pmc fincorp ltd Management discussions

INDUSTRY OVERVIEW

NBFCs have played a vital role in the financial system over the last decade and will continue to do so as India embarks on a journey towards further growth. They complement as well as compete with banks, bringing in efficiency and diversity in the financial intermediary segment. The financial year 2021-22 had been quite a challenging year for the Indian economy and particularly for the financial services sector. As the Indian economy began to recover in second half of FY2021, we as a nation still lost two years of GDP growth. The continued liquidity crunch, uncertain and volatile credit environment and slow economic growth created headwinds. The second (Delta) wave of COVID-19 pandemic in the beginning of FY2022 impacted the businesses and aggravated the prevailing sectoral challenges. Non-Banking Financial Companies (NBFCs), today, are confronted with multiple challenges. The unprecedented business environment has put to test the resilience, prudence and adaptability of any business model. Having said that, the fiscal year has been full of learning’s. The Company continues to closely observe the situation.

New waves of COVID-19 such as the ones seen in the first half of FY2022 across many countries resulted in stretched fiscal and monetary policies leaving limited room for any further support to struggling economies. We have since experienced bottoming out of these measures as the world entered new phase of challenges, with inflation on the rise aided by decade long ultra-loose monetary policies, supply disruptions and dynamic geopolitical situations. Since Russias invasion of Ukraine, commodity markets have been in turmoil. Central bankers across the globe have had to shift policy to counter runaway inflation in response.

Although Indian economy is well positioned to counter the risk of rising inflation and geo-political events, challenges remain. Firstly, as the US central bank raises interest rates, emerging market assets such as India, face outflow of capital, putting pressure on the Indian currency and subsequently on the capital markets. Further, as benchmark rates are raised in India and the rest of the world, monetary conditions will tighten and will lead to risk averse approach in investments and lending. This poses challenges for a company like ours, while the higher yields are attractive, they signify higher risks. The middle market lending segment is particularly sensitive to higher rates, as servicing these rates will require businesses to grow at a higher rate, and that seems to be counter cyclical to the objectives of central banks mission to curb demand as they seek to control inflation. With respect to the capital markets, we believe that the one-way rally has ended for now, and the market will experience extreme volatility. On balance, we believe that the India economy is well positioned but faces significant external risks. So, we need to be prepared for the continuous volatility.

BUSINESS & FINANCIAL PERFORMANCE

The Company being a registered NBFC with the Reserve Bank of India has been engaged in the business of financing activities, investment in Securities of Listed and Unlisted Companies.

Your Company has earned Income from Operation and Profit before Tax aggregated to ^738.19 Lacs and ?255.02 Lacs during the current year, respectively as compared to Income ^543.26 Lacs and Profit ^243.40 Lacs during the previous year.

SEGMENT WISE / PRODUCT WISE PERFORMANCE

The Company engaged in investment activities and other financial services during the year under review, hence the requirement of segment-wise reporting is considered irrelevant.

OPPORTUNITIES AND THREATS

Volatility brings both opportunities and threats. Recognising these becomes the key to navigating such times. Among the key risk arising out of the rising interest rate scenario is rise in NPA situation and subdued capital market returns. The middle market lending segment is particularly sensitive to higher rates, as servicing these rates will require businesses to grow at a higher rate, and that seems to be counter cyclical to the objectives of central banks mission to curb demand as they seek to control inflation. It is also estimated that under a severe stress scenario such as the possibility of recession in the US and other developed economies by the end of 2022 would put pressure on the NPA situation. The banks would, thus, need to make higher provisions to cover the stressed assets. This in turn could impair the credit available for investment spending and lending.

We as a Company face systematic risks from these risks but we are committed to addressing these challenges from a position of strength, which emanates from a strong balance sheet; having sufficient cash and other resources at our disposal. This enables us to absorb any market risks arising out of these volatile times while at the same time taking advantage of opportunities in times of distress. We are committed to keep developing agile execution capabilities, robust early warning systems and extensive use of analytics for risk mitigation and resource allocation. This will enable us to take advantage of the tailwinds that may emerge during the course of the year. We believe that with a strong and stable government at centre, the capital market offers attractive investment opportunities for longer term as external shocks are mitigated through robust and expansionary policies further enhancing Indias position among global peers.

RISK AND CONCERN

Risk is synonymous with NBFCs as it is inherent part of their business. Your Company is also subjected to various types of such risks and proactively works towards identifying and guarding itself against these risks by adopting a range of strategies and measures to reduce their impact.

The very nature of the Companys business makes it subject to various kinds of risks. The Company encounters credit risk and operational risks in its regular business operations. Further the performance of the Company is dependent on the market conditions. Even though it is envisaged that Indian stock market will continue to do well, global concerns can result in short term systematic risks.

HUMAN RESOURCES

The Company recognizes that employees are its direct assets and their engagement contributes to lower turnover and absenteeism, higher productivity and better customer service.

The Companys future success depends substantially on the continued service and performance of members of its management team and employees. There is intense competition for experienced senior management and other qualified personnel, particularly office managers, field executives and employees with local knowledge in client procurement, loan disbursement and installment collections. Inability to hire additional or retain existing management personnel and employees, may impair the companys ability to expand its business and adversely affect its revenue. Failure to train and motivate its employees properly may result in an increase in employee attrition rates, require additional hiring, divert management resources, adversely affect its origination and collection rates, increase the Companys exposure to high-risk credit and impose significant costs.

The Company has taken several actions to ensure that the talent pipeline for the Company is strong especially when it comes to key management positions. The Company also has a strong focus on ensuring that its employees are adequately trained in their job functions and on all compliance related trainings.

INTERNAL CONTROL AND THEIR ADEQUACY

The Company always implements adequate system of internal controls to ensure accuracy of accounting records, compliance with all laws & regulations and compliance with all rules, procedures & guidelines prescribed by the management. An extensive internal audit is carried out by independent firm of Chartered Accountants. Post audit reviews are also carried out to ensure follow up on the observations made.

OUTLOOK

The fundamentals of Indias economy remain robust, and the service sector is catching up. This is further backed by the corporate sectors improved performance, as evidenced by the up trend witnessed in the quarterly results. India is expected to witness a GDP growth of 7.2% in FY 2022-23.

The Governments substantial capital spending program, as envisaged in the Union Budget 2022 along with a healthy financial system, is well-positioned to attract private investment by reviving economic activity and boosting demand. The Indian economy is buoyed by significant Foreign Exchange reserves which exceed its level of external debt, placing it favourably. Furthermore, with the Central Banks Globally as well as in India engaging in gradual and calibrated withdrawal of liquidity, this would foster growth in a non-disruptive manner. However, the impacts of further outbreak of Covid-19 and its variants and the ongoing geopolitical crisis owing to the Russia- Ukraine war needs to be monitored closely. The effect of mark to market profit / losses thereon have been taken into account in the Statement of Profit and Loss for the year. The Company believes that it has taken into account the impact of known events arising out of COVID-19 pandemic in the preparation of financial results resulting out of fair valuation of these investments.

Going forward, NBFCs would begin FY 2022-23 with enough capital buffers, consistent profitability, and considerable on Balance Sheet provisioning, as well as sufficient system liquidity to protect against additional Covid-19 outbreaks and geo-political risks. These impacts would remain to be seen once the Financial Stability Report is released by the RBI for the full year. The NBFC sectors AUM is predicted to increase by 6% to 7% in FY 2021-22 and by 9% to 10% in FY 2022-23. The impacts of the pandemic are fading and Covid-19 limitations being relaxed internationally, putting NBFCs on a growth path. Furthermore, as the worlds fastest growing economy, Indias rise across all sectors would create a large demand for loans. (Source: CRISIL NBFC Report 2021, Ind-Ra Research)

CAUTIONARY STATEMENT

The statements in the "Management Discussion and Analysis Report" section describes the Companys objectives, projections, estimates, expectations and predictions, which may be "forward looking statements" within the meaning of the applicable laws and regulations. The annual results can differ materially from those expressed or implied, depending upon the economic and climatic conditions, Government policies and other incidental factors.