Paisalo Digital Ltd Management Discussions

<dhhead>MANAGEMENT’S DISCUSSION AND ANALYSIS</dhhead>

GLOBAL ECONOMY

With the mounting e_ects of the past three years of adverse impact mainly by the COVID-19 pandemic and Russia-Ukraine crisis, the global economy is yet again at a highly uncertain moment. Last year in many economies the inflation reached at a very high level caused by low demand, supply disruptions and hike in commodity price. This lead central banks to tighten aggressively to bring inflation back toward their targets and keep inflation expectations anchored. The unexpected failures of two specialized regional banks in the United States in mid-March 2023 and the collapse of confidence in Credit Suisse—a globally significant bank—have fret financial markets, with bank depositors and investors re-evaluating the safety of their holdings and shifting away from institutions and investments perceived as vulnerable. As a result of this bank equities have come under extreme pressure and other broad equity indices across major markets have also fallen below their levels prior to the turmoil. Despite strong policy actions to support the banking sector and reassure markets, some depositors and investors have become highly sensitive to any news, as they struggle to discern the breadth of vulnerabilities across banks and nonbank financial institutions and their implications for the likely near-term path of the economy. Financial conditions have tightened, which is likely to entail lower lending and activity if they persist.

In its June 2023 edition of Global Economic Prospects World Bank reported that after growing 3.1 percent last year, the global economy is set to slow substantially in 2023, to 2.1 percent, amid continued monetary policy tightening to rein in high inflation, before a tepid recovery in 2024, to 2.4 percent. Tight global financial conditions and subdued external demand are expected to weigh on growth across emerging market and developing economies.

With the recent increase in financial market volatility and multiple indicators pointing in di_erent directions, the fog around the world economic outlook has thickened. Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled. The emergence of stress in financial markets is complicating the task of central banks at a time when inflationary pressures are proving more persistent than anticipated. Before the recent stress episodes, interest rates in advanced economies had risen sharply and were more aligned with central bank communications about the need to keep monetary policy restrictive for longer. Since then, investors have sharply repriced downward the expected path of monetary policy in advanced economies. They now anticipate central banks to begin easing monetary policy well in advance of what was previously forecast. Inflation, however, has remained uncomfortably well above target. After having significantly increased their securities holdings during the pandemic, central banks have started to reduce their balance sheets. This normalization process could pose challenges for sovereign debt markets at a time when liquidity is generally poor, debt levels are high, and additional supply of sovereign debt will have to be absorbed by private investors The major forces that a_ected the world in 2022—central banks’ tight monetary stances to allay inflation, limited fiscal bu_ers to absorb shocks amid historically high debt levels, commodity price spikes and geo economic fragmentation with Russia’s war in Ukraine, and China’s economic reopening—seem likely to continue into 2023. But these forces are now overlaid by and interacting with new financial stability concerns, particularly for advanced economies hard landing has become a much larger risk. Policymakers may face di_icult trade-o_s to bring sticky inflation down and maintain growth while also preserving financial stability.

Further, the impact of tighter monetary and financial conditions could be amplified because of financial leverage, mismatches in asset and liability liquidity, and high levels of interconnectedness within the NBFI sector and with traditional banking institutions. These events have been a reminder that funding can disappear rapidly amid widespread loss of confidence. Shifting patterns of deposits across di_erent institutions could raise funding costs for banks which could restrict their ability to provide credit to the economy.

In the event of more widespread banking sector stress, global growth could be weaker than anticipated. To restore price stability monetary policy should stay the course, and fiscal policy should aim to tone down the cost of living pressures while maintaining a su_iciently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints.

INDIAN ECONOMY

India’s growth continues to be resilient despite some signs of moderation in growth, says the World Bank in its latest India Development Update, the World Bank India’s biannual flagship publication.

In FY 2023, multiple challenges confronted the Indian economy. Country’s headline inflation remained above the upper tolerance level of 6 per cent for 10 successive months since January 2022, before moderating during November-December on seasonal easing in food prices. Unfavourable rise in the international commodity prices (crude oil, metals and food prices) followed by war in Ukraine and adverse domestic weather conditions increasing the retail inflation in the Country. Despite of multiple challenges, the India has remained among the fastest growing major economies of the world, contributing more than 12 per cent to global growth on average during the last five years. The overall growth remains robust and is estimated to be 6.9 percent for the full year with real GDP growing 7.7 percent year-on-year during the first three quarters of fiscal year 2022-23. There were some signs of moderation in the second half of FY 2022-23.

The World Bank has revised its FY2023-24 GDP forecast to 6.3 percent from 6.6 percent (December 2022). Growth is expected to be constrained by slower consumption growth and challenging external conditions. Rising borrowing costs and slower income growth will weigh on private consumption growth, and government consumption is projected to grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures. The Governments and the Reserve Bank of India has taken various measures like cut excise duties, customs duties, restriction on exports, raised the monetary policy rates and reduction in excess systemic liquidity to control the inflation rate. India’s financial sector also remains strong, buoyed by improvements in asset quality and robust private-sector credit growth. Strong and healthy balance sheets of banks, financial institutions and corporate entities is helping to regain growth momentum eroded by the pandemic and the war.

remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Various international agencies have forecasted India to be one of the fastest-growing economies in 2023-24, supported by robust growth in private consumption and sustained pick-up in private investment,despite strong global headwinds and tighter domestic monetary policy.

Despite prolonged geopolitical tensions and slowing global trade, India’s merchandise exports touched US$ 450.4 billion during 2022-23, which is 6.7 per cent above the previous year’s record level. India witnessed a transition from net importer to exporter in areas such as mobile phones and toys and registered a 10-fold increase in exports of defense goods in a short span, leveraging on policies such as ‘Make in India’ and ‘Aatma Nirbhar Bharat’. India’s merchandise imports, after recording high growth in the first half of the year, decelerated during the second half, reflecting, inter alia, the fall in international commodity prices and slowing demand for export-related imports. India’s merchandise trade deficit increased during the year, but the pace of increase slowed in the second half.

The Union Budget FY 2023-24 aimed at enhancing the nation’s positioning with increased capital expenditure to Rs. 10 Lac crore, marking an increment of 33% in capital outlay as compared to FY 2022-23. Union government’s focus on capital expenditure, strong manufacturing capacity utilisation, double-digit credit growth, and moderation in commodity prices are likely to enhance manufacturing and investment activities. This move is highly optimistic for key industries like manufacturing, infrastructure and health care coupled with Governments’ introduction of various measures to support economic growth including the National Infrastructure Pipeline (NIP) and the Production Linked Incentive (PLI) scheme. India’s GDP growth accelerated to 6.1% in the January to March 2023 quarter, lifting the economy’s uptick in 2022-23 to 7.2% from the 7% estimated earlier, according to the provisional national income data released by the National Statistical O_ice (NSO).

Source: MoSPI, India (Publication: Advance and Quarterly Estimate)

To sum up, several shocks tested the resilience of the Indian economy in 2022-23. On the back of sound macroeconomic policies, softer commodity prices, a robust financial sector, a healthy corporate sector, continued fiscal policy thrust on quality of government expenditure, and new growth opportunities stemming from global realignment of supply chains, India’s growth momentum is likely to be sustained in 2023-24 in an atmosphere of easing inflationary pressures. Slowing global growth, protracted geopolitical tensions and a possible upsurge financial market volatility following new stress events in the global financial system, however, could pose downside risks to growth. It is important, therefore, to sustain structural reforms to improve India’s medium-term growth potential.

India to witness GDP growth of 6.0 per cent to 6.8 per cent in 2023-24, depending on the trajectory of economic and political developments globally.

The optimistic growth forecasts stem from a number of positives like the rebound of private consumption given a boost to production activity, higher Capital Expenditure (Capex), near-universal vaccination coverage enabling people to spend on contact-based services, such as restaurants, hotels, shopping malls, and cinemas, as well as the return of migrant workers to cities to work in construction sites leading to a significant decline in housing market inventory, the strengthening of the balance sheets of the Corporates, a well-capitalised public sector banks ready to increase the credit supply and the credit growth to the Micro, Small, and Medium Enterprises (MSME) sector to name the major ones.

Source: https://pib.gov.in/PressReleasePage.spx?PRID=1894932

SERVICE SECTOR PERFORMANCE

In Economic Survey 2022-23, Ministry of Finance noted that India’s services sector is a source of strength and is poised to gain more. From low to high value-added activities with export potential, the sector has enough scope to generate employment and foreign exchange and contribute to India’s external stability. The Economic Survey projected a baseline

GDP growth of 6.5 per cent in real terms in FY 24. The projection is broadly comparable to the estimates provided by multilateral agencies such as the World Bank, the IMF, and the ADB and by RBI, domestically. Growth in service sector is expected to be high in FY 24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in India with the strengthening of the balance sheets of the corporate and banking sectors.

Further support to economic growth will come from the expansion of public digital platforms and path breaking measures such as

• PM Gati Shakti National Master Plan for seamless movement of people and goods.

• National Monetisation Pipeline with Rs. 9.0 lakh crore investment potential.

• UPI touched its highest ever mark with 782 crore transaction in Dec 2022.

• National Logistics Policy for making Indian logistics competitive globally.

• Capacity of major ports nearly doubled in 8 years.

• Open Network for Digital Commerce in pipeline.

• Open Credit Enablement Network for democratising lending operations.

FINANCE SECTOR

The recent financial sector disturbance in the US and Europe has compelled the need to reassess risks to financial stability and recovery of financial institutions in the context of monetary policy tightening. While Indian banks and nonbanking financial intermediaries remain sound and resilient, they need to stress test for new challenges. Capital bu_er and liquidity position, therefore, must be constantly reviewed and strengthened. Accordingly, policy measures, such as guidelines on introduction of expected loss-based approach for provisioning are likely to be announced during 2023-24. The finance system continued the e_orts to augment capital and improve asset quality, during the year. The onset of a fresh lending cycle since the second half of 2021-22 gained momentum during 2022-23, resulting in double digit credit growth encompassing all major sectors. The asset quality of scheduled commercial banks (SCBs) continued to improve, with gross non-performing assets (GNPA) ratio and net non-performing assets (NNPA) ratio declining and the quarterly slippage ratio cooling o_. The provisioning coverage ratio (PCR) also steadily increased. Net interest margin (NIM) witnessed an improvement, reflecting the higher degree of transmission of monetary policy to lending rates than to deposit rates in the rising interest rate cycle. Consequently, profit after tax (PAT) registered strong growth. Return on equity (RoE) and return on assets (RoA) for SCBs improved further during the year.

To commemorate 75 years of independence (Azadi Ka Amrit Mahotsav), 75 Digital Banking Units (DBUs) were set up in 75 districts of the country to catalyse the adoption of digital modes of doing banking transactions in the country. These 75 DBUs were dedicated to the service of the nation by the Hon’ble Prime Minister on October 16, 2022. As on March 31, 2023, there were 84 DBUs functioning across the country.

India outpaced other nations to emerge as the largest player in real-time transactions at the global level, with a 46 per cent share in 2022. The strong penetration and growth in Unified Payments Interface (UPI) were buoyed by rapid merchant on boarding, growing digital awareness and policy thrust on continuous enhancements in the scope and reach of payment systems.

Non-banking financial companies (NBFCs) maintained robust credit growth during 2022-23, supported by the broad-based revival in economic activity and targeted policy initiatives. The sector strengthened its financial soundness during the year through robust capital bu_ers, improved asset quality and consolidation of balance sheet. A scale based regulatory framework was implemented for NBFCs during 2022-23.

Furthermore, as a part of a responsive and forward-looking regulatory approach, several measures were undertaken for strengthening and developing credit risk markets, enhancing the robustness of the capital adequacy and provisioning frameworks applicable to regulated entities, and augmenting the rating processes adopted by the credit rating agencies for bank loan ratings. A new SupTech initiative - DAKSH -Reserve Bank’s Advanced Supervisory Monitoring System - was launched by the Reserve Bank on October 6, 2022. It is a web-based end-to-end workflow application through which the Reserve Bank monitors actual compliances in a more focused manner with the objective of further improving compliance culture among supervised entities (SEs). Due to the wave of digital transformation, India has emerged stronger and more resilient from the pandemic. Taking forward digitisation e_orts announced in the Union Budget 2022-23, the Reserve Bank introduced its Central Bank Digital Currency (CBDC) in phases during the year, with the launch of pilots for Digital Rupee (e ) in the wholesale and retail segments on November 1, 2022 and December 1, 2022, respectively. The pilots were preceded by issuance of a ‘Concept Note’ on CBDC to create awareness about CBDCs in general and the planned features of the Digital Rupee (e ), in particular.

To protect the interests of customers of regulated entities (REs) and for ensuring public confidence in the financial system, the Reserve Bank is in the process of embedding artificial intelligence (AI)/machine learning (ML) and other cutting edge technological tools in its 24x7 online complaint management system (CMS) to facilitate lodging of complaints with ease, provide complainants with necessary information on grievance redressal and expedite complaint processing by aiding decision making for the ombudsman.

INDUSTRY OVERVIEW

Non–Banking Financial Companies (NBFCs), form one of the four broad constituents of the credit ecosystem of the Indian financial sector along with Public Sector Banks, Private Banks and Financial Institutions. As the statics shows, in past few years, NBFCs have been recording higher credit growth than Schedule Commercial Banks (SCBs) with their competitive edge in their superior understanding of regional dynamics, customised products, well–developed collection systems and personalised services in the drive to expand financial inclusion in India. Lower transaction costs, quick decision making, customer orientation and prompt provision of services have typically di_erentiated NBFCs from banks. The reach and last mile advantages of NBFCs have empowered them with agility, innovation and a cutting edge in providing formal financial services to under banked and unserved sections of the society.

Over 9,500 NBFCs are currently registered with the RBI. Even though the combined balance sheet size of NBFCs continues to be approximately one-fifth when compared with the Scheduled Commercial Banks (SCBs), NBFCs play a significant role in last-mile credit delivery. As per RBI Financial Stability Reports over the last five years, loans to industry lost market share from 40.6% in FY19 to 36.8% in FY23 and yet continued to constitute the largest segment, followed by personal loans at 31.2%, services at 14.2% and agriculture at

1.7%. Advances to the retail segment grew the fastest in H1FY23. Government-owned NBFCs have been ceding ground in the industry segment. According to RBI’s Financial Stability Report June 2023, the NBFC-UL group recorded higher credit growth (y-o-y) of 18.8% and a better GNPA ratio of 3.7% as of March 2023 than the overall NBFC sector.

The largest net borrowers of funds from the financial system are NBFCs which owed close to 57% in FY23 (similar levels in FY22) to Banks. Banks’ outstanding credit to NBFCs rose by Rs.3.09 lakh crore over the last 12 months and stood at Rs.13.3 lakh crore in March 2023. This was primarily because the NBFCs’ additional borrowings moved to banks due to di_erentials between market yields and interest rates o_ered by Banks. On the other hand, mutual funds’ debt exposure to NBFCs fell 14.1% YoY to Rs. 46 lakh crore in March 2023, while increasing sequentially by 2.5% from February 2023 levels. Absolute bank lending to NBFCs has more than tripled in the last five years, while mutual funds exposure has reduced by over a third over during the same period. Banks’ credit to NBFCs started witnessing healthy growth in H2 FY22 which continued its upward trajectory into FY23, data shows.

As part of the overall objective of aligning the regulatory/supervisory framework with global best practices, important strides in the areas of risk management, regulatory compliance and enforcement, and consumer education and protection in banks were made during the year. Accordingly, several guidelines were issued during the year, pertaining to classification of Non-Banking Financial Companies (NBFCs) in the middle layer of scale-based regulation (SBR), digital lending, large exposure framework for the upper layer NBFCs under the SBR, review of regulatory framework for Asset Reconstruction Companies (ARCs), establishment of digital banking units (DBUs), and a revised regulatory frameworkforUCBs.TheFinTechDepartmentlaunched pilots of the digital rupee in phases for wholesale and retail segments. The Department of Supervision (DoS) also initiated a host of measures to further strengthen both onsite and o_-site supervision, including developing dynamic supervisory dashboards/ early warning indicator model, strengthening cross-border supervisory cooperation, monitoring of large borrower groups, enhancement of cyber security and the launch of advanced supervisory monitoring system (DAKSH), among others.

RBI’s supervision of NBFCs

The Department of Non-Banking Supervision (DNBS) continued to closely monitor the NBFCs (excluding HFCs) and ARCs registered with the Reserve Bank. DNBS had set the following goals for supervision of NBFCs in 2022-23

• Review the supervisory framework and the returns’ formats for NBFCs under Indian Accounting Standards (Ind-AS) based on the regulatory guidance in the matter (Utkarsh)- During the year, a Working Group comprising of o_icials from the Reserve Bank, select large NBFCs and audit firms reviewed and designed new returns’ formats as per the supervisory framework for NBFCs in alignment with the Indian Accounting Standards (Ind-AS).

• Make changes in sectoral assessment in the context of recently released scale based regulatory framework for NBFCs- During the year, the Reserve Bank, for the purpose of sectoral assessment of NBFCs in the context of recently released scale-based regulatory framework for NBFCs, classified 16 NBFCs in the upper layer. The model design was also modified to cover all NBFCs in various layers, viz., top, upper, middle and base layer.

• Roll out KRIs for select NBFCs to assess their cyber security risk profile and Roll out of IT examination for select NBFCs- In order to assess the inherent risks and put in place an e_ective o_-site monitoring mechanism, KRIs were rolled out for select NBFCs. These NBFCs have started submitting KRI data and a scoring model is being formulated based on the same. IT examination for select NBFCs will be initiated in 2023-24.

• Fraud Reporting and Sensitisation of NBFCs - The online fraud reporting system for NBFCs has commenced from July 1, 2022. As part of online reporting system, a separate quarterly return (FMR 4) has been introduced for reporting security incidences, i.e., theft, burglary, dacoity and robbery. Further, workshops have been conducted for select NBFCs to sensitise them on fraud prevention, prompt /accurate reporting and follow up action.

(Source: RBI Annual Report-2022-23)

Action Against Non-compliant NBFCs

During the year, based on targeted scrutiny of arrangements entered into by certain NBFCs with

Digital Lending Partners (DLPs), various issues such as non-adherence to outsourcing guidelines (including those pertaining to recovery agents), fair practices code and KYC norms were examined. Further, certain dormant NBFCs were also identified which were vulnerable to misuse by miscreants. Appropriate supervisory actions, including cancellation of certificate of registration (CoR) of a few NBFCs, were taken based on the supervisory examinations.

(Source: RBI Annual Report-2022-23)

BUSINESS OVERVIEW

During FY 2022–23, Company registered a consistent performance in all key financial parameters including business growth especially in small loan segment, robust asset quality and improved key financial indicators. For the FY 23 Company’s consolidated revenue from operation was INR 4731.89 Million and During the FY 2022–23, total disbursement was INR 25,996 Million, Company’s total Assets Under Management stood at INR 32,204 Million (Standalone) and at INR 34,928 Million (consolidated) as on March 31, 2023. As on March 31, 2023 Company’s Gross & Net NPA stood at INR 69.63 Million and INR 5.55 Million respectively.

The Company is providing a number of financial products like Business Loans, SME & MSME Loans, Income Generation Loans for business/self–employment purpose.

RESULTS OF OUR OPERATIONS

The Company is providing a number of financial products like Business Loans, SME & MSME Loans, Income Generation Loans for business/self–employment purpose. During, the year under review Company has posted 18.13 % increase in the Net Profit after tax from the finance business of the Company financial performance of the Company for the Financial Year 2022–23 is summarized below:

Particulars	Standalone		Consolidated
	FY 2022–23	FY 2021–22	FY 2022–23	FY 2021–22
Revenue from Operations	4,229.72	3,563.98	4,731.89	3,922.23
Less: Expenditure	2,945.53	2,500.06	3,424.24	2,850.69
Profit Before Tax (PBT)	1,238.30	1,063.91	1,262.37	1,071.22
Tax Expenses	321.38	276.76	326.19	278.71
Net Profit After Tax (PAT)	916.93	787.14	936.19	792.51
Earnings per Share (EPS) (INR)	2.06	1.86	2.10	1.87

 

STANDALONE KEY RATIO FOR FINANCIAL YEAR 2022–23

Current Ratio	2.38
Debt– Equity Ratio	1.58
Debt Service Coverage Ratio	0.58
Return on Equity Ratio	7.90%
Net Capital Turnover Ratio	0.37
Net Profit Ratio	21.68%
Return on Capital Employed	10.07%
Return on Investments	0.14%

 

ASSET LIABILITY MANAGEMENT

The company is continuously 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, 2023: Behaviouralised ALM snapshot as on 31 March 2023

		Over 14	Over 1	Over 2	Over 3	Over 6	Over 1	Over 3
	Upto 14 days	days to 1 month	month & Upto 2 months	months & Upto 3 months	months & Upto 6 months	month & upto 1 year	year & Upto 3 years	years & upto 5 years	Over 5 Years	Total
Deposits	—	—	—	—	—	—	—	—	—	—
Advances	426.20	653.70	1053.80	1044.70	3085.20	6338.00	10038.00	5157.70	191.50	27988.80
Investments
(Bank FDR)	180.00	—	—	—	—	—	26.60	—	—	206.60
Borrowings	—	623.80	188.00	388.80	684.90	5473.40	7615.40	2219.70	984.00	18178.00
Foreign Currency
Assets	—	—	—	—	—	—	—	—	—	—
Foreign Currency
Liabilities	—	—	—	—	—	—	—	—	—	—

 

CAPITAL ADEQUACY RATIO

The company’s strength lies in its healthy capital structure. Our Company is among those few NBFCs who are low leveraged. As of March 31, 2023, the Company’s Capital Adequacy Ratio (CRAR) stood at 40.34 % as against 15.00 % of statutory requirement.

Particulars	2022-23	2021-22
i) CRAR %	40.34%	42.92%
ii) CRAR – Tier I Capital %	36.49%	37.73%
iii) CRAR – Tier II Capital %	3.85%	5.19%
iv) Amount of subordinated debt raised as Tier-II Capital	8,900	8,900
v) Liquidity Coverage Ratio	2.45	3.24
vi) Amount raised by issue of Perpetual Debt Instruments	Nil	Nil

 

ASSET QUALITY

Asset quality is the criteria where the Company stands far ahead from its peers as for last several years. Company has a policy of writing o_ its overdue advances. However, recovery e_orts in such accounts are continued. Standard Assets as on the date of Balance Sheet stood at INR 27,919.16 Million and Sub–Standard Assets stood INR 69.63 Million.

Movement of NPAs (INR in Lakhs)

Particulars	Current Year	Previous Year
(i) Net NPAs to Net Advance (%)	0.02%	1.26%
(ii) Movement of NPAs (Gross)
(a) Opening balance	3,569.34	1,394.59
(b) Additions during the year	1.03	2,875.07
(c) Reductions during the year	2,874.08	700.32
(d) Closing balance	696.29	3,569.34
(iii) Movement of Net NPAs
(a) Opening balance	2,956.10	1,093.42
(b) Additions during the year	—	2,585.79
(c) Reductions during the year	2,900.63	723.11
(d) Closing balance	55.47	2,956.10
(iv) Movement of provisions for NPAs (excluding provisions on standard assets)
(a) Opening balance	613.24	301.18
(b) Provisions made during the year	314.89	383.37
(c) Write -back of excess provisions	287.30	71.29
(d) Write o_	—	—
(e) Closing Balance	640.83	613.24

 

Sr. No. Category	% of Write o_s to Total Advances
	2022-23	2021-22
1 Agriculture & Allied activities	0.24	0.02
2 MSME	0.46	0.24
3 Corporate Borrowers	1.41	0.27
4 Services	0.18	1.38
5 Unsecured Personal Loans	—	—
6 Auto Loans	—	—
7 Other Personal Loans (LAP)	0.04	0.32
Total	2.33	1.83

 

CONVERSION OF FULLY CONVERTIBLE WARRANTS AND ISSUE OF EQUITY SHARES

In terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and Special Resolution passed by the Shareholders of the Company at Extraordinary General Meeting held on March 8, 2021, on receipt of initial warrant subscription amount of INR 460.01 Million equivalent to 25% of the warrant issue price as prescribed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 for allotment of Fully Convertible Warrants (‘Warrants’), on March 20, 2021 the Company considered and allotted 26,10,000 Warrants to Promoter Group entities, on preferential basis. As per the terms of the issue of Warrants, conversion option can be exercised by Warrant holders at any time during the period of 18 (Eighteen) months from the date of allotment of warrants, in one or more tranches.

Out of total convertible warrants, 16,20,000 warrants had already been converted into equity shares during the financial year ended March 31, 2022 and balance 9,90,000 warrants had been converted during the reporting financial year. As on March 31, 2023, no convertible warrants / convertible securities were outstanding.

SHARE CAPITAL

During the financial year ended March 31, 2023 Warrant Holders opted to exercise their right to convert the 9,90,000 warrants into equity shares and paid 75% of issue price to convert 9,90,000 warrants into equity shares Accordingly, 85,55,000 equity shares of INR 1/– each at premium of INR 69.50/– each on September 3, 2022 and 13,45,000 equity shares of INR 1/– each at premium of INR 69.50/– each on September 12, 2022, allotted to the warrant holders on conversion of warrants. The Authorized Share Capital of the Company stood at INR 1,25,00,00,000.00 and consequent to allotment of equity shares on conversion of warrants, the Issued Share Capital of the Company, as on March 31, 2023, was stood at INR 44,91,46,990.00 consisting of 44,91,46,990 Equity Shares of face value of INR 1/– each and the Subscribed Share Capital of the Company, as on March 31, 2023, was stood at INR 44,90,84,490.00 consisting of 44,90,21,990 Equity Shares of face value of INR 1/– each and 1,25,000 forfeited equity shares of face value of INR 1/– each (amount originally paid–up @ INR 0.50 each) and the Paid–up Share Capital of the Company, as on March 31, 2023, was stood at INR 44,90,21,990.00 consisting of 44,90,21,990 Equity Shares of face value of INR 1/– each fully paid–up and INR 62,500 for 1,25,000 forfeited equity shares of face value of INR 1/– each (amount originally paid–up @ INR 0.50 each).

Capital Structure of the Company as on March 31, 2023:

Authorized Share Capital	INR 1,250.00 Million (consisting of 1,20,00,00,000 Equity Shares of face value of INR
	1/– each and 50,00,000 Preference Shares of face value of INR 10/– each)
Issued Share Capital	INR 449.15 Million (consisting of 44,91,46,990 Equity Shares of face value of INR 1/–
	each).
Subscribed Share Capital	INR 449.08 Million (consisting of 44,90,21,990 Equity Shares of face value of INR 1/–
	each and 1,25,000 forfeited equity shares of face value of INR 1/– each, amount
	originally paid–up @ INR 0.50 each).
Paid–up Share Capital	INR 449.02 Million (fully paid–up) (consisting of 44,90,21,990 Equity Shares of INR 1/–
	each fully paid–up and INR 62,500 consisting of 1,25,000 forfeited equity shares of
	face value of INR 1/– each, amount originally paid–up @ INR 0.50 each).

 

SHAREHOLDERS’ FUNDS

As on March 31, 2022, Company has only one class of outstanding issued share capital i.e. Equity Shares of face value INR 1/– each and on March 31, 2023, total fully paid capital was stood at INR 449.02 Million. The Other Equity increased to INR 11,052.81 Million as on March 31, 2023 from INR 9,686.93 Million as on March 31, 2022.

The Book value of per equity share of the Company stood at INR 25.54/– as on March 31, 2023.

CREDIT RATING

M/s Infomerics Valuation and Rating Pvt. Ltd. assigned following rating to Company’s instruments:

Sr No. Instrument/Facility	Amount (INR in Million)	Rating Assigned
1 Fund Based Facilities from Banks Long Term	18000.00	IVR AA–/Stable Outlook (IVR Double A Minus with Stable Outlook)
2 Non-Convertible Debentures	1150.00
3. Commercial Paper	1500.00	IVR A1+ (IVR A One Plus)

 

RISK MANAGEMENT

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

The risks that could have significant influence on the Company and Company’s strategy to mitigate such risks are:

Associate risk

The risk of loss to the Company from the failure of customers or counterparties to fully honour their obligations to the Company, including the whole and timely payment of principal, interest, and other receivables. It is measured as the amount at risk due to repayment default by customers or counterparties to the Company. Various metrics such as instalment default rate, overdue position, instalment moratorium, restructuring, onetime resolution plan, debt management e_iciency, credit bureau information etc. are used as leading indicators to assess credit risk.

Strategy to mitigate such risk

Company has a strong governance framework in place for identifying, assessing, measuring, monitoring, controlling and reporting credit risks in a timely and e_icient manner. Fixing up the responsibility of business units for e_ective credit risk governance. Continuously aligning credit and debt management policies and resourcing, obtaining external data from credit bureaus and reviews of portfolios and delinquencies by senior and middle management team observe early warning signs of delinquency and ensuring proactive measures to maintain asset quality. Customize risk measurement approaches for various portfolio segments/sub–segments.

 

ii. Liquidity Risk

Associate risk	The risk that the Company is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets. Funding risk arises from:
	• Inability to raise incremental borrowings and deposits to fund business requirement or repayment obligations
	• When long term assets cannot be funded at the expected term resulting in cash flow mismatches
	• Amidst volatile market conditions impacting sourcing of funds from banks and money markets
Strategy to mitigate such risk	Liquidity Risk measure, monitored and managed by the Company as under It is measured by:
	• Identification of gaps in the structural and dynamic liquidity statements.
	• Assessment of incremental borrowings required for meeting the repayment obligation, the Companys business plan and prevailing market conditions.
	• Liquidity Coverage Ratio (LCR) in accordance with guidelines.
	It is monitored by:
	• Assessment of the gap between visibility of funds and the near term liabilities given current liquidity conditions and evolving regulatory framework for NBFCs.
	• A constant calibration of sources of funds in line with emerging market conditions in banking and money markets.
	• Periodic reviews of liquidity position, LCR and stress tests assuming varied what if scenarios and comparing probable gaps with the liquidity bu_ers maintained by the Company. It is managed by:
	• Constitution of Assets and Liability Management Committee (ALCO) in line with the guidelines issued by the RBI, for looking after the liquidity position of the Company against the Company’s financial obligations.
	• Holding optimum levels of liquidity to manage business requirements and maturing debt obligations.
	• Projected cashflow planning in discussion with business to have adequate flow of funds.
	• Obtain longer maturity debt to manage the asset–liability mismatch.
	• Diversified and sustainable funding mix.

 

iii. Technology Risk

Associate risk	The risk that comes from lack of up–to–date systems, system failure and continuously changing cyber threat landscape.
Strategy to mitigate such risk	To mitigate technology risk Company has taken following steps:
	• In–house dedicated team of experienced IT professionals responsible to robust the IT infrastructure of the Company.
	• Constantly monitoring systems for uptime and health.
	• Continuously upgrading in technology and security system.
	• Creation of disaster recovery system for seamless operations.
	• Reviewing and monitoring data and systems for security.
	• IT System Audit from independent IT Auditor to check the IT and Security system.
	• Real Time back of data in back–up server(s) located at di_erent place from main server.
	• E_ective monitoring & controls
	• Tested disaster management system.

 

iv. Operational Risk

Associate risk	Operational risk is the risk arising from inadequate or failed internal processes, people or systems, or from external events.
	The Company manages operational risks through comprehensive internal control systems and procedures laid down around various key activities in the Company viz. loan acquisition, customer service, IT operations, finance function etc. Internal
Strategy to mitigate such risk	Audit also conducts a detailed review of all the functions from time to time, this helps to identify process gaps on timely basis. Further IT and Operations have a dedicated compliance and control units within the function who on continuous basis review internal processes. This enables the Management to evaluate key areas of operational risks and the process to adequately mitigate them on an ongoing basis.
	Further, the Company has put in place a robust Disaster Recovery (DR) plan and Business Continuity Plan (BCP) to ensure continuity of operations including services to customers.

 

INTERNAL CONTROL SYSTEMS AND AUDIT

Company’s internal control system is designed to ensure operational e_iciency, 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 di_erent 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 e_ectiveness of the Company’s 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 e_ectiveness of the internal controls in the Company. The Company has various committee including Risk Management Committee and the Asset and Liabilities Management Committee to review and oversee critical aspects of the Company’s operations. Further, to strengthen the internal control system, Chief Compliance O_icer has been appointed, under whose supervision, the compliance function shall, among others, be responsible for identification and assessment of compliance risk, provide guidance on related matters and monitor and test compliance across the Company. The Company has implemented controls through systems and processes ensuring a robust control framework. The Internal Audit department and compliance function review the business unit’s adherence to internal processes and procedures as well as to regulatory and legal requirements providing timely feedback to management for corrective action, including minimising the design risk, if any.

The Audit Committee of the Board also reviews the performance of the audit and compliance functions and reviews the e_ectiveness of controls and compliance with regulatory guidelines. In the opinion of Board and the Senior management, Internal Control System of the Company 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 fixed the responsibility of various o_icials inside the organization to oversees implementation of fraud prevention measures. Frauds are investigated to identify the root cause and relevant corrective steps are taken to prevent recurrence. Periodic reports are submitted to the Board and senior management committees.

HUMAN RESOURCE DEVELOPMENT

The Human Resource (HR) function in the Company remains focused on improving organizational e_ectiveness, developing frontline leaders, promoting employee empowerment and maintaining stability and sustainability amidst growth and a rapidly changing business environment.

As PAISALO believes that "happy employees are the key for Company’s success". The 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, the 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.

As on March 31, 2023, Company had 1,650 permanent employees.

SWOT ANALYSIS

In the pyramid of development, the bottom most layer needs to be strengthened through financial inclusion by serving the financing needs through employment and income generation loans to the economically weaker sections.

Non–Banking Financial Companies (NBFCs) provides loans and other financial services to the public, forming an integral part of the Indian financial ecosystem. NBFCs are providing boost to the generation of employment and wealth through providing credit to millions of underbanked and unbanked individuals and businesses across the country, these companies provide them an opportunity to be a part of the financial mainstream and contribute towards development of Indian economy.

Strengths

Caters to the Ground level : India is a land of opportunities, so this is so right for the NBFCs, as there are opportunities for NBFCs to succeed in the country. What sets NBFCs apart from traditional banks is their ground–level understanding of their customers’ profile and their credit needs. These insights add to their ability to innovate and customize products as per their clients’ needs. This is why NBFCs are often able to carve their niche based on their customer profile

Boon for the rural sector: One of the biggest opportunities for NBFCs is its new to credit investment customers. Rural sector has limited ground presence of banks and other institutional credit financial services and whatever banks are present in these sector as regulated by legislation, have rely on banking and credit history while assessing the loan and cannot provide loans or financial services to the people who do not qualify for the bank loan. They have emerged as a lucrative segment as far as NBFCs concerned. To serve this segment, NBFCs have to build the entire machinery in a di_erent way. They need to implement unique models to assess the creditworthiness of applicants and lend them with comparatively less paperwork.

Such credit people are the greatest opportunity for NBFC as there are no competitions due to probable risk and the new to credit segment provides a huge opportunity for NBFCs to expand their market base in villages and tier 2 & 3 towns across the country. Majority of population in India lives in areas where banks would not provide loans and financial services because of the absence of requisite paperwork. And such people look for financial help and are capable of returning the loan but face the problem due to paperwork and are denied loans.

Less paper work : The NBFCs, becomes a source of help to provide financial aid as it involves less paper work. Taking into consideration the rise in non– performing assets (NPAs), banks are being cautious in relation to credit worthiness of the customers and deny loans for the same. Due to this, credit gap is made. However, in the case of NBFCs, they charge high rate of interest, within the guidelines of the government. The customers accept to pay additional interest rate for loan to the NBFCs in order to skip any complications of complying with the requisites of the banks that are put on them.

These people needs and wants are more than that which NBFCs are providing to these people and if these people are nurtured and educated accordingly, they can become long term business opportunity for the NBFCs.

Flexibile rules and regulations : Also, keeping in regard the financial needs of the people and the structure of the banks, for the interest of the people the government has exempted NBFC from some hard rules and regulations that are imposed on the other financial institutions, such as in the case of banks. The NBFCs enjoy the flexibility in rules relating to restrictions paper work, easy and simplified sanction procedure and disbursement, thereby making it suitable for the entrepreneurs to show their interest in NBFCs, Further, NBFCs have played an important role in contributing towards India’s GDP to the extent that the government is also coming forward now and will do so in future to protect the interests and help the NBFCs to grow and emerge as they have been providing financial help and services with easy procedure to the people of the country. The business of NBFCs are of profit and their contribution in the growth of the India’s GDP shows that NBFCs are working for a better in these past years.

Market Expansion: New–to–credit segment presents a massive opportunity for NBFCs to expand their market base. This market is largely untapped or underpenetrated in villages and tier 2 & 3 towns across the country. The segment also sees comparatively less competition due to probable risk.

Opportunities

As per the Standing Committee report on ‘Strengthening Credit Flows to the MSME Sector’-

The Micro, Small and Medium Enterprises (MSMEs) which contributes around 30% to the Indian GDP, 48% to exports and provides employment to around 11 crore people is facing credit gap of around Rs 20-25 lakh crore.

The Committee noted that less than 40% of MSMEs avail credit from formal financial systems and therefore depend on costly and unreliable credit.

As a result, there’s a big opportunity in the coming years for the NBFCs to capture this unserved sector and partner in India’s 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.

This o_ers a good opportunity to NBFCs to diversify their assets by remotely o_ering products which otherwise required expensive physical distribution.

This o_ers a good opportunity to NBFCs to diversify their assets by remotely o_ering products which otherwise required expensive physical distribution.

Co–Lending Partnerships with Banks: Co–lending partnerships are a "win–win" for banks and non–banking financial companies. While it enables NBFCs to compete on the pricing front, banks get the benefit of the last mile reach of NBFCs, access to new product lines typically financed by NBFCs, this also speed up the execution and strength of collections.

The unhindered reach to the smallest customer on the socioeconomic ladder and low cost of operations of NBFCs coupled with low cost of funds of Banks, can be blended and benefit be passed on to the bottom of pyramid customer via Co–Lending model. The size of the bottom rung is mind–boggling and can be estimated to be around 40 crores of Indians waiting to be touched by the banking system on the credit side.

Emerging Trends in Technology: 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. The use of modern methods by NBFCs has overcome key challenges that had overwhelmed conventional lending 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.

Higher yield: Since these customers find it hard to attain a bank loan, they are ready to pay some additional amount of interest on their loan. Moreover, given the rise of non–performing assets (NPAs) in the banking industry, banks have become even more cautious to evaluate the credit worthiness of their borrowers. The credit gap presents a significant opportunity for NBFCs

Weaknesses

Fund requirement: Availability of fund a major challenge that NBFCs face in its smooth functioning, Banks and Capital Market are the major source of fund for NBFCs. There are no other economically e_icient options for NBFCs for its funding requirements.

Lack of education among people: The most of population in India is uneducated and unaware with the norms and processing of NBFCs. This can be challenge to NBFC sector at various levels. People hesitate at first to take loan from NBFCs and even after taking loan from NBFCs people not familiar with the processing of NBFCs that may cause NBFCs to indulge extra manpower and fund to make people educate about the NBFCs.

Due Diligence: The due diligence is important to optimize the default risk. Since the customers who avail borrowings from NBFCs do not have any credit history, it becomes quite di_icult to verify their financial credentials. Therefore, NBFCs have to deploy additional resources for on–ground visits, psychoanalytic tests, reference checks and so on. All this adds to the operational cost and makes it tough to service this segment. However, this due diligence is critical to optimize the default Risk.

Several Representative Bodies: In the current times, there are several representative bodies for NBFCs. This is quite a challenge for NBFCs as the NBFC sector is still in developing stage and presence of several representative bodies poses a challenge for NBFCs. There is a need to ensure that every segment of NBFCs are adequately represented in an apex body in a way that it promotes the balances growth of the NBFC sector Business risk management: NPAs have been a challenge not only for Indian banks but also for NBFCs. With new to credit customers, despite all the possible measures, the risk remains higher compared with those customers who have a strong credit history. Therefore, NBFCs have to continuously work on checks and balances to make sure that the EMIs are on time, customer records remain up to date, and any red alerts are notified immediately.

Threats

Threats refer to components that have the potential to damage an organization. For example, unfavorable government policies, drastic decline in revenue. Other common threats include things like rising costs for materials, increasing competition, and tight labour supply, and so on.

Government Policies: Government regulations can directly a_ect the banking sector of a country, these government policies might be unfavourable for PAISALO.

Global Uncertainty in the Financial Ecosystem: The world is going through di_icult economic times at the moment. The international banking sector has all been a_ected by trade wars, protectionist policies, and economic downturns. If the world’s economic conditions do not change, the financial service industry will face a bleak future.

Lack of Proper Cyber Security Systems: The current banking industry relies entirely on the cyber-world. Whether it is data storage, monetary transactions, or personal information, everything is stored digitally. This makes the banking sector a primary target for hackers who are seeking to benefit financially by leveraging flaws in the bank’s digital infrastructure. NBFCs need to take e_ective cybersecurity steps to safeguard their records, they will face a significant cyberspace threat.

Outlook

RBI in its Report on Trend and Progress of Banking in India 2020–21, said "With increased pace of vaccinations and the broadening revival of the economy, the NBFC sector is expected to remain buoyant. The financial system is maturing from a bank dominated space to a hybrid system wherein nonbank intermediaries are gaining prominence. The developments in the sector in 2020–21 are harbinger of even brighter prospects in the years ahead.

India Ratings and Research (Ind–Ra) has maintained a neutral sector outlook and a Stable rating Outlook for Non–Banking Finance Companies (NBFCs) for FY23. With the positive approach, in absence of any negative event, Sector would see normalization of business activities, after facing challenges in the past few years following the default by Infrastructure Leasing & Financial Services Ltd (‘IND D’) leading to liquidity challenges and then the COVID–19 pandemic. NBFCs would begin the year with su_icient capital bu_ers, stable margins and sizeable on–balance sheet provisioning, while adequate system liquidity would aid funding. Nevertheless, an expected increase in systemic interest rates and asset quality issues in some segments due to the lagged impact of pandemic would be a drag on the operating performance.

India Rating and Research its report expected that NBFCs to maintain loan growth of around 14% YoY in FY23, with FY22 growth closing at 7%–8%.

The sector has been facing increased regulatory oversight and push towards convergence with banks through various measures such as scale–based regulation, realignment in asset quality classification and Prompt Corrective Action norm. The incremental impact of the notification on NPA recognition however will be moderate as the maximum impact has already been seen in FY22 and NBFCs are holding adequate provisions.

Funding, one of the major challenges for NBFCs, but in near past funding condition is stable because banks are lending to NBFCs. Mutual funds, that had become very cautious to lend to NBFCS, have now also started lending. NBFCs are also diversifying their funding base by looking at retail borrowing.

We believe that as the sector revive and bounced back in the second quarter of 2021–22 in terms of disbursements and AUM (asset under management) growth, the years to come shall be very good for the sector and the Company with improvement and growth in Indian economy, and the sector is set to expand further in the upcoming days.

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, 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.