Northlink Fiscal & Capital Services Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

Global Economy Overview

The disruption wrecked by the ongoing COVID-19 pandemic put the global economy in recovery mode. Multiple vaccine approvals and the launch of vaccination in many countries raised hopes of an eventual end to the pandemic. Despite the high and rising human toll caused by the novel virus, economic activity remained subdued in 2020 as the global economy contracted by 3.3 per cent. Economies adapted to new ways of working after lockdowns were eased in the second half of the year. With the passage of time, businesses have adapted to subdued contact-intensive operations.

Yet, global prospects remain highly uncertain one year into the pandemic. New virus mutations and the accumulating human toll raise concerns, even as growing vaccine coverage lifts sentiment. Economic recoveries are diverging across countries and sectors, reflecting variation in pandemic induced disruptions and the extent of policy support. Additional policy measures announced at the end of 2020, notably in the United States and Japan, are expected to support the global economy in 2021 and 2022. Global growth is projected at 6 per cent in 2021, moderating to 4.4 per cent in 2022, which reflects the additional fiscal support in certain advanced economies and the anticipated vaccine- powered recovery starting second half of 2021.

(Source: IMF World Economic Outlook, April 2021)

Indian Economy outlook

Even before the COVID-19 outbreak, the Indian economy was in slowdown mode. Led by a decline in private consumption growth, weaknesses in the financial sector compounded a collapse in investment demand. The COVID-19 outbreak that triggered a nationwide lockdown followed by phased opening of economic activities, impacted GDP growth in FY 2020-21. The sub-sectors worst affected by the mobility restriction due to the lockdown included aviation, tourism, hospitality, trade, construction and industrial activity.

The Governments huge spending on healthcare and infrastructure sectors, RBIs liquidity measures and the massive vaccination drive helped economic recovery in the second half of FY 2020-21. As per the second advance estimates of National Income by the Governments National Statistics Office (NSO), real GDP contraction is estimated around 8 per cent mainly on account of significant growth of subsidies.

The massive spending push of over Rs. 4 trillion announced in the Union Budget 2021-22 is expected to boost consumption supported by solid fiscal and quasi-fiscal measures.

The agriculture sector has been the only silver lining this fiscal year while the manufacturing sector also registered a partial recovery in the second half of this fiscal in anticipation of festival season demand.

As per the World Bank, Indias GDP growth is estimated between 7.5-12.5 per cent during FY 2021-22 depending on the success of the vaccination campaign, requirement of mobility restrictions and global economic recovery. As economic activity normalizes domestically and in key export markets, the current account is expected to return to a mild deficit of around 1 per cent in FY 2021-22 and FY 2022-23 while capital inflows are projected basis the continued accommodative monetary policy and abundant international liquidity conditions.

(Source: National Statistics Office, World Bank)

India officially entered into a recession in 2020. Data from the Central Statistical Office (CSO) however reveals sequential improvement in quarterly GDP growth (-24.4%/- 7.3%/0.4% in 1Q/2Q/3QFY2020-21) driven by - i) gross capital formation (possibly driven by center and states government capital expenditure growth along with households capital expenditure in real estate), and ii) private and government consumption expenditure. India is again witnessing a fresh surge of infections that reinforces growth pressures amidst several regional lockdowns. The second wave of Covid-19 infections remains the key downside risk to growth assumptions which so far have been retained by the RBI at 10.5%YoY for 2021 (IMF projects growth at + 12.5% in 2021). In response to the pandemic crisis, the government announced stimulus measures worth INR 17trn - (8% of FY2019-20 GDP), directed primarily towards the poor, migrants and rural areas (c.44%). The economic slowdown in 2020 directly reflected in the negative growth in revenues. Yet, favouring counter-cyclical policy, the Centre held up spending and revised its gross-fiscal deficit-to-GDP target for FY2020-21 from 3.5% to 9.5%. For FY22, the deficit target has been set at 6.8% with focus on i) capital expenditure, ii) infrastructure spending and announcement to set-up a Development Finance Institution, iii) asset monetization, and iv) financial sector reforms (privatization of Public sector banks /one insurance company, setting up of an ARC and AMC), amongst others.

(Source: International Monetary Fund, Reserve Bank of India, Union Budget 2021-22)

Monetary conditions

As the Covid-19 pandemic picked up pace in India, the RBI cut the i) repo rate by 40bps to 4.0%, and ii) reverse repo rate by 45bps to 3.35%. After May20, with high inflation and improving economic activity with easing lockdowns, no further rate cuts were announced but the RBI maintained its accommodative stance with the commitment to do so "as long as necessary to sustain growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward". The RBI also announced liquidity measures worth INR 13.6trn (7% of FY2019-20 GDP) including- i) long-term/ targeted-term repos (LTRO/TLTRO/TLTRO 2.0/On-Tap LTRO worth INR 2/1/0.5/1trn), ii) net Open market operations (OMO) purchases worth 1.5trn, iii) special liquidity facility for mutual funds/ refinance to NABARD, SIDBI, NHB and EXIM bank/ special liquidity scheme for NBFCs worth INR 500/750/300bn, iv) variable rate repo worth INR 2.25trn, and v) CRR cut worth INR 1.37trn ( to be reversed in two phases). In order to ensure the gradual and orderly evolution of the yield curve, after bond yields rose sharply with the higher than-expected market borrowings in the Union Budget 2021- 22, the RBI for the first time in history committed its balance sheet for the conduct of monetary policy by announcing the Government Securities Acquisition Programme (G-SAP). This announcement assures purchase of G-securities worth INR 1trn in 1QFY22, in addition to the exiting tolls of the RBI such as the LAF operations, OMOs, special OMOs etc.

(Source: International Monetary Fund, Reserve Bank of India, Union Budget 2021-22)

Inflation

Inflation remained above RBIs target band of 4% +/-2% for the first eight months of FY2020-21 till Nov20-reaching its highest peak since 2014 of 7.6% in Oct20 mainly on account of high food inflation. Though retail inflation fell back under RBIs target band post Nov20, it gained pace again in Feb21/ Mar21 reaching 5%YoY/ 5.5%YoY due to- i) uptick in food inflation, and ii) historic highs in petrol/diesel prices

Overall, retail inflation in FY2020-21 stood at 6.2%YoY, 1.4ppts above FY2019-20 retail inflation. Wholesale inflation on the other hand came off by 1.1ppts to 0.6%YoY in FY2020- 21 (till Feb21) vs. FY2019-20. The inflation target of 4% with a +/-2% tolerance band was retained for the next five years. the RBI expects inflation to average at 5% for FY22- i) 5.2% in 1QFY22, ii) 5.2% in 2QFY22, iii) 4.4% in 3QFY22, and iv) 5.1% in 4QFY22. Upside risks to inflation remain in the form of - i) higher commodity prices and the consequent passthrough to output prices, and ii) elevated fuel taxes by the Centre and states which has implications on core inflation too.

(Source: International Monetary Fund, Reserve Bank of India, Union Budget 2021-22)

INDUSTRY OVERVIEW NBFC Sector Analysis

NBFCs play an important role in providing credit by complementing the efforts of commercial banks, providing last mile financial intermediation and catering to niche sectors. NBFCs have become important constituents of the financial sector and have been recording higher credit growth than scheduled commercial banks (SCBs) over the past few years. NBFCs are continuously leveraging their superior understanding of regional dynamics, well-developed collection system and personalised services to expedite financial inclusion in India. Lower transaction costs, quick decision making, customer orientation and prompt provision of services have typically differentiated NBFCs from banks. Considering the reach and expanse of NBFCs, these are well-suited for bridging the financing gap. Systemically important NBFCs have demonstrated agility, innovation and frugality to provide formal financial services to millions of Indians.

Over the last decade, NBFCs have witnessed phenomenal growth. From being around 12% of the balance sheet size of banks in 2010, these are now more than a quarter of the size of banks.

Given their large interconnection with the financial system and the importance of the NBFC in credit intermediation, the RBI has been enhancing the regulatory oversight of large NBFCs. Keeping in mind potential systemic risks that NBFCs might pose to the financial system, the RBI in its ‘Discussion Paper on Revised Regulatory Framework for NBFCs: A Scale-Based Approach (12 January 2021) seeks to balance regulatory arbitrage in favour of NBFCs and the recent growth trajectory of NBFCs by adopting a new approach towards regulating NBFCs.

The continuing lockdown till June 2020 and a gradual opening of economy thereafter resulted in a sharp reduction in inquiries for consumer credit and consequent lower acquisition of business .On 27 March 2020, the RBI had announced a moratorium for EMIs / payments falling due from 1 March 2020 till 31 May 2020. This moratorium was further extended on 23 May 2020 for all EMIs / payments falling due up to 31 August 2020. Approximately 40.4% of total outstanding loans of financial institutions as on 31 August 2020 were under moratorium covering approximately 45.6% of customers

Thus, the business model of the NBFC sector was severely tested in FY2021. This was the fourth large external stress that the sector has faced in the last few years, namely, (i) demonetization, (ii) GST implementation, (iii) failure of a large NBFC, and (iv) the pandemic. The fact that many NBFCs have managed to overcome these severe stresses without significant impact is a testimony to their resilience. With superior capital adequacy, better margins, frugal cost management and lower non-performing assets (NPAs), the NBFC sector is well poised to seize the opportunity provided in the postpandemic revival cycle. The revised regulatory framework proposed by the RBI intends to make the NBFC sector more resilient.

(Source: RBI Report on Trend and Progress of Banking in India)

Revised Regulatory Framework for NBFCs - A Scale-Based Approach

Over the years, NBFC sector has undergone considerable evolution. Higher risk appetite of NBFCs has contributed to their size, complexity and interconnectedness making some of these entities systemically significant, posing potential threat to financial stability.

In this overall context, the Reserve Bank has released a discussion paper on Revised Regulatory Framework for NBFCs - A Scale-Based Approach. Aimed at development of a strong, well governed and resilient NBFC sector, the discussion paper proposes a scale based regulatory framework, founded on the principle of proportionality. The degree of regulatory/supervisory interventions will depend on the risk inherent in the operation of an NBFC and the extent of spillover risks it is likely to pose to the financial system. The proposed regulatory framework would place NBFCs into various layers based on the need for differentiated regulations for NBFCs falling in each layer.

The lowest layer will comprise NBFCs currently classified as non-systemically important non-deposit taking NBFCs (NBFC-ND). The threshold for NBFCs falling in the layer will be raised to Rs. 1,000 crore. Additionally, certain NBFCs considered to be inherently less risky in their operations will fall in this layer, including peer-to-peer lending platforms, NBFC- account aggregators, non-operative financial holding companies and type I NBFCs. NBFCs in this layer will continue to be governed by extant regulations applicable for NBFC-ND. However, the regulatory framework would be supplemented by enhanced governance and disclosure standards.

The middle layer will consist of systemically important non-deposit taking NBFCs (NBFC- ND-SI) and deposit taking NBFCs (NBFC-D). In addition, a few other types of NBFCs, such as housing finance companies (HFCs), infrastructure finance companies, infrastructure debt funds, standalone primary dealers (SPDs) and core investment companies (CICs) will also feature in this layer on the basis of their activity. These NBFCs shall be subject to regulatory structure as applicable for NBFC-ND-SI and NBFC-D at present. However, adverse regulatory arbitrage vis-a-vis banks is proposed to be addressed in order to reduce systemic risk spillovers, where required. Though CICs and SPDs will fall in the middle layer of the regulatory pyramid, the existing regulations specifically applicable to them, will continue to prevail.

The upper layer will consist of only those NBFCs which are specifically identified as systemically significant among NBFCs, based on a set of parameters, viz., size, interconnectedness, complexity and supervisory inputs. In addition to the regulations applicable to the previous layer, a set of additional regulations will apply to these NBFCs. In view of their large systemic significance and scale of operations, the regulation of these NBFCs will be tuned on similar lines as those for banks, while providing for the unique business model of the NBFCs as also preserving flexibility of their operations. Some of the proposed regulatory provisions for these NBFCs include mandatory listing, introduction of common equity tier 1 and certain aspects of large exposure framework.

It is possible that considered supervisory judgment might push some NBFCs out of the upper layer of the systemically significant NBFCs for higher regulation/supervision. These NBFCs will occupy the top layer as a distinct set. Ideally, this top layer of the pyramid will remain empty unless supervisors take a view on specific NBFCs.

(Source: RBI)

• OPPORTUNITIES & THREATS, PERFORMANCE AND OUTLOOK

The Company is expecting good opportunities in the upcoming financial year. However, threats are perceived from its existing and prospective competitors in the same field also the changes in the external environmental may also present threats to the industry i.e. Inflationary pressures, slowdown in policy making and reduction in household savings in financial products, Competition from local and multinational players, Execution risk, Regulatory changes, Attraction and retention of human capital are the major setbacks for NBFCs. The company bears the normal risk in terms of inherent business risk in the kind of business the company is into. The Board of the company has taken a balanced approach for investing in these activities. After bad experience in the past, the Board is adopting a cautious approach and not an aggressive one. After stabilization for existing business, the company will foray into other related areas to have good growth in future.

• INTERNAL CONTROL AND THEIR ADEQUACY

Internal control measures and systems are established to ensure the correctness of the transactions and safe guarding of the assets. The control systems set on place and further supplemented by MIS which provided for planned expenditure and information in disposal and acquisition of assets. The Company has in place adequate internal control systems covering all its operations. Proper accounting records highlight the economy and efficiency of operations, safeguarding of assets against unauthorized use or losses, and the reliability of financial and operational information. Some of the significant features of internal control system are:

> Financial and Commercial functions have been structured to provide adequate support and control of the business.

> Risk Management policy has been adopted by the Company.

> The Company has an Internal Audit System conducted by the internal auditor of the Company. Standard operating procedures and guidelines are reviewed periodically to ensure adequate control.

• Risk and Concerns:

Due to stiff competitions in the finance field where the companys activities are centered in, the overall margins are always under pressure, but maintainable with the constant effort and good services rendered by the company.

• FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The Company has achieved total revenue Rs. 165.95 Lakh and earned profit after tax of Rs. 17.86 Lakh.

• MATERIAL DEVELOPMENT IN HUMAN RESOURCES AND INDUSTRIAL RELATION FRONT, INCLUDING NO. OF PEOPLE EMPLOYED

Your company continues to lay great stress on its most valuable resource people. Continuous training, both on the job and in an academic setting, is a critical input to ensure that employees at all levels are fully equipped to deliver a wide variety products and services to the customers of the company. The company had employed 7 persons during the financial year 2020-21. Industrial Relations throughout the year continued to remain very cordial and satisfactory.

• KEY FINANCIALS RATIO

Sr. No. Ratio 31.03.2021 (In %) 31.03.2020 (In %) Variation Explanations
1. Interest Coverage Ratio 10.27 7.09 44.71% Variation due to decrease in interest paid in 2021 as compared to 2020.
2. Current Ratio 1.23 1.72 -28.49% Variation due to increase in loan & advances granted in 2021.
3. Debt Equity Ratio 0.12 0.29 -58.62% Variation due to debt paid by the company during 2021.
4. Operating Profit Margin 10.01 2.06 384.28% Variation due to decrease in revenue
5. Inventory Turnover Ratio 27.11 77.44 -64.99%
6. Net Profit Margin 10.76 1.76 511.36%
7. Debtor Turnover Ratio 1.25 0.67 86.57% Variation due to decrease in revenue as well as receivables.
8. Return on N et Worth 3.00 3.42 -12.28% -

• DETAILS PERTAINING TO NET-WORTH OF THE COMPANY:

Sr. No. Particulars 31.03.2021 (In Rs.) 31.03.2020 (In Rs.)
1. Net worth Rs. 5,92,23,000 Rs. 5,78,48,000

• DISCLOSURE OF ACCOUNTING TREATMENT:

The Company has followed the same Accounting Standard as prescribed in preparation of Financial Statements.

• CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis Report describing our company objectives, expectations or predictions may be forward looking within the meaning of applicable regulations and other legislations. Actual results may differ materially from those expressed in the statement. Important factors that could influence company operations include global and domestic financial market conditions affecting the interest rates, availability of resources for the financial sector, market for lending, changes in regulatory directions issued by the Government, tax laws, economic situation and other relevant factor.