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, 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.

Global Economy

The pandemic continues to exact a heavy toll, particularly across emerging market and developing economies (EMDEs). Since COVID-19 started to spread, it has infected at least 160 million people and caused more than 3 million deaths. Hundreds of new cases are being reported every day, and the number of unreported cases is estimated to be substantial. Global outbreaks of the virus have come in several waves, each cresting at a higher daily infection rate than the one before.

Following a 3.5 % contraction caused by the COVID-19 pandemic in 2020, the global economy is experiencing an exceptionally strong but uneven recovery and there is considerable uncertainty about its durability. While advanced economies are rebounding, many of the worlds poorest countries are being left behind, and much remains to be done to reverse the pandemics staggering human and economic costs. The ongoing pandemic continues to shape the path for global economic activity, with severe outbreaks continuing to weigh on growth in many countries.

The global economy is set to expand 5.6 percent in 2021, its strongest post-recession pace in 80 years. This recovery is uneven and largely reflects sharp rebounds in some major economies. Growth is concentrated in a few major economies, with most EMDEs lagging behind: while about 90 percent of advanced economies are expected to regain their pre-pandemic per capita income levels by 2022, only about one-third of EMDEs are expected to do so. In low-income countries, the effects of the pandemic are reversing earlier gains in poverty reduction and compounding food insecurity and other long-standing challenges.

The global outlook remains highly uncertain, with major risks around the path of the pandemic and the possibility of financial stress amid large debt loads. Controlling the pandemic at the global level will require more equitable vaccine distribution, especially for low-income countries.

Despite the strong pickup, the level of global GDP in 2021 is expected to be 3.2 percent below pre-pandemic projections. The recovery is envisioned to continue into 2022, with global growth moderating to 4.3 percent. Still, by 2022, global GDP is expected to remain 1.8 percent below pre-pandemic projections.

The near- and longer-term consequences of the COVID-19 crisis pose enormous policy challenges. The immediate priority continues to be pandemic control, including overcoming obstacles in procuring and distributing vaccines. International cooperation is needed to help ensure timely and equitable vaccine distribution particularly in Low Income Countries, where inoculation continues to be very slow. As the pandemic is brought under control, policy actions will also be needed to address its adverse legacies, which will require balancing competing priorities. Vaccination campaigns are gathering pace in many advanced economies and a number of EMDEs, with about 10 percent of the global population having received at least one vaccine dose. All countries remain vulnerable to renewed outbreaks so long as the virus continues to circulate in some areas amid unequal global vaccine coverage.

Despite continued waves of infection, the impact of the virus and associated lockdown measures on economic activity appears to be diminishing in most countries. Over time, firms and households have adjusted their behavior to mitigate disruptions and shift activity to less-affected sectors. In addition, compliance with lockdown measures appears to have waned somewhat over time. Global trade has continued to rebound; however, the strength of global trade growth is set to be dampened by shifting activity from manufacturing to the low-trade-intensity domestic services sector in countries where COVID-19 caseloads have been declining. The recovery in global trade started earlier and has been stronger than that of other components of global output, as the pandemics impact on activities requiring face to face contact initially encouraged a rotation in demand toward the consumption of durable goods, which have a high trade intensity.

Financial conditions have tightened but remain generally supportive. Global borrowing costs have increased as expectations of stronger future growth and higher inflation have pushed up long-term yields on government bonds. Thus far, these developments have been substantially less disruptive to global and EMDE financial conditions than the 2013 taper tantrum. Global corporate borrowing costs have also risen, but spreads have been stable and stock market valuations in most regions are still close to multiyear highs. Business bankruptcies, which had been limited considering the depth of the global recession, have picked up in some industries and countries but remain below pre-pandemic levels amid easy access to credit and the extension of some COVID-19 relief measures. The extent of post-pandemic credit losses may be limited by the fact that crisis-hit sectors account for a small share of total non-financial-sector debt.

The recovery of foreign direct investment (FDI) flows to EMDEs is largely attributable to investors optimism about prospects in China and a few large foreign acquisitions in India. FDI flows to other EMDEs remain subdued due to concerns about the course of the pandemic and uncertainty about growth prospects.

Commodity prices have seen a sharp rise in 2021, with many now well above their prepandemic levels. Oil prices have rallied markedly, averaging $60/bbl in 2021 so far. Prices have been supported by a gradual firming in demand and continued production restraint among OPEC+, even if the group is gradually reducing the extent of its production cuts as the market recovers. However, thepickup in oil prices has been partly dampened by uncertainty regarding the evolution of the pandemic and its potential impact on future oil demand. Oil prices are projected to average $62/bbl in 2021 and 2022. Base metal prices have increased sharply this year, supported by continued strong demand from China as well as recovery in the rest of the world. The forecast for metals prices in 2021 has been revised sharply upwards, and prices are now expected to be 36 percent higher in 2021 on average relative to last year, before fallin0g back in 2022 as some supply constraints ease. Agricultural prices have also seen a substantial rise, particularly those of food commodities, and concerns about food insecurity persist in some countries, especially those afflicted by conflict or experiencing adverse weather events. While most global agricultural commodity markets remain well supplied, production growth for the main crops has been below trend for the past few years. Agricultural prices are expected to rise by 16 percent in 2021 before plateauing in 2022.

Indian Economy

The Indian economy is estimated to decline by 7.3 % in FY 2020-21, the first year of contraction since 1980. Indias economic decline was sharper than other key economies due to strict and early lockdowns to control the spread of COVID-19. However, the economy registered a YoY growth of 1.1 per cent in H2: FY 2020-21 as compared to (-) 15.9 per cent in H1: FY 2020-21 - implying a growth of 25.5 per cent in H2 over H1. In terms of Real GVA, the economy registered a contraction of 6.2 per cent in FY: 2020-21 with a contraction of 14.9 per cent in H1: FY 2020-21 and growth of 2.4 per cent in H2: FY 2020-21.

The countrys GDP grew by 1.6 per cent in Q4: FY 2020-21, an improvement over the 0.5 per cent growth in Q3: FY 2020-21 and the negative growth of 24.4 per cent and 7.4 per cent in the first two quarters of FY 2020-21. The higher economic growth during the fourth quarter can be linked to the unlocking of the economy and revival in business and consumer confidence that was underway during the period. India is one of the select few economies that have witnessed positive year-on-year growth in the last two consecutive quarters.

The growth in output in Q4 FY:2020-21 was broad-based across sectors. Agriculture, industry and services sector witnessed positive YoY growth during the quarter. The industrial sector grew at a 11-quarter high of 7.9 per cent aided by the higher output in manufacturing (6.9 per cent), electricity, gas, water & utility services (9.1 per cent) and construction (14.5 per cent). Only the mining and quarrying sector recorded negative growth during the quarter (-5.7 per cent). Agriculture sector grew by a strong 3.1 per cent in Q4 FY: 2020-21 which was over a high base of 6.8 per cent growth in the same period last year. The services sector returned to growth after a gap of three quarters in Q4 FY: 2020-21, recording a YoY growth of 1.5 per cent. This improvement was led by finance, real estate & professional service (5.4 per cent growth) along with public administration (2.3 per cent growth). Contact-intensive hotels, trade and transport sectors contracted by only 2.3 per cent in Q4 after large declines in previous quarters. Agriculture was the only sector which registered growth in FY: 2020-21 raising its share in overall GVA.

The onset of the second wave of COVID-19, however, has posed a downside risk to this momentum in Indias economic recovery. With the peaking of the second wave in first half of May 2021 and the localised restrictions adopted to combat its spread, its economic impact is expected to be restricted to the first quarter of FY: 2021-22. Taking all these factors into consideration, RBI has projected real GDP growth at 9.5 per cent in 2021-22 consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4 of 2021-22.

Emerging as the silver lining among the pandemic-hit economy, agricultural sector has cushioned the economic impact being the only sector posting growth in FY 2020-21. Indias foodgrain production is estimated to rise 2.7 per cent to a new record of 305.43 million tonnes in the current crop year 2020-21, on record output of rice, wheat, maize and gram. Total pulses production has also posted a record at 25.58 million tonnes - a rise of 11.2 per cent over last year. In the non-food grain category, based on record production of groundnut and Rapeseed & Mustard, total oilseeds production touched a record of 36.57 million tonnes - 10.1 per cent rise over last year. With the prediction of a ‘normal monsoons this year, the government has set a record target to raise foodgrain production further to 307.31 million tonnes during 2021-22 crop year, starting July.

The Index of Industrial Production (IIP) posted a robust double-digit expansion of 22.4 per cent YoY in March 2021 against a decline of 18.7 per cent in March 2020 and registering a growth of 4.7 per cent over March 2019 - largely due to the lockdown induced favourable base from last year. During FY 2020-21, IIP has de-grown by 8.6 per cent compared with negative growth of 0.8 per cent in FY 2019-20. Industrial output in first half fell by 20.8 per cent while in the second half the growth has been steady at 3.5 per cent. Manufacturing sector fell by 9.8 per cent in FY 2020-21 as compared to a decline of 1.4 per cent in FY 2019-20; followed by significant decline in Mining at 7.8 per cent (against a growth of 1.6 per cent in FY 2019-20) and a decline of 0.5 percent in Electricity (against a growth of 1.0 per cent in FY 2019-20). Under the use-based classification, capital goods and consumer-durables showed a sharp double digit decline at 19.2 per cent and 15.2 percent respectively followed by de-growth of 9.7 percent in intermediate and 9.1 per cent in infrastructure goods.

Indias power consumption, one of the bright spots of the economic recovery since September 2020, registered a growth rate of 7.3 per cent in May 2021 over May 2020. Local lockdown restrictions imposed by state governments, impact of cyclones Tauktae and Yaas hitting the West and East coasts respectively, and rains over North Indian regions, led to the moderation in power consumption in the month of May. It dimmed in the first half of May followed by an uptick in the second half. With COVID-19 cases on the downhill, unlocking of mobility restrictions is expected to refuel industrial activity and power demand.

Strong pent-up demand renewal continued in the last month of FY 2020-21 with domestic sales of passenger vehicle and two & three wheelers growing at a strong 115 per cent and 71 per cent YoY respectively during March 2021 over the low base of March 2020. This suggests shifting consumer preference for personal travel in response to the pandemic. Total domestic sales of commercial vehicles in FY 2020-21 were 5.68 lakh units, 20.7 per cent lower than previous year levels. Resilient rural demand trajectory since June 2020 continued with tractor sales growing at a strong 172.4 per cent YoY and 12.5 per cent sequentially in March 2021. Even on a pre-COVID base of March 2019, tractor sales grew at 36.5 per cent.

Travel indicators have remained weak - air traffic still at -37% y-o-y in March 2021 and rail traffic also weak at -28% y-o-y. Among other industrial indicators, electricity demand growth is now positive and GST collections registered a good growth and collections exceeded INR 1 lakh crore in each of the last six months owing to economic recovery during this period. Digital adoption saw acceleration during the crisis, particularly in the usage of digital payments. UPI digital transactions was almost double at INR 41.0 lakh crore as compared to INR 21.3 lakh crore in FY: 2019-20. The external sector exhibited resilience as current account turned surplus for the first time since 2004, on weaker domestic demand, falling oil prices and strength in Indias services exports.

India emerged as the preferred investment destination in the year, attracting highest ever FDI inflow of USD 81.72 billion during FY 2020-21 as compared to USD 74.39 billion in FY 2019-20. This reflected the confidence of the foreign investors in Indias fundamentals. This drive Indias forex reserves to an all time high of ~USD 580 billion by the end of FY 2020-21, against ~USD 475 billion by the end of FY 2019-20.

Overall monetary and credit conditions in the economy remained accommodative with money supply growing by11.3 per cent as on April 9, 2021 compared to 10.2 per cent a year ago. As on April 23, 2021, currency in circulation grew at 15.2 per cent compared to 15.7 per cent at same time in previous year.

Bank credit growth stood at 5.3 per cent in the fortnight ending April 9, 2021 as compared to 5.6 per cent in the previous fortnight. Non-food credit growth of scheduled commercial banks stood at 5.4 per cent as on April 9, 2021 as compared to 5.5 per cent as on March 26, 2021. Continuing its uptrend, credit growth to agriculture and allied activities accelerated to 12.3 per cent in March 2021 from 4.2 per cent in March 2020. Credit growth to industry

decelerated marginally to 0.4 per cent in March 2021 from 0.7 per cent in March 2020. However, credit to medium industries registered a robust growth of 28.8 per cent in March 2021 as compared to a contraction of 0.7 per cent a year ago. Credit growth to micro and small industries decelerated to 0.5 per cent in March 2021 from 1.7 per cent a year ago, while credit to large industries contracted by 0.8 per cent as compared to a growth of 0.6 per cent a year ago. Credit growth to the services sector decelerated to 1.4 per cent in March 2021 from 7.4 per cent in March 2020, mainly due to deceleration in credit growth to NBFCs and contraction in credit to professional services. However, credit to trade segment continued to perform well, registering accelerated growth of 11.8 per cent in March 2021 as compared to 4.6 per cent a year ago. Slowdown in growth of personal loans continued, as it decelerated to 10.2 per cent in March 2021 from 15.0 per cent a year ago. However, vehicle loans and loans against gold jewellery continued to perform well during the month, registering accelerated growth.

Easy financing conditions enabled the corporate sector to raise substantial funds from financial markets. Private placements of listed corporate bonds stood at INR 7.72 lakh crore in FY 2020-21, 14.4 per cent higher than that in previous year (INR 6.7 lakh crore), supported by low interest rate and surplus liquidity in the system.

Domestic financial conditions continue to remain comfortable with RBIs consistent efforts to maintain adequate liquidity support. The Central bank has conducted open market purchases to the tune of INR 3.13 lakh crore in

FY 2020-21 and INR 25000 crore in April 2021. Average daily net liquidity absorption under the liquidity adjustment facility (LAF) was at INR 5.8 lakh crore in April 2021. Further, RBI conducted two fine-tuning variable rate repo auctions of INR 25,000 crore each on March 26 and March 31, 2021 for 11 days and 5 days respectively to provide for unanticipated liquidity needs and ensure flexibility to the banking system. During April, the RBI conducted two 14-day variable rate reverse repo auctions on April 9 and April 23, 2021 for INR 2 lakh crore each. As a one-time measure, RBI did not conduct any variable rate reverse repo auction for the fortnight beginning March 27, 2021 to ensure ample liquidity to fulfil year-end CRR requirements.

In its monetary policy statement on April 7, 2021, RBI announced extension of TLTRO on Tap Scheme by six months till September 30, 2021 and additional support of INR 50,000 crore to the All-India Financial Institutions (AIFIs) for fresh lending in FY 21-22, thereby standing to ensure adequate liquidity to productive sectors of economy. Further on May 5, 2021, RBI announced further measures as a part of its calibrated and comprehensive strategy

against the second wave. These measures included Term Liquidity Facility of INR 50,000 crore to Ease Access to Emergency Health Services, Special Long-Term Repo Operations (SLTRO) INR 10,000 crore for Small Finance Banks (SFBs), Lending by Small Finance Banks (SFBs) to MFIs for on-lending classified as Priority Sector Lending, incentivising credit to MSME Entrepreneurs, Resolution Framework 2.0 for COVID Related Stressed Assets of Individuals, Small Businesses and MSMEs, rationalization of compliance to KYC Requirements for customer convenience, utilization of Floating Provisions and Countercyclical Provisioning Buffer and relaxation in Overdraft (OD) facility for States Governments

The second wave of COVID in India is witnessing a much higher caseload with new peaks of daily cases, daily deaths and positivity rates and presents a challenge to ongoing economic recovery. India is emphasizing on a fivefold strategy to curb the tide of new COVID cases -Test, Track, Treat, COVID Appropriate Behaviour, Vaccination. A dynamic and concerted policy response to the second surge has been initiated with ramping up health infrastructure, oxygen supplies and deregulating the vaccine availability for all Indians above the age of 18 from May 1, 2021. With the second wave of COVID-19 infections forcing localized or state-wide restrictions, there is a downside risk to growth in the first quarter of FY:2021-22. However, there are reasons to expect a muted economic impact as compared to the first wave. The experience from other countries suggests a lower correlation between falling mobility and growth as economic activity has learnt to operate ‘with COVID-19.

Industry Structure

Non-Banking Finance Companies (NBFCs) have played an important role in the Indian financial system by complementing and competing with banks, and by bringing in efficiency and diversity into financial intermediation.

As on May 31, 2021, 56 NBFCs-D and 310 NBFCs-ND-SI were registered with Reserve Bank of India . AH 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.

NBFCs balance sheet in aggregate is around 18.8% of total SCBs balance sheet of the total asset size (INR 33.9 lakh crore) of NBFCs in FY 20, 38.6% is dominated by the government owned NBFCs. As of H1 FY21, the balance sheet of NBFC-ND-SI comprises of 86.1% share, while balance 13.9% is accounted by NBFC-D in total balance sheet size of NBFCs.

As of H1 FY 21, the Industry sector has received the highest credit (53.6%) by NBFC sector, followed by retail segment (23.3%) and services (15.8%). Within the industrial sector, large industries segment has received 46.4% of the credit disbursed to industrial sector.

Lockdown, moratorium and NBFCs

The extent of lockdown triggered by the Covid-19 pandemic impact will depend on four factors: asset class, income source of the customer, level of field work in operations, and proportion of cash collections. This will have impact on collections and fresh-loan disbursements of Non-Banking Financial Companies (NBFCs).

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

Loan Moratorium availed by customers of NBFC sector (As on August 31, 2020)







% 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
NBFCs 42.70 37.20 68.80 67.00 23.10 56.50 50.20 33.20 26.60 44.90
SCBs 18.00 30.40 77.20 68.10 43.70 33.90 35.60 39.10 43.80 37.90
System 31.30 34.30 77.50 69.30 42.60 41.00 45.40 42.10 45.60 40.40

Source: RBI Trends and Progress of Banking in India

As on August 31, 2020, the overall percentage of NBFC customers availed the loan moratorium has been comparatively lower than banks, while the loans outstanding under moratorium were higher as compared with banks. Among the sectors MSME segment under NBFCs availed the scheme most. -69.0% of MSME customers have availed the moratorium as of August 30, 2020 as compared with -61.0% as of April 30, 2020. Other categories such as individuals, witnessed a reduction in the share of customers 32.5% as of April 30, 2020 to 23.1% as of August 30, 2020, while, the corporate segment has registered a fall in outstanding amount of loans under moratorium between April 2020 and August 2020.

Performance of NBFC sector

During the last two years, liabilities of the NBFC sector grew at CAGR of 13.8%, i.e., from INR 26.2 lakh crore in FY18 to INR 33.9 lakh crore in FY20. The growth in liabilities slowed to 5.8% (INR 35.8 lakh crore) in H1FY21. Post the NBFC crisis, the focus shifted from growth to stability, liquidity and concentrated on managing their ALM (asset-liability management). However, larger NBFCs were able to borrow from debt market based on their scale and parentage. Specific measures taken by RBI and Government (e.g. special liquidity scheme for NBFCs/HFCs) enabled these entities to combat liquidity constraints and restricted market access.

On the supply side, sources of funds, especially for small and mid-sized NBFCs, were impacted due to reduced risk appetite of banks for low rated and unrated exposures. On the demand side, the prevailing economic contraction contributed to the subdued credit offtake.

As of H1FY21, the overall borrowings of NBFCs grew by 7.9% YoY, while NBFC-ND-SI and NBFC-D registered a growth of 8.8% and 1.4% respectively. The share of NBFC-ND-SI marginally improved to 87.9% in overall borrowings (87.1% share in H1FY20).

Out of the total assets of the NBFC sector (INR 35.8 lakh crore) in H1FY21, loans and advances account for approximately 70%. Of the total asset size (INR 33.9 lakh crore) of NBFC segment in FY20, approximately 39.0% is dominated by the government owned NBFCs. There was a sharp reduction in credit growth to all sectors except retail. Agriculture, Industry and Services sectors witnessed a significant decline, while the retail sector registered a slower growth in FY20 as compared with FY19.

The annual and half-yearly performance of the NBFC-ND-SI and NBFC-D companies for the financial years, FY18, FY19, FY20, H1FY20 and H1FY21. Key financial indicators of the profit and loss account like total income, total expenditure and net profit after tax have been presented.

Source: RBI Trends and Progress of Banking in India

The above figure shows that the total income grew strongly at 13.9% y-o-y in FY19, but the growth slowed down to 12.9% y-o-y in FY20 due to slower loan disbursals and rate cuts. NBFC sector registered a net profit growth of 167.3% in FY20 as compared with a de growth of 59.4% in FY19 (low base).

NBFC-ND-SI comprise around 83.0% share in total income of the NBFC sector, the income and net profit measured as percentage of total asset is higher for the NBFC-D set of companies (it accounts for around 23% share in net profit of NBFCs). The total cost to income ratio of the NBFC-ND-SI declined from 80.2% in FY18 to 70.8% in H1FY21 indicating a fall in operating expenditure of this segment. On contrary, the total cost to income ratio of the NBFC-D increased from 77.8% in FY18 to 81.9% in H1 FY21.

Interestingly, while NBFCs have ROA of 1.9% in FY20, while SCBs (Scheduled Commercial Banks) had ROA of 0.2% in the same period. Similarly SCBs had NIM of 2.9% in FY20 thus, indicating higher profitability of NBFCs.

The GNPA ratio increased to 6.6% in FY20 from 6.0% in FY19 which is partly due to increase in slippages (from 0.30% in FY19 to 0.52% in FY20), while the NNPA ratio stood stable. Recovery and write offs ratio of NBFCs increased from 0.08% and 0.07% in FY19 to 0.10% and 0.13% in FY20 respectively.

Banks outstanding to NBFCs registered a highest growth of 46.3% in absolute terms from September 2018 (INR 5.5 lakh crore) to September 2020 (INR 8.0 lakh crore). The overall composition of NBFCs in bank credit increased from 6.9% in September 2018 to 8.7% in September 2020 and remained stable on m-o-m basis (8.7% in August 2020). However, growth in bank credit to NBFCs has registered a downward trend, due to the base effect and risk aversion in banking system due to the COVID-19 pandemic. Also, NBFCs were not in need of funds as disbursements were muted.

Despite slower rundown due to moratorium to a significant part of their borrowers, the loan growth for the NBFCs on y-o-y basis came at 11.8% in Q2FY21 as compared with 13.6% in Q2FY20 due to weak demand on the back of nationwide lockdown and the resultant risk aversion. Except one or two NBFCs, all NBFCs witnessed a decline in overall disbursement growth.

The profitability of NBFCs stood largely stable due to the slow growth in their advances in Q2FY21. The NBFCs recorded return on assets (ROA) from 0.46% in Q2FY20 to 0.52% in Q2FY21 as profitability impacted majorly on account of an increase in their provisions despite significant reduction in operating costs. The moderation in interest income comes on account of the slow growth in the advances of the NBFCs. As a result, the NBFCs have been able to conserve their NIMs and ROA at levels similar to that in Q2FY20. Most NBFCs made additional COVID related provisions as a prudent measure. Hence there was an increase in the provisions of NBFCs in Q2FY21. The ROA chain indicates that the growth in the loan of NBFCs has led to a rise in their interest income; their interest expense as a percentage of total assets has declined marginally and there was a fall in the cost of borrowing of some NBFCs.

Business Overview

During FY 2020-21, 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 the FY 2020-21, total disbursement was INR 14,238.10 Million Companys total Assets Under Management stood at INR 21,424.66 Million (Standalone) and INR 23,178.51 Million (Consolidated) as on March 31, 2021. As on March 31, 2021 Companys Gross & Net NPA stood at INR 139.46 Million and INR 109.34 Million respectively. For the FY 2020-21 the Net Profit of the Company was stood at INR 609.19 Million. As of March 31, 2021, the standalone net-worth of the Company stood at INR 8,618.83 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, 2021:

(Amount in Lakhs)

Upto 14 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 1year & Upto 3 years Over 3 years & upto 5 years Over 5 Years Total
Deposits -
Advances 3833 3627 6250 7514 19643 44233 86266 18227 3863 193456
Investments (Bank FDR) - 3253 34 3287
Borrowings 1536 267 340 140 10238 40423 18302 15904 31446 118596
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, 2021, the Companys Capital Adequacy Ratio (CRAR) stood at 44.47 % 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 company has a policy of writing off its overdue advances. 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 1726.48 Million.

Movement of NPAs

(Amount In INR Lakhs)

Particulars Current Year Previous Year
(i) Net NPAs to Net Advance (%) 0.57% 0.34%
(ii) Movement of NPAs (Gross)
(a) Opening balance 761.43 515.65
(b) Additions during the year 672.66 256.04
(c) Reductions during the year 39.50 10.26
(d) Closing balance 1394.59 761.43
(iii) Movement of Net NPAs
(a) Opening balance 594.06 437.38
(b) Additions during the year 608.80 180.97
(c) Reductions during the year 109.44 24.29
(d) Closing balance 1093.42 594.06
(iv) Movement of provisions for NPAs (excluding provisions on standard assets)
(a) Opening balance 167.38 78.27
(b) Provisions made during the year 134.32 90.69
(c) Write -back of excess provisions 0.52 1.59
(d) Write off
(e) Closing Balance 301.18 167.38

Sector wise NPAs (Write Offs)

% of Write offs to Total Advances
S. No. Category 2020-21 2019-20
1 Agriculture & Allied activities 0.33 0.39
2 MSME 0.55 0.67
3 Corporate Borrowers 0.46 0.84
4 Services 0.37 1.68
5 Unsecured Personal Loans 0.00 0.00
6 Auto Loans 0.00 0.00
7 Other Personal Loans (LAP) 0.11 0.21
Total 1.83 3.79

Shareholders Funds

As on March 31, 2021 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 200.70 per share.


During FY20, the NBFC sector faced headwinds in the aftermath of the IL&FS crisis in the form of erosion of confidence among investors, rating downgrades and liquidity stress compounded by the COVID-19 pandemic. On an overall basis, NBFCs were taking corrective actions including reducing business growth, correcting ALM profiles, reducing leverage, etc.

Further, in H1FY21, the Reserve Bank of India continued to take sequential regulatory measures to make available sufficient liquidity to the NBFC sector. The consolidated balance sheet of NBFCs gained traction in H1FY21 after witnessing a deceleration in FY20 due to stagnant growth in loans and advances.

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 upcoming years.

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 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 measure, assess, monitor, and manage these risks systematically across all its portfolios.

Internal Control Systems and Audit

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 afl 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. 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 a central vigilance team oversees 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

PAISALO 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 effectiveness of the security initiatives taken by 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 wellbeing of our employees and customers and with the relaxation provided

by the Governments/ Authorities, in phase manner, the Registered Head Office and various Branch Offices have been /will be open as per government guidelines.

Human Resource Development

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. 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, 2021, your Company had 920 employees.

Opportunities and Threats

Non-Banking Finance Companies (NBFCs) form an integral part of the Indian financial ecosystem. By extending the line of secured and unsecured 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. 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.

There are some of the opportunities for the future of NBFCs in India which would help them to growth and emerge and contribute in the economy. One of the biggest opportunities for NBFCs is its new to credit investment customers. One such segment is low income, new to credit customers. These customers have not borrowed from any financial institution in the past. These customers usually reside in rural pockets where banking and institutional credit financial services have limited ground presence. Therefore, NBFCs are a boon for the rural sector. NBFCs have become a profitable segment for such purposes.

Usually, banks often rely on banking and credit history while assessing the loan applications of their customers. Therefore, these new to credit customers do not qualify for a bank loan. However, they have become a lucrative segment for NBFCs. To serve this segment, NBFCs have to build the entire machinery in a different 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. There 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 (NPA), 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.

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 harsh 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, thereby making it suitable for the entrepreneurs to show their interest in NBFCs, Further, NBFCs have played an important role in contributing towards Indias 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 Indias 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. There are approximately 6.3 crore MSMEs in India, contributing to about 29 per cent of Indias GDP. According to a survey, the credit gap is huge and it at about INR 16.66 lakh crore. Only 16% of the credit demand of this sector is being served by the formal sector. As a result, theres a big opportunity in the coming years for the NBFCs to capture this unserved sector 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.

Further 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.

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. 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 lock down is likely to result in faster adoption of technology in payments and Customer interactions.

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.

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 difficult 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.

Customer education: As the name suggests, new to credit customers do not have any experience of availing financial services. Therefore, they may not naturally look to engage with any NBFC to attain loan for their personal or business requirements. Hence, to onboard such potential customers, NBFCs have to spend additional resources in financial literacy and awareness. On the positive side, once these customers understand the benefits of obtaining a loan from an NBFC, there is a high likelihood to convert the lead into real business.

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.