when compared to the US and China but access to formal credit remains the lowest of all. Out of total MSMEs in India, only 16% have access to formal credit. This forces more than 50

Million Indian MSMEs to opt for informal credit and pay extraordinarily high interest rates. Therefore, digital lending in India is all set for an accelerated growth in the coming years driven by the following factors.

• Increased digital adoption: ~68% of MSMEs have undergone a digital transformation in some way or the other as per estimates released by International Data Corporation in 2020. With MSMEs becoming more comfortable with technology, their inclination towards availing digital loans over other options is expected to grow.

• Digital lending, a viable way to serve MSMEs: Over the years, traditional banks could not underwrite credit for MSMEs owing to the lack of relevant information. Also, MSMEs need quick disbursement of small size loans, therefore the time and effort required to underwrite a loan given the size was not economical. Thus, banks increased focus on larger ticket size loans creating a huge market for digital lenders that work on a more agile and cost-efficient model. By ensuring an end-to-end fully digital process from consumer onboarding to product delivery, Fintechs can serve underserved MSMEs and unbanked areas of the country at a fraction of the cost spent by traditional banks that operate on a brick-and-mortar model.

• Growing consumer demand: In India, per capita income grew by over 150% in the last decade. As a result, consumer spending has increased substantially, ultimately driving the MSME growth. This has increased the need for investments to avoid capacity constraints and maintain sufficient working capital for day-to-day requirements. Being a consumer-driven economy, the trend will continue in India, ultimately expanding the opportunity for B2B lenders.

• Support from Government: GoI has not just introduced various schemes but has also been supporting innovation through its continued developments in IndiaStack. a. Credit Guarantee Fund Scheme (CGS) is one such initiative wherein government aims to reduce lending risks among MSMEs by offering guarantee of 75% of the loan amount availed by MSMEs. b. On the innovation aspect, Open Credit Enablement Network (OCEN) is a component of the wider IndiaStack framework of open APIs that allows easy interaction between an ecosystem of lenders, lending service providers (LSPs), account aggregators, and small business borrowers. It will also enable these market participants to form partnerships and work together to develop new financial solutions specifically suited to serve last-mile borrowers and MSMEs.

• Support from Reserve Bank of India

a. Issuance of Udyam Asset Certificate (UAC):Lack of required documents made it enterprises to register on the Udyam Registration Portal (URP) ultimately barring them access to government schemes. Therefore, issuing UAC to these informal enterprises will classify them as micro enterprises making them eligible for various schemes and avail loans issued by NBFCs and banks as per the priority sector lending norms. Fintechs can effectively serve these credit-starved enterprises by employing cash-based lending models wherein they can assess the credit worthiness of the micro enterprise based on their cash flows instead of documents.

b. New Digital Lending Guidelines: Given the digital lending space has grown exponentially in the past couple of years, we saw Reserve Bank of India (RBI) issue various guidelines on digital lending last year to regulate the lending platforms and applications in an aim to protect the borrowers from unethical lending practices. In September 2022, RBI released a comprehensive set of guidelines pertaining to Digital Lending Applications (DLAs) and Lending Service Providers (LSP). These were on various facets, such as loan disbursal, servicing, repayment, regulatory reporting, collections, disclosures to borrowers, borrowers data collection, usage and third-party sharing. Hence, it has become imperative for DLAs to have the necessary technology and infrastructure in place, for informal micro that is compliant with the regulatory guidelines.

In December 2022, with an aim to smoothen the digital lending process and protect borrowers from usurious interest rates, RBI laid out further guidelines to strike a balance between innovation and compliance. One of the key guidelines was that execution of loan disbursals and repayments will occur between the bank accounts of the borrowers and the regulated entities such as the banks and the NBFCs. Being a regulated entity with a digital DNA, Niyogin exists at a sweet spot where it is able to merge the best of both traditional lenders and modern fintech.

It can serve MSMEs by providing not just credit but also a host of other financial services through its fully digital platform, NiyoBlu. Niyogins tie-ups with financial institutions allow its offerings to go beyond lending and choose from a host of other financial services available on the platform. Niyogins asset light and partnership model allow it to acquire customer and distribute services cost effectively.

Indian Digital Payments Landscape

Over the last five years, Indias digital payments landscape has grown from US$ 165 Billion in 2022 to US$ 253 Billion in 2030, growing at a CAGR of 5%. This is expected to be driven by following factors.

Recent key government initiatives and is expected to increase

• GoI, through its collaboration with Singapores PayNow, has introduced UPI-PayNow to facilitate cross border transfers between these two nations, paving the potential for additional collaborations in future.

• National Logistics Policy: GoI plans to regularize the highly fragmented Logistics sector, currently valued at 160 Billion, for better management. Therefore, the plan has been to set up a single platform called Unified

Logistics Interface Platform (ULIP) that will digitize the sectors financial transactions and act as a boost for digital payments.

• National Common Mobility Card: NCMC is another great move by GoI to achieve its vision of ‘One Nation One Card. The card will give an integrated access to the commuters irrespective of where they are travelling, or the commute taken. Integration of NCMC on credit and debit cards to facilitate transit payments will provide further impetus to digital payments.

Recent initiatives by RBI

RBI took a number of actions to support growth of digital payments and promote financial inclusion in FY2023.

DigiSaathi: To raise public knowledge of digital payments, the RBI and NPCI created DigiSaathi. It is a round-the-clock helpline with a website, chatbots, and toll-free calls that addresses customer queries and distributes information on all digital payment products.

UPI123PAY: ~28% of Indian population still own feature phones. This will make digital payments available to those users by allowing feature phone users to send payments via UPI.

UPI Lite: This is an on-device wallet-based UPI system for small ticket transactions up to 2000 wherein users can load money in their wallet, which can then be used to make payments in offline mode. This is expected to help users in areas of low/negligible internet connectivity.

Inward, cross-border remittance through BBPS: The

RBI launched BBPS cross-border payments for inward remittance. This will help non-resident Indians (NRIs) pay utility, water, and telephone-related bills directly from their mobile phones.

BBPS open for all categories of payments and collections: The RBI enabled dual payments and collection of both recurring and non-recurring in nature for all categories. This is expected to facilitate payments like education fees, tax payments and rent collections, to be made through BBPS.

Central Bank Digital Currency (CBDC): Through CBDC, RBI has started exploring the usage of digital currencies. RBI launched CBDC in retail and wholesale segments in late 2022, within a closed group. While currently RBI has started testing with 4 banks, CBDC is expected to be used for both Peer to Peer (P2P) as well as Peer to Merchant (P2M) payments.

Linking RuPay Credit Cards to UPI: This is expected to increase the adoption of digital payments and benefit its stakeholders due to the following reasons:

• Increase in credit card usage

• Income augmentation to payment facilitators by charging merchant discount rate (MDR) to merchants for all UPI transactions made through credit card

• Increase in sales to merchants as consumption is expected to increase

Key digital payment methods

Unified Platform Interface (UPI):

Unified Platform Interface (UPI): UPI emerged as the fastest growing payment instrument in India as transaction volumes grew by over 55% YoY to ~8700 Million in FY2023. Rising income levels, increased smartphones penetration and push by the government and other regulators are expected to continue to drive this growth in future.

We are seeing various new trends in the sector that will further boost the use of UPI by Indians and grow the segment in future.

• Cross border payments: Indias partnerships with other countries like Singapore, the UAE, Nepal, Malaysia, Thailand, Cambodia, Hong Kong, Taiwan, Japan, Vietnam, Philippines, South Korea and Bhutan will enable low-value transactions and cross-border remittances through UPI.

• Re-introduction of Merchant Discount Rate (MDR):

More than three years ago, in an attempt to boost the use of UPI, RBI had removed MDR that was charged to merchants by digital payment providers. However, RBIs plan to reimburse MDR for FY2023 and re-introduce the same in a couple of years will provide much-needed relief to industry players who have not been generating any revenue through UPI transactions.

Aadhaar Enabled Payment System (AePS)/Micro-ATM (M-ATM): AePS and M-ATM are a digital to cash product that is especially meant to serve Indias deeper geography population. Lack of smartphone penetration, network connectivity issues and systemic issues like digital illiteracy have been the key reasons as to why digital only payments have not found substantial traction in rural India.

AePS is a bank-led technology that permits online interoperable financial transactions using PoS (Point of Sale/Micro-ATM) terminals and uses Aadhaar number and biometric authentication as factors for authenticating the transactions. There were 20 Million M-ATM devices as on March 31, 2023, that grew at a CAGR of 72% in last 2 years.*

Bharat Bill Payment System (BBPS): The growth of digital payments has witnessed a substantial contribution coming from the BBPS segment. BBPS volume and value of transactions was largely driven by utility bill payments. National Payment Corporation of India (NPCI) has planned to introduce newer categories that are recurring in nature and will help boost the future growth in the segment.

Currently, e-challan, ticketing, wallet reloading, semi-closed PPI reloading and rent payments are expected to contribute significantly in the coming years. Besides RBIs BBPS-related initiatives, governments effort towards improving infrastructure in rural areas will result in more households receiving water supply and electricity ultimately increasing the customer base for BBPS.

Prepaid payment instruments (PPIs): This is an emerging segment in India, with prepaid wallets being a significant contributor towards segments growth, as per PwC analysis. These instruments facilitate ease of payments for goods and services, including financial services, remittances, and fund transfers to family and friends. However, in the coming years, prepaid cards are expected to become a prevalent instrument in a lot of sectors like FMCG, wherein they can issue specific prepaid cards to purchase their goods, and among travel companies that might start issuing travel cards, are some use cases. This will result in steady growth in the PPI segment.

Fintech infrastructure players supporting other Fintechs to launch Super Apps

Matured Fintechs have been working towards building super apps. As the name suggests, the objective is to create a single platform with a variety of features and services to cater to customers day-to-day needs like transferring money, paying bills, fees, booking tickets, managing investments, applying for loans and buying insurance, among others. Fintechs keep adding new features and products to maintain customer engagement. They have been grouping several specialised applications creating an ecosystem of integrated third-party services backed by a payment system. Financial infrastructure providers have been playing a key role in helping other Fintechs to expand their product stack by providing BaaS in the form of full stack, API, and SDKs.

Niyogins subsidiary, iServeU, a financial infrastructure or BaaS provider, has built a comprehensive stack to cater to the various needs of banking correspondent agencies, banks and Fintechs.

• Effective management of the backend: Besides providing its stack, iServeU also takes the responsibility of continuously maintaining and upgrading the technology. This allows its customers to focus on their core business operations without having to worry about the tech.

• Cost-efficient and robust financial delivery model: iServeUs partner-led and asset light strategy allows the Company a cost-efficient market access. It has further built its own switch – "iSwitch" that not just helps in reducing transaction costs and earn a higher margin, but also ensures a seamless customer experience and significantly high transaction success rates.

• Promoting financial inclusion: iServeU offers its financial inclusion stack to banking correspondent agencies and agents to facilitate cost-efficient delivery of financial services that is more economical than traditional banks.

• Supporting banks: iServeUs ability to offer customized solutions allows it to cater to specific use cases of banks and assist them in their digital journey. By gaining access to iServeUs tech stack and a team of experts, banks can scale up more rapidly and employ prompt digital processes as and when they identify the need.

• Empowering other Fintechs: iServeU has been working with multiple Fintechs to help them provide varied services on their platform. It is also assisting Neo-banks by offering APIs that facilitate a fully digital banking experience by offering services like digital account opening to its customers. iServeUs scalable and flexible

API infrastructure allow it to manage large amounts of data on behalf of the Fintech customer without compromising on the end users experience. Moreover, iServeUs Plug and Play approach allows Fintechs to easily add new products. The Company is further leveraging its ability to offer customized solutions and emerging as a Go-To partner for the multiple marquee partners that it works with.