Octal Credit Capital Ltd Management Discussions.

NBFCs in India

OCCL is a registered NBFC-ND with RBI and the company is listed with BSE Ltd and Calcutta Stock Exchange Ltd. The company is actively engaged in the fund based activities, providing loans and advances, inter corporate deposits, investment in shares & securities etc. OCCL services today are readily available to individual, corporate, financial institutions etc. The Indian NBFC sector for the past three years have been giving stiff competition to established banks in the country and finally edged ahead as their portfolio of loans grew at a rate of 14.9% during the first half of 2017-18, compared to 6.2% in the case of banks. The credit granted by NBFCs as a percentage of GDP rose to 8%, displaying their significance in the countrys financial ecosystem. While the bank credit reached a historical low during 2016-17, NBFCs recorded an increased credit performance during the same year, highlighting the growing popularity in the country. Retail NBFCs benefited immensely from lower interest rate and benign liquidity conditions in the last three years. It not only lowered their cost of funds and boosted margins but easy availability of capital allowed them to raise their share of the overall loan market at the expense of commercial banks. This came on the back of industrys equally fast growth in the previous three years. Retail NBFCs loan book grew at a CAGR of 19.7% during the three years ending March 2017. This was nearly thrice the pace of growth (6.9%) in bank loan books during the period. This helped bridge the credit gap in the country and provided alternate sources of finance to individuals and entities with lower credit ratings. This rise was mainly on account of a subdued performance by banks on the back of events such as the demonetisation and the implementation of resuscitative actions such as the PCA and the AQR. This translated into a profit boom in the industry and the combined net profit of NBFCs grew at a CAGR of 18.7% during three-year period ending March 2017, making NBFCs one of the best-performing sectors on the bourses during the period.

Our Company is a professionally managed company, which focuses its vision on financial services & follows strict code of conduct of business by practicing fair business values with stake holders and society at large. It had been complying with all relevant enactments and status of the land in letter & in spirit. There is a strict adherence to ethics and responsibility towards all those who come within its corporate ambit.

Global economy Overview

In 2017, a decade after the global economy spiralled into a meltdown, a revival became visible. Every major economy expanded and a growth wave created jobs. This reality was marked by ongoing Euro-zone growth, modest growth in Japan, late revival in China and improving realities in Russia and Brazil leading to an estimated 3.7% global economic growth in 2017, some 60 bps higher than the previous year. Crude oil prices increased in 2017, the prices at the beginning of the year being at $54.13 per barrel, declining to a low of $46.78 per barrel in June 2017 and closing the year at $61.02 per barrel, the highest since 2013.

Indian economy Overview

As the fastest growing major economy in the world, India is expected to emerge as one of the top three economic powers of the world over the next 10-15 years, as per Central Statistics Organisation (CSO) and IMF (International Monetary Fund). Moodys upgradation of Indias sovereign rating after 14 years, from Baa3 (lowest investment grade) to Baa2, also underlines the strength of its economic fundamentals.

After a temporary slowdown triggered by demonetisation and GST (Good Services Tax), the economy started showing signs of recovery in the second half of the year. The revival in positivity was reflected in the pick-up of industrial production and a decline in retail inflation (as measured by the CPI) after a period of negativity. The third quarter of the financial year saw India record its fastest growth in five quarters at 7.2%, to overtake China, which grew at 6.8% in this period. The farm, manufacturing and services sectors propelled this growth, which is expected to sustain in the coming year. Retail inflation touched a five-month low in March 2018 after climbing steadily till November 2017, prompting Reserve Bank of India (RBI) to lower its April-September retail inflation projection to 4.7% from a previous range of 5.1-5.6%, released in February. RBI also maintained its policy rates during its April 2018 monetary policy review, taking a neutral stance on interest rates.

The financial sector in India predominantly comprises of the banking sector, with commercial banks accounting for more than 64% of the total assets held by the financial system. However, the role of the NBFC sector has been growing. The balance sheet of the NBFC sector expanded by 14.5% during financial year 2016- 17. Despite the growth, NBFCs managed their asset quality better than the banks. Gross bad loans of the NBFC industry stood at 4.4% in March 2017, down from 4.9% in September 2016, when banks in general witnessed a rise. Net NPAs as a percentage of total advances also declined from 2.7% to 2.3%.

India is expected to grow at 6.6% in financial year 2017-18, as per the latest estimates from CSO. The World Bank, however, has projected Indias growth at 7.3% in financial year 2018-19 and 7.5% in financial year 2019-20 (Source: World Bank India report, March 2018). The Governments continuing reforms agenda is expected to infuse dynamism into the national economy, contributing to its growth momentum.

The Government continued with its reform agenda, with the most notable ones being dynamic fuel pricing (June, 2017), Goods and Service Tax (July, 2017), Banking Regulation (Amendment) Bill, 2017 (August, 2017) and announcement of PSU bank recapitalisation plan (October, 2017), selling of stake and public listing under disinvestment scheme launched in 2016 and liberalisation of FDI policy. Demonetisation, along with various measures taken to promote digital payment, boosted transactions through systems such as debit and credit cards, prepaid wallets, UPI, mobile banking, etc.

Opportunity and threats

Rising entrepreneurship among the countrys youth has bolstered demand for small-ticket loans because of the low interest burden associated with them. People are gradually opting for online loan facilities because of the inherent ease-of-use and speed of transactions. The market remains largely under-penetrated with the 15 major cities in India preferring loans against shares and properties, whereas the remaining 15 cities beyond the top-15 exhibiting a preference for microfinance. NBFCs lend to retail borrowers without strong credit history and mid-level corporates who are usually not considered creditworthy by major banks, indicating the fact that there is still ample headroom for growth for NBFCs. With the banking sector bearing the brunt of rising NPA levels, they are becoming increasingly strict when it comes to disbursing loans, brightening prospects for NBFCs. Even if half of the lower-middle class makes the transition to upper-middle or middle class, they would still amount to ~350 million people, indicating that there will be a sizeable chunk of the population for the NBFCs to cater to over the long-term.

The Financial Intelligence Unit put 9,491 non-banking finance companies (82% of the total NBFCs in India) under the highrisk category because of noncompliance with Prevention of Money Laundering Act. With a large number of NBFCs getting into the market, the competition is becoming fierce as consumers have more alternatives to choose from. Unorganised money lenders continue to hold sway in the rural markets and are a significant threat to NBFCs in these areas.

At Octal, we shifted our focus on identifying pockets of opportunities across our network of operations. We redefined our model to serve corporate in need for small ticket size loans than those with large ticket size loan amount. This would bring in multiple benefits to us. One it would protect our margins and de-risk us from larger NPAs. Two, it would broaden our customer portfolio, widening our revenue basket in the coming years. We are confident that with this strategy we shall demonstrate our capabilities to strengthened our loan book, and create more values for our loan book, and create more value for our stakeholders. Your company has also adopted strategies to shift towards secured lending practices there by bringing down its gross NPAs and increasing its income from operations and profitability.

The company is exposed to all risked & threat with financial markets & Non Banking Finance Company faces. In financial service business, effective management has become very crucial. As an NBFC, your company is exposed to credit risk, liquidity risk and interest rate risks. Your company has in place suitable mechanism to effectively reduce such risks. All risks are continuously analysed and reviewed at various levels of management through an effective information system. The company is also facing risk of heavy ups and downs in stock market which can be minimized due to risk management system of our company. Slow industrial growth, Being in an independent sector, competition from banks and financial institutions, Globalization of Indian market, Major shakeout in the NBFC sector, Hesitations on the parts of bank to continue to finance HP and leasing ventures, introduction of rigorous regulatory and supervision system are some other risk for which we are taking preventive measures as suitable. Can threats be handled using strengths? The perceived threat of stiff competition within the NBFCs as well as with banking sector can be eliminated /minimized by using the strength of being a niche player, consolidation and focus.

It is clear that NBFCs can themselves take steps to minimize their weakness and face all threats by making better use of strengths and opportunities, identified by them. The areas where active intervention is required is the area of debt recovery for which the support and encouragement of the government is required. The future of the NBFC sector is bright with ample opportunities thrown open to the NBFC sector.

With the growing mobile and data connectivity there is a sea change in terms of service availability. The Governments drive towards a connected and Digitized Indian economy coupled with advances high accessible trading platforms via mobile and growing awareness ensures that the securities and commodities market will grow steadily.Indias population is gradually moving up the income curve and also India is the fastest growing major economy which in turn has increased the credit scope for the industry and availability of larger and deeper market.

The RBI has continuously reduces the policy rate over the last two years making cost of capital more affordable .This would enhance and push economic growth.

With inflation well under RBIs target, it has maintained liquidity in the market. If the inflation spikes up RBI could curb liquidity in the market which may have adverse impact on margins. There is a growing concern about the geopolitical scenario in the Middle East and Asia Pacific. It can have an adverse effect on global trade and markets.

Risks and mitigation

Though the industry is presently doing well, it possesses certain risks as well. One of them being the high interest rates levied on NBFCs which will affect them in two ways. First, it will compress industrys NIMs or the spread of yield on assets over cost of funds. Secondly, higher interest rate could hit the demand for retail loans, lowering industrys pace of growth. The fact that credit penetration of NBFCs in India is at 13% of GDP, which is significantly low in comparison to other emerging economies, reflects that there are still few challenges that need to be addressed immediately. One of the key challenges that NBFCs currently face is that they are extremely dependent on competitors, banks and capital markets for raising funds. This can prove detrimental to the sustainability of their growth and can cause lot of distress, as funds from these sources can dry up without much notice. A strong regulatory framework which allows opening up of refinance windows will help NBFCs raise low-cost funds and increase their lending penetration. Another critical factor that forms a challenge for NBFCs is lack of flexibility in classification of loans. The assumption of ‘one-size fits all doesnt work for NBFCs. The regulations need to consider the borrowers profile and assets under classification. Other issues that need redressal include withdrawal of priority sector status of bank lending to NBFCs, disparity in treatment in terms of taxation for NBFCs and banks and minimum mandatory credit rating for deposit taking NBFCs.

Internal control systems

OCCL has adequate internal control mechanism with well defined structure and processes to prevent revenue loss and/or misappropriation of funds and other assets of the company. The OCCL maintains a system of internal controls designed to provide a high degree of assurance regarding effectiveness and efficiency of financial operations, the adequacy of safe guard for assets, the reliability of financial and controls and compliance with applicable laws. Internal audit functions conducted by independence chartered accounts firms on quarterly basis and the report is placed before the Audit Committee of the company for reviewing and observing the changes.

The board of the company has constituted an Audit Committee, which is headed by non Executive independent Director. The audit committee periodically reviews internal audit reports and bring to the notice of the Board any significant process deviations. The internal control function is vested with Audit Committee members who hold eminent experience in the field of companys business. The Audit committee is the responsible for evaluating and reporting the adequacy and effectiveness of design of processes and internal controls and in mitigating the business risks. The level of discipline in process of compliance by various functions and process owners in their respective operations and business decisions. The modus operandi, internal/external involvement and collusion as well as corresponding process lapses/non compliances by investigating the suspected fraudulent cases.

The organization is well structured with documented and pre defined authority. The company has implemented suitable controls to ensure that all resources are utilized optimally, financial transaction are reported with accuracy and there is strict adherence to applicable laws and regulations.

Human resources

The company continue to emphasize on retaining, nurturing its human resource base. It recognized the role that human capital plays in the modern workplace and aims to create a harmonious environment to enable the raising of employee productivity and hence allow employees to reach full potential. Later the company prospects to expand its operations which will require to raise our human resource.


The improvement in credit demand in the later part of FY 2017-18 has shown positive growth in NBFC sector. The company would remain focus on capitalizing the opportunities in the market with intend to improve ROE. OCCL remain confident of the long term growth prospects &opportunities ahead of it in its business and chosen customer segments. OCCL belives that it is uniquely positioned with the NBFC industry to capitalize on the opportunities provided and shall continue to seek growth in its target segment. The management feels that its blend of business model, infrastructure, technology, management bandwidth and field force, would lead to a sustainable high growth trajectory in future years to come.The materialization of structural reforms such as implementation of GST, the institution of the Insolvency and Bankruptcy Code , and the abolition of the foreign Investment Promotion Board would boost investor confidence and enhance efficiency. Also the increase in IPOs in the primary capital market augurs well for investment and growth.

Cautionary statement

The management discussion and analysis report containing your Companys objectives, projections, estimates and expectation may constitute certain statements, which are forward looking within the meaning of applicable laws and regulations. The statements in this management discussion and analysis report could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operation include raw material availability and prices, cyclical demand and pricing in the Companys principal markets, changes in the governmental regulations, tax regimes, forex markets, economic developments within India and the countries with which the Company conducts business and other incidental factors.