Paisalo Digital Ltd Management Discussions.

Forward looking statements

Certain statements in this Management Discussion and Analysis may be forward-looking and are stated as may be required by applicable 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 realized, and actual results may vary from those expressed or implied, depending upon economic conditions, Government policies and other incidental/related factors and external and internal factors, which are beyond the control of the management. Hence the Company assumes no responsibility in respect of forward-looking statements that may be amended or modified in future on the basis of subsequent developments, information or events.

Economy

The world is facing an unprecedented crisis with the highly contagious Novel Coronavirus (COVID-19) hitting major economies across the world in rapid succession. As on June 30, 2020, COVID-19 has had 5,82,147 people infected in India, claiming 17,322 lives.

India imposed a strict lockdown from March 25, 2020 to control the effect of COVID-19 pandemic. High frequency indicators point to a sharp dip in demand beginning March 2020 across both urban and rural segments. Domestic economic activity virtually came to a standstill in April 2020; however for several sectors the contraction became less severe from May 2020. Early data arriving for June 2020 indicates some plateauing much below pre COVID-19 levels. Agriculture and allied activities, however, showed continued resilience on the back of all-time production highs and huge buffer stocks of rice and wheat. Above normal rains predicted for 2020-21 also boded well for agricultural production. PMI (Manufacturing) has also consistently improved from 27.4 in April to 30.8 in May and further to 47.2 in June 2020. For the fiscal year as a whole, there is still heightened uncertainty about the duration of the pandemic. As such, the downside risks to growth remain significant and full restoration in economic activity would be contingent upon the support for robust health infrastructure, recovery in demand conditions and fixing of supply dislocations, in addition to the state of global factors like trade and financial conditions.

In May 2020, Government, adding to its past measures and that of RBI, announced a consolidated stimulus package of INR 20 lakh crore. The stimulus package was pivoted on "Atma Nirbhar Bharat", wherein Micro, Small and Medium Enterprises (MSMEs) received a huge financial package in terms of collateral free debt, guarantee for subordinate debt through Funds-of-Funds, and interest subvention scheme. Besides, the definition of MSME was changed to remove hindrance against their investment and expansion.

Indias real GDP growth rate was 4.2 per cent in 2019-20 as per the provisional estimates released by National Statistical Office (NSO) compared to 6.1 per cent recorded in the previous year. Nominal GDP for the year was estimated at INR 203.4 lakh crore—lower compared to the budget estimates.

Rating agencies, both global and domestic, are unanimous that the Covid-19 pandemic will be an economic tsunami for the world economy. Even though India may not slip into a recession, unlike the Eurozone, the US, or Asia-Pacific that have stronger trade ties with China, it is expected that the impact on Indias GDP growth would be significant.

The Asian Development Bank (ADB) has projected India growth to slow down to 4% for the financial year 2020-21. It is expected that Indias gross domestic product growth will strengthen to 6.2% in FY22, boosted by Government reforms.

RBI has taken a number of measures to ensure sufficient liquidity in the system since the beginning of 2019-20. The Government rationalized tax rate to 22/25 per cent from 30 per cent subject to the condition that companies will not avail of any exemption/incentive.

The Companys performance is highly dependent on the functioning of the different macro-economic parameters as stated above.

Industry Structure

A total of 9,601 NBFCs were registered with the RBI at end-March, 2020 of which 66 were deposit accepting (NBFCs-D) and 278 were systemically important non-deposit accepting NBFCs (NBFCsND-SI). All NBFCs-D and NBFCs-ND-SI, including Government owned NBFCs, are subject to prudential regulations such as capital adequacy requirements and provisioning norms, along with reporting requirements.

Non-banking financial institutions (NBFIs) are a group of diverse financial intermediaries which, in a bank-dominated financial system like India, serve as an alternative channel of credit flow primarily to the unbanked commercial / noncommercial sector. Among the various institutions that perform this function, those regulated by the Reserve Bank are All-India Financial Institutions (AIFIs), Non-Banking Financial Companies (NBFCs), Primary Dealers (PDs) and the most recent addition, Housing Finance Companies.

Lockdown, Moratorium and NBFCs

The lockdown triggered by the Covid-19 pandemic will have near-term impact on collections and fresh-loan disbursements of NBFCs. The extent of this impact will depend on four factors: asset class, income source of the customer, level of field work in operations, and proportion of cash collections.

The microfinance and small loan segment have impacted very badly during the lockdown because collection of repayments involves visit to households, such borrowers typically have weak credit profiles and disruption in their income generation activities.

Any delay in return to normalcy will put pressure on collections and asset-quality metrics. Additionally, any change in the behavior of borrowers on payment discipline can affect delinquency levels.

Disbursement of fresh loans have reduce substantially in the near term and remain muted in the medium term given the expected challenges on the economic front.

Amid the lockdown, the government and the Reserve Bank of India (RBI) have announced a slew of measures to provide relief. The biggest of these is the moratorium on bank facilities. It will help lenders in managing their asset classification requirement. In terms of RBI directions NBFCs are providing relief to borrowers impacted by the lockdown. . Nearly half of the customers accounting for around half of outstanding bank loans opted to avail the benefit of the relief measures

Analysis of Loan Moratorium Availed as on April 30, 2020.

Sector

Corporate

MSME

Individual

Others

Total

% of total customers

% of total outstanding % of total customers % of total outstanding % of total customers % of total outstanding % of total customers % of total outstanding % of total customers % of total outstanding
PSBs 28.8 58 73.9 81.5 80.3 80 48.8 63.7 66.6 67.9
PVBs 21.6 19.6 20.9 42.5 41.8 33.6 39.1 40.9 49.2 31.1
FBs 32.6 7.7 73.3 50.4 8.4 21.1 75.8 4.8 21.4 11.5
SFBs 78.8 43.7 90.5 52.3 90.9 73.2 64.6 12.3 84.7 62.6
UCBs 63.4 69.3 66.5 65.5 56.8 62 35.6 59.2 56.5 64.5
NBFCs 39.7 56.2 60.7 61.1 32.5 45.9 37.3 41.4 29 49
SCBs 24.7 39.1 43.1 65.3 52.1 56.2 45.7 55.7 55.1 50
System 30.8 41.9 45.8 65 50.4 55.3 45.7 54.6 48.6 50.1

Source: RBI Supervisory Returns.

While the moratorium provides some relief on the assets side, it is on the liabilities side that challenges could emerge for NBFCs with high share of borrowings. Thats because no formal moratorium has been announced so far for borrowings by the NBFCs and repayments on these will have to be made on time, during a period when collections would be impacted significantly.

Banks and market borrowings account for over 70 per cent of total outside liabilities of the NBFC sector. With the waning of market confidence, the share of long-term market debt i.e., non-convertible debentures (NCDs) in total borrowings of the NBFC sector declined from 49.1 per cent at end-March 2017 to 40.8 per cent at end-December 2019. The consequent funding gap was met through bank borrowings, which rose from 23.1 per cent of total borrowings to 28.9 per cent over this period. The declining share of market funding for NBFCs is a concern as it has the potential to accentuate liquidity risk for NBFCs as well as for the financial system. Smaller / mid-sized and AA or lower rated / unrated NBFCs have been shunned by both banks and markets, accentuating the liquidity tensions faced by NBFCs which was also reflected in the lacklustre response to the Targeted Long-Term Repo Operations 2.0.

The RBI move on targeted long-term repo operations (LTROs) should also provide secondary market liquidity to mutual funds and allow banks to increase their primary market subscriptions, resulting in investment appetite for NBFC debt.

However, this may be restricted to NBFCs with superior credit profiles; further the adequacy of the LTRO quantum of INR 1 Lakh crore to meet the near-term liquidity needs of the debt market will also need to be seen. Further, smooth transitioning of the investor base to banks under the LTRO route is critical. In this context, it is good to see banks, especially from the public sector, willing to provide additional working capital lines to pandemic-affected businesses.

Business Overview

The Company is using technology with high touch hi-tech model, enabled to register good and sustainable growth. The Company was able to scale up its business operation through its Intranet model of financing from 129 branches in FY 2019-20. The Company has cumulatively served around 1.18 million satisfied borrowers.

While remaining focused on growth, Company consistently maintains high asset quality level and continues to build the institution on the strong pillars of ethics, values and corporate governance.

During FY 2019-20, Company registered a consistent performance in all key financial parameters including business growth especially in retail segment, robust asset quality and improved key financial indicators. During FY 2019-20, total disbursement was INR 14975.75 million Companys total assets under management stood at INR 19195.70 million as on March 31,2020. As on March 31,2020 Companys Gross & Net NPA stood at INR 76.14 million and INR 59.41 million respectively. For FY 19-20 the Net Profit of the Company stood at INR 540.38 million. As of March 31,2020, the standalone net-worth of the Company stood at INR 7603.20 million.

Asset Liability Management

The Company is following a prudent policy for matching funding of assets, which transforms into a robust Asset- Liability Stability.

Asset Liability Management Maturity Pattern of Certain Items of Assets and Liabilities as on March 31,2020:

(Amount in Lakhs)

Upto 7 days Over 14 days to 1 month Over 1 month & Upto 2 months Over 2 months & Upto 3 months Over 3 months & Upto 6 months Over 6 month & upto 1 year Over 1 year & Upto 3 years Over 3 years & upto 5 years Over 5 Years Total
Deposits - - - - - - - - - -
Advances - - - - 8738 39467 96115 24072 4106 172498
Investments (Bank FDR) - - - - - - 34 - - 34
Borrowings 113 100 - 625 1125 46482 44168 12800 1600 107013
Foreign Currency Assets - - - - - - - - - -
Foreign Currency Liabilities - - - - - - - - - -

Capital Adequacy Ratio

The Companys strength lies in its healthy capital structure. PAISALO is among those few NBFCs who are low leveraged. As of March 31, 2020, the Companys Capital Adequacy Ratio (CRAR) stood at 43.06 % as against 15.00 % of statutory requirement.

Asset Quality

Asset quality is the criteria where PAISALO stands far ahead from its peers as for last several years the Company has a policy of writing off all its overdue advances as per prudential norms on income recognition asset classification and pertaining to advances stipulated by RBI. However, recovery efforts in such accounts are continued. Due to this unique methodology of cleaning the balance sheet, now Company is standing on a hidden asset of INR 1643.07 million.

Movement of NPAs

(Amount In INR Lakhs)

BAiiUiSLiMiAafl Current Year Previous Year
(i) Net NPAs to Net Advance (%) 0.34% 0.26%
(ii) Movement of NPAs (Gross)
(a) Opening balance 515.65 390.38
(b) Additions during the year 256.04 259.80
(c) Reductions during the year 10.26 134.53

 

Particulars Current Year Previous Year
(d) Closing balance 761.43 515.65
(iii) Movement of Net NPAs
(a) Opening balance 437.38 351.35
(b) Additions during the year 180.97 224.57
(c) Reductions during the year 24.29 138.54
(d) Closing balance 594.06 437.38
(iv) Movement of provisions for NPAs (excluding provisions on standard assets)
(a) Opening balance 78.27 39.03
(b) Provisions made during the year 90.69 49.36
(c) Write -back of excess provisions 1.59 10.13
(d) Write off - -
(e) Closing Balance 167.38 78.27

Shareholders Funds

As on March 31,2020, total fully paid up outstanding shares of the Company stood at 4,22,92,199 equity shares of INR 10/- each with the book value of INR 181.90 per share. Looking at the robust, unique business model of the Company, certain investors are interested in investing in the Company.

Outlook

Stress on Non-Banking Financial Companies that had mounted in the wake of credit events in 2019, has been exacerbated by risk aversion and flight to safety among banks, leading to funding constraints and differentiation in market access. The outlook remains clouded with considerable uncertainty as the pandemic takes its toll. In the interregnum, however, financial markets have stabilised in response to recent policy measures, and liquidity stress experienced by several financial intermediaries has eased.

NBFCs will have to evolve their customer acquisition and engagement in post COVID economy, and financial intermediary must find its niche in order to add value to consumers. The Company with the distribution that is built over the years and committed workforce is cautiously optimistic in its outlook for the year 2020-21.

NBFCs and Banks are combining their low cost of funds and low cost of operations and thereby co-lending funds to flow into these sectors to tap the vast potential that they offer. PAISALO is approaching the target customers with financial lending product solution, which is Available - Aware - Affordable.

Risk Management

Risk Management at your Company includes risk identification, risk assessment, risk measurement and risk mitigation with its main objective to minimize negative impact on profitability and capital. Your Company is exposed to various risks that are an inherent part of any financial service business. Your Company is committed towards creating an environment of increased risk awareness at all levels. Your Company has policies and procedures in place to measure, assess, monitor, and manage these risks systematically across all its portfolios.

Internal Control Systems and Audit

Your Companys internal control system is designed to ensure operational efficiency, compliance with laws and regulations and accuracy and promptness in financial reporting. The Company has proper and adequate internal controls systems to ensure that all activities are monitored and controlled against any unauthorized use or disposition of assets, misappropriation of funds and to ensure that all the transactions are authorized, recorded, reported and monitored correctly. For correctness and accuracy, the process of job rotation is followed in different departments. The Company has adequate working infrastructure having computerization in all its operations including accounts and MIS.

The internal control system is supported by an internal audit process for reviewing the design, adequacy and effectiveness of the Companys internal controls, including its systems, processes and procedures to ensure compliance with regulatory directives. 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. Your Companys internal control system is commensurate with its size and the nature of its operations.

Fraud Monitoring and Control

The Company has put in place a whistle blower policy, and a central vigilance team oversees the implementation of fraud prevention measures. Frauds are investigated to identify the root cause, and relevant corrective steps are taken to prevent recurrence. Fraud prevention committees at the senior management and board level also deliberate on material fraud events and initiate preventive action. Periodic reports are submitted to the Board and senior management committees.

IT Security

Your Company is governed by the IT framework recommended by RBI, and various initiatives have been implemented in the area of IT and Cyber security to ensure industry standard security framework. The operational processes are in place to monitor and manage the effectiveness of the security initiatives taken by the Company. Effective monitoring & controls have also been put as a part of this governance.

Health Safety and Pandemic Risk

The Companys priority is the safety and well being of our employees and customers; with the relaxation provided by the Governments/ Authorities, in a phased manner, the Registered Head Office and various Branch Offices have been /will be open as per Government guidelines.

Human Resource Development

Your Company has a work environment that inspires people to do their best and encourages an ecosystem of teamwork, continuous learning and work-life balance. In an increasingly competitive market for talent, Your Company continues to focus on attracting and retaining the right talent. The Company fosters work-life balance and condemns any kind of unfair treatment in the workplace. Regulation and compliance have remained as the major focus area for the Management of the Company. The Company enforces a strict compliant and ethical culture with adequate channels for raising concerns supported by a grievance handling mechanism. The Human Resource (HR) function in the Company remains focused on improving organizational effectiveness, developing frontline leaders, promoting employee empowerment and maintaining stability and sustainability amidst growth and a rapidly changing business environment.

As on March 31,2020, your Company had 1,043 employees.

Opportunities and Threats

Over the years, lenders have leveraged data analytics, and data science to offer superior customer experience through new-age underwriting models, seamless partner integration and real-time loan decisions. This offers a good opportunity to NBFCs to diversify their assets by remotely offering products which otherwise required expensive physical distribution.

The financialization of Indian household is already presenting newer opportunities for financial services and we are ready to capture a fair share. Social, Mobility, Analytics and Cloud Computing are the emerging trends in technology. Government initiatives in respect of Digital India and move towards formal and cashless economy has also opened new client segments which NBFCs like PASIALO can tap for future growth. Extensive use of technology tools due to lockdown is likely to result in faster adoption of technology in payments and customer interactions.

There are around 55-60 million MSMEs in India, contributing to about 30 per cent of Indias GDP. This sector had a credit demand of about INR 45 lakh crore in 2018 out of which 40 per cent was served by informal credit. As a result, theres a big opportunity in the coming years for the NBFCs to capture this unserved population and partner in Indias growth story. This is because banks often find it expensive or unviable to serve these segments which new-age NBFCs are serving on the back of advanced technology and better reach in the remote corners of the country.

On March 27, 2020, RBI announced various measures to address the stress in financial conditions caused by COVID-19. RBI permitted all lending institutions to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020. It was further extended for 3 months till the end of August 2020.

In line with the RBI COVID Regulatory Package, the Company offered a moratorium to its eligible borrowers on loan installments based on Board approved policy. In respect of such borrowers to whom the benefit of asset classification was extended consequent to the moratorium, the Company made provisions on conservative basis for expected credit loss.

The overleveraged non-financial sector, simmering global geopolitical tensions, and economic losses on account of the pandemic are major downside risks to global economic prospects.