Octal Credit Cap Management Discussions


GLOBAL ECONOMIC OVERVIEW

It has been three years since the start of the pandemic, and the global economy has been through a series of unexpected and hugely impactful disruptions. Over the past year alone, the global economy has witnessed one of the biggest surges in inflation. The global growth is expected to fall to 2.8% this year from 3.4% in 2022 before edging back up to 3% in 2024 (Source: IMF).

GLOBAL ECONOMIC OUTLOOK

Ongoing inflation and elevated interest rates continue to exert pressure on global economic performance, compounded by a pervasive climate of uncertainty and risk that has given rise to a spectrum of plausible outcomes. Nevertheless, the advanced economies have demonstrated remarkable resilience, while the reopening of China in late 2022 has helped generate positive growth impulses, culminating in a more promising outlook for the global economy.

Despite facing several challenges, the US economy has experienced certain degree of growth momentum well into 2023. Driven by consumer spending, the real GDP growth forecast for the US has undergone an upward revision of 0.9% in 2023(Source: Euromonitor International). Nevertheless, uncertainties and vulnerabilities are still present, owing to factors like the mounting impact of high-interest rates and prolonged inflation, as well as the turbulence in the US banking sector that began in March 2023. It is anticipated that the eurozone economy will experience a positive upward trend and is projected to expand by 0.5% in the year 2023. This is due to sharply reduced energy prices and considerably higher energy security. Against this backdrop, economic resilience will be supported by strength in the labour market, private consumption and manufacturing. Nonetheless, the escalation of inflation, which excludes food and energy, and the restrictive monetary policy implemented by the European Central Bank to curb surging prices, are likely to weigh on short and medium-term growth prospects. Pent-up demand in China is expected to boost consumption and consequently, stimulate substantial regional growth effects, with tourism and commodities expected to reap benefits. Projections indicate that real GDP growth in the Asia Pacific region will attain 4.6% by 2023 (Source: Euromonitor International), emerging as the highest rate amongst all regions. This growth will be bolstered by Chinas expansion, which is further expected to generate momentum in the Asian Pacific region, comprising some of the worlds top growing emerging economies in 2023, such as India, Indonesia, the Philippines, and Vietnam. While advanced economies slackening will impede the regions manufacturing and commodity exporters, these nations are still expected to retain significant growth momentum.

INDIAN ECONOMIC OVERVIEW

India will surpass China to become the worlds most populous nation during May 2023, according to calculations from the United Nations, in a milestone that is expected to cement its growing image as one favourites of the global economy. The countries so-called“demographic dividend,” the potential economic growth arising from a large working-age population, represents a major opportunity. Its vast consumer market and pool of affordable labour is also drawing more attention from global brands and trading partners.

INDIAN ECONOMIC OUTLOOK

Growth in investments will be critical to meet Indias rising demand and ensure non-inflationary growth in the long run. Capital investments, at a higher scale by the government and expected fresh ones by the private sector, will drive medium-term growth, while digitalisation and efficiency-enhancing reforms will raise the contribution of productivity. Better physical infrastructure is expected improve connectivity and lower logistics costs for industries, while digital infrastructure will bring efficiency gains by serving as a platform for innovation and efficient payments systems. India Inc.s, revenue growth is expected to touch double digits in fiscal 2024 despite a global slowdown and interest rate hikes. This will be driven by a 10-12% growth in revenue for the non-commodity sectors, even as commodity prices remaining benign. Importantly, this will follow a 16-18% on-year rise in revenues in fiscal 2023 after the commodity super-cycle boost in fiscal 2022.While government policies is expected to push industrial capex and new-age opportunities, infrastructure spending will drive 12-16% growth in overall capex next fiscal. This is to achieve nearly 75% of the initial targets set under the National Infrastructure Pipeline by fiscal 2025.Overall industrial capex is expected to see rising to nearly Rs. 5.7 lakh crores on average between fiscals 2023 and 2027, compared with Rs. 3.7 lakh crores in the past five fiscals. Nearly half of this incremental capex is expected to being driven by the Production-Linked Incentive (PLI) scheme and new-age sectors. Merchandise exports are also expected to grow a moderate 2-4% in fiscal 2024 after an estimated 5-7% increase in fiscal 2023, with the PLI scheme supporting demand owing to global supply chain diversification and ‘friend-shoring strategies.

Union Budget 2023 24 builds on the vision set out in the previous budgets and provides a blueprint for steering the economy towards a sustained high-growth trajectory.

NBFC INDUSTRY IN INDIA

The world seems to be recovering from the aftermath of the challenges posed in the last few years. Overall despite the challenges, India has emerged as a bright spot in terms of economic growth amidst an outlook of global slowdown. Recently, the World Bank has reported that India is better positioned to navigate global headwinds and handle global spill-overs, as compared to other major emerging economies. The uptick in demand during the festive season is another reason which makes us optimistic. It is heartening to see that the RBI and policymakers recognise the contribution of NBFCs in supporting real economic activity and meeting the credit demand, especially reaching the unbanked. The recent RBI Scale based norms is another welcome step for the industry that will elevate the status of NBFCs in line with several other public sector NBFCs.

There are over 9,000 NBFCs which are currently registered with the RBI, and NBFCs are classified into four layers namely Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL) and Top Layer (NBFC-TL) based on their size, activity, and perceived riskiness. Recently, sixteen entities have been identified for categorisation as NBFC-UL under the Scale Based Regulation framework. At the end of H1FY23, aggregate credit extended by NBFCs grew by 13.1% and stood at Rs 31.5 lakh crores (Source: Care Ratings). Over the last four and half years, loans to industry lost market share from 40.6% in FY19 to 37.5% in H1FY23 and yet continued to constitute the largest segment, followed by personal loans at 29.5%, services at 14.7% and agriculture at 1.7%. Advances to service and retail segments grew the fastest in H1FY23. Government-owned NBFCs have been ceding ground in the industry segment. According to RBIs Financial Stability Report December 2022, NBFC-UL group recorded higher credit growth (y-o-y) of 17.2% and a better GNPA ratio of 4.2% as of September 2022 than the overall NBFC sector.

The GNPA ratio declined in September 2022 as it neared the sectors pre-pandemic levels. However, Special mention accounts (SMAs), however, increased from 8.5% per cent of total advances in December 2021 to 10.8% in September 2022. The capital adequacy (CRAR - Capital to Risk (Weighted) Assets Ratio) of NBFCs continued to be robust as of September 2022. The marginal decline was attributed to rising lending activities. The credit outlook is expected to be stable for Banks and NBFCs with scaling up of operations. Macro stress tests indicate that under the baseline scenario, the Gross Non Performing Asset (GNPA) of NBFCs reduces to 5.8%, while under the medium risk and high risk, the GNPA ratio rises to 6.9% and 8%, respectively.

OPPORTUNITIES AND THREATS

Over the years, the NBFC sector has evolved in terms of its size and assumes an important role in the process, as it is a valuable source of financing for many firms, micro and small units as well as individuals/small business owners and facilitating competition amongst the credit providers. Further, niche NFBCs fulfil the unmet and exclusive credit needs of various segments such as infrastructure, factoring/ leasing, operations and technological sophistication. The NBFC sector has also grown significantly and more interconnected with the financial system.

The RBI red-flagged the NBFCs, as it observed that balance sheets of the shadow banks expanded even as their asset quality deteriorated. The balance sheet of NBFCs expanded in 2022-23 but the sectoral asset quality witnessed deterioration, although capital cushions showed an improvement. Whilst contribution of NBFCs towards supporting real economic activity and acting as supplemental channel of credit intermediation alongside the banks is well-recognised, higher risk appetite of the NBFCs has contributed to their size, complexity and interconnectedness, thereby posing potential threat to financial stability of the country. Thus NBFCs need to be mindful of frailty and ensure robust asset-liability management apart from improving the quality of their credit portfolios. The central bank also introduced scale-based regulatory framework for the sector, wherein larger NBFCs will be subject to tighter regulations, given their systemic importance. The current geo-political scenario can also alter the status of domestic NBFC sector. The Russia-Ukraine war and associated sanctions/disruptions are leading to a stressful macro situation for NBFCs in India. Inflation, which is already high, is likely to spurt due to supply chain issues across sectors and high energy prices.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS

The company is committed to help its people to gain varied experiences, accomplish challenging assignments, learn continuously and build their career. Our endeavour has been to create home-grown leaders who focus on its customers needs aligned to its core values and operate with an ethical governance mind-set. Integral to the companys approach to human resource development is its focus on developing and nurturing distributed leadership so that each business of the company is managed by competent, passionate and inspiring leaders, who are capable of building a future-ready organization through continuous learning, innovation and execution. The key aspects of our HR practice include recruitment, training and development and compensation.

INFORMATION TECHNOLOGY AND SYSTEMS

The companys constant drive for growth leads to strengthening of its information technology too. All the systems of the company are connected by integrated tailor-made software. It also has a well-developed MIS and accounting system and database to manage the information related to the borrowers.

CAUTIONARY STATEMENT

This statement made in this section describes the companys objectives, projections, expectation and estimations, which may be ‘forward looking statements within the meaning of applicable securities laws and regulations. Forward looking statements are based on certain assumptions and expectations of future events. The company cannot guarantee that these assumptions and expectations are accurate or will be realised by the company. Actual result could differ materially from those expressed in the statement or implied due to influence of external factors, which are beyond the control of the company. The company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments.