Poonawalla Fin Management Discussions


ECONOMIC AND INDUSTRY OVERVIEW:

Global Economic Overview:

The beginning of 2022 was marked by optimism, driven by pent-up demand and the expanding reach of vaccinations. However, in February, Russias attack on Ukraine caused an unprecedented humanitarian and economic crisis. Driven by both the pandemic recovery and the Ukraine conflict, prices of both fuel and non-fuel commodities significantly rose, leading to an inflation rate of 8.7%. To combat inflation, central banks around the world raised policy rates. However, commodity prices eventually stabilised as growth slowed. Additionally, the Chinese economy reopening after strict lockdowns brought about a sense of optimism, as it was expected to alleviate disruptions in the global supply chain. The global economy reported a growth of 3.4% in 2022, from 6.1% in 2021.

Fuel and non-fuel prices are expected to decline in 2023 and 2024. Crude oil prices are projected to fall by about 24% in 2023 and a further 5.8% in 2024. Primary commodity prices declined 28.2% between August

2022 and February 2023 led by energy commodities, down 46.4%. This will result in a fall of global inflation rate to 7% for 2023 and 4.3% for 2024.

Against the growth rate of 3.4% in 2022, the world economy is projected to grow at 2.8% in 2023. The same is expected to improve to 3.0% in 2024. The growth will be majorly driven by developing and emerging economies. Developing economies will clock higher growth of 3.9% in 2023 and 4.2% in 2024 whereas advanced economies are expected to grow at 1.3% in

2023 and at 1.4% in 2024. For Emerging & Developing Asian Countries, the growth is projected at 5.3% in 2023, 5.1% in 2024 as against 4.4% growth in 2022.

It is expected that 76% of economies will experience lower headline inflation in 2023. By 2025, it is expected that the inflation to be close to targets in most of the economies. 90% of the advanced economies are expected to struggle, while developing countries like India and China are predicted to have a certain uptick contributing nearly half of the economic growth in 2023 while US and Europe contributing 10% only.

Source - World Economic Outlook by IMF

Indian Economic Overview:

India remains at a radiant spot and among the very few top countries to showcase and continue its resilient growth, despite slower growth projection.

As per the second advance estimates, GDP growth for FY23 is estimated to be 7% fueled by strong urban and rural consumption and lesser reliance on global

demand. Higher tax collections, direct tax and GST, has shelved India from the global economic slowdown.

The RBI has projected India?s GDP growth at 6.5% for FY24 and has predicted inflation to subside at 5.2% with governments focus on capital expenditure, better capacity utilisation and moderate commodity prices. As per the latest Monetary Policy, quarterly inflation for FY24 is projected for Q1 at 5.1%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.2%. The wide pipeline laid down by Government of India in the FY24 budget for capital spend will encourage project commissioning and will assist investment demand. The quarterly GDP growth projections for FY24 is Q1 at 7.8%, Q2 at 6.2%, Q3 at 6.1% and Q4 at 5.9%.

FY24 is expected to see higher growth in investment, due to supportive government policies, sound macroeconomic fundamentals, improved asset quality and strong growth in credit among the private and MSME sectors.

India is expected to achieve its fiscal deficit target of 5.9% (of GDP) against 6.4% for FY23 and stabilise the debt to GDP ratio. The Government aims to bring down the fiscal deficit below 4.5% by FY26. Export of services has been a stronghold and will continue to grow robustly and strengthen India?s overall balance of payments position.

Source: World Economic Outlook by IMF Economic Survey 2022-23

NBFC Industry Overview

The overall loan book of NBFCs is projected to grow by ~13% to reach 50 Trillion by March 2024. The RBI has been appreciative of the efforts of NBFCs including their efforts towards covering individuals beyond the financial fold. NBFCs are expected to focus upon new business such as unsecured loans and the SME segment which promises a higher growth prospect as compared to the traditional products. Additional funding of 2.9 to 3.3 Trillion in FY24 would be required to achieve the projected growth.

NBFC-Retail sector AUM is projected to grow at the rate of 12-14% in FY24 and reach 14.7 Trillion by March 24.

NBFCs are being instrumental to leverage technology for quicker paperless disbursals and wider coverage in terms of people. NBFCs are expected to focus on improving the asset quality and further improve their profitability. NBFCs spread across segments are looking to knit together in a community with the help of technology to offer a bouquet of products which will also help smaller and mid-sized NBFCs to scale and grow among the established.

The asset quality has continued to improve when compared to the pre-pandemic point as NBFCs wrote off most of the bad loans. The new write-offs will be at a moderate level when compared to historical levels. The overall industry Provision Coverage Ratio (PCR) for NBFCs has been improving steadily over the last two years.

NIMs for Retail NBFC sector are expected to remain around 7.5-76% for FY24 in line with estimated for FY23 and FY22 actual. However, the segment may see a rise in Opex in FY24 to 4.3% from 4.1% in FY23(P) and 3.6% in FY22 due to recovery efforts and scale expansion.

7.5-7.6%

ESTIMATED NIM FOR RETAIL NBFCS IN FY24

GNPA (GS3) % is expected to decline to 3.4% as on March 2024. Supported by improved asset quality the credit costs are estimated to decline to 1.5% in FY24 from 1.7% in FY23(P) vs 2.2% in FY22. With this, NBFCs are expected to maintain their profitability at 2.4%-2.6% in FY24 in line with FY23 and FY22.

NBFCs have managed to maintain adequate capitalisation. Internal profit generation remains vital in the future to maintain healthy capital. Though growth in the sector is imperative, maintaining capital cushion in line with the growth will be an essential consideration.

At the end of the calendar year 2022, banks? outstanding credit to non-banking financial companies (NBFCs) rose by 35.5% (y-o-y) breaching the 13 Lakh Crore mark to reach 13.2 Lakh Crore. NBFC?s funding as a percentage of total bank lending increased significantly in calendar year 2022 from 8.5% at the beginning of the year to 9.9% at the end of the year. The banks credit exposure to NBFCs had crossed four crucial thresholds in calendar year 2022, i.e., 10 Lakh in January 2022, 11 Lakh Crore in June 2022 and 12 Lakh Crore in October 2022. The growth has remained robust due to high growth in the NBFC asset book and as additional borrowings moved to banks due to differentials between market yields and interest rates offered by banks and lower borrowings in the overseas market.

Source: As per ICRA April?23 Quarterly Update

Overview of Underlying Segments:

Automobile Sector:

The demand for passenger vehicles has remained healthy since the beginning of2022 supported by strong underlying demand and the easing up of semiconductor supply. Passenger Vehicle industry wholesale volumes are expected to touch an all-time high of 3.7-3.8 Million units in FY23 with a growth of 21-24% YoY and grow at a moderate pace of 6-8% YoY in FY24.

The used car segment has been witnessing strong growth and the sector set to grow from 3.8 Million units in FY21 to 5.4 Million units in FY23 and is estimated to reach 8.2 Million units in FY25 with a CAGR of 21% from FY21 to FY25. Trends such as decreasing replacement cycles increasing preference of first-time buyers for used cars due to, a desire to limit use of public transport because of COVID-19, long waiting period for new cars on account of chip shortage and attractive offers by financers being introduced in this segment, are expected to fuel the growth of the used car market in India. The ratio of used car vs new car which was 1.5 in FY21 is estimated to be 2.1 in FY25. Financing penetration is in the segment is also witnessing an upward trend.

MSME:

The total number of Udyam registered MSMEs as of March 31, 2023, stood at 1.54 Crore. Maharashtra (28.54 Lakh) recorded highest number of MSMEs followed by Tamil Nadu (16.05 Lakh), UP (17.17 Lakh), Gujarat (11.72 Lakh) and Rajasthan (11.59 Lakh). The ministry extended credit guarantee of 3.86 Lakh Crore to MSMEs under the CGTMSE as of Dec-22.

1.54 Crore

UDYAM REGISTERED MSMES IN INDIA

The micro sector with 630.52 Lakh estimated enterprises accounts for more than 99% of total estimated number of MSMEs. The small sector with 3.31 Lakh and medium sector with 0.05 Lakh estimated MSMEs accounted for 0.52% and 0.01% of total estimated MSMEs, respectively. Out of 633.88 Lakh estimated number of MSMEs, 324.88 Lakh MSMEs (51.25%) are in rural areas and 309 Lakh MSMEs (48.75%) are in the urban areas.

The total sum allotted to the ministry of small and medium-sized enterprises (MSME) in the FY24 budget was 22,238 Crore, 3.3% more than 21,422 Crore allotted in FY23.

The credit demand is estimated around 106 Trillion as of FY22 out of which 20% is met through formal financing. Assuming an annual rise of 9% in credit demand, the credit gap is expected to be around 85 Trillion as of FY22 which creates a huge potential for NBFCs and fintech companies to address this credit gap.

106 Trillion

ESTIMATED CREDIT DEMAND FOR MSME SECTOR IN FY22

Loan against properties (LAP) & Small & medium enterprises (SME) loans:

Loan against properties (LAP) & Small & medium enterprises (SME) loans witnessed a strong growth in FY23 on the back of lower growth during the pandemic period, amidst a revival in demand from smaller businesses.

The credit flow remained subdued during the last two years as cash flows were impacted due to the pandemic. The NBFC AUM in this segment, after remaining range bound for eight quarters, started growing from Q3 FY22. LAP & SME market in India is expected to grow at 12-14% in FY24 to ~3.1 Trillion from ~2.6 Trillion as of March 2023.

These loans are driving the industry since they cater to the unmet credit needs at low interest rates and EMIs. Loan against property pools and the continuation of rate hikes will not have a significant bearing on the collection efficiencies, given the association of the borrower with the underlying collateral (residential properties) and the priority given by borrowers to repay such loans.

The types of property, loans available, interest rates, sources, tenures, geographic regions, and companies are used to segment the loan against property market in India. There is a gradual shift from traditional loans from bank to loans from NBFCs due to quicker and hassle-free disbursements.

Source: As per ICRA April?23 Quarterly Update

STANDALONE FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE:

Profitability

We delivered a robust performance in FY23.

During FY23, the total Income (before interest expenses and including Fee and other income) stood at 2,010 Crore, registering strong growth of 28% YoY. Interest Expenses on the other hand, grew 17% YoY to 595 Crore. This resulted in expansion of Net Interest Margin by 89 bps to reach 10.7% for FY23.

Operating expenses grew 33% YoY to 803 Crore in FY23 from 605 Crore in FY22, primarily on account of higher ESOP charges which are expected to get moderated in the coming year. The Cost to Income Ratio improved by 40 bps to 56.8% for FY23 as compared to 57.2% for FY22.

Pre-provision Operating Profit grew strongly by 35% to 612 Crore as compared to 453 Crore in FY22.

Provisions for the year FY23 remained negative at -134 Crore as compared to 69 Crore in FY22.

Profit after Tax for FY23 grew significantly by 100% to 585 Crore as compared to 293 Crore for FY22. The Return on Assets (%) for FY23 grew by 172 bps YoY to 4.4% as compared to 2.7% in FY22.

Disbursements and Loan Assets

Total disbursements for FY23 grew 109% YoY to 15,751 Crore from 7,524 Crore in FY22. Direct Digital Program (DDP) continued a healthy trajectory, contributing 81% of the total disbursements in Q4FY23 compared to 66% in Q3FY23, 54% in Q2FY23, 39% in Q1FY23 and 24% in Q4FY22.

The loan assets grew 37% YoY to 16,143 Crore as on March 31, 2023, from 11,765 Crore as on March 31, 2022. The loan assets are well diversified with Business loans and Loans to Professional constituting 28%, Preowned car constituting 17%, Personal and Consumer loans and Loan Against Property constituting 16% each. The growth in our loan assets is as per our stated guidance of 35-40% growth.

Asset Quality

The GNPA ratio improved by 185 bps during the year to 1.44% as on March 31, 2023 as compared to 3.29% as on March 31, 2022. Similarly, the NNPA ratio improved by 52 bps to 0.78% as on March 31, 2023 as compared to 1.30% as on March 31, 2022. With effect from September?22, we aligned Stage 3 numbers to RBI IRAC norms.

Liquidity

We maintained a strong liquidity position throughout the year. Liquidity is composed of cash/cash equivalents, available bank lines and stock of unencumbered assets.

We ended the year under review with standalone liquidity of around 3,000 Crore comprising of available cash and cash equivalent, unutilised credit limits and partially undrawn term loans.

During the year, we borrowed secured term loans of 4,600 Crore from Banks and Financial Institutions for an average tenor of 3 to 7 years, which resulted in tenor extension. Besides public sector banks/financial institution incremental credit lines were received from private/foreign banks to diversify the borrowing base. We also raised Commercial Paper aggregating to 1,975 Crore and 500 Crore of Non-Convertible Debentures during the year.

By way of contingency funding, we maintained a stock of highly liquid investments, undrawn bank lines and

a buffer of unencumbered assets. This was overlaid by continuous discussions with market participants and bankers for enhancements and fresh facilities thereby maintaining robust funding pipelines. Pool sales through assignments and securitisation remain other options of raising funds if traditional markets dry up.

The Long-Term credit rating of our Company was upgraded to the highest rating of AAA; Stable from AA+ (stable) by CARE. CRISIL has also upgraded the longterm rating assigned to debt instruments and bank facilities to ‘CRISIL AAA/ Stable? from ‘CRISIL AA+/Stable?.

Financial highlights

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Particulars

Standalone

FY 2023

FY 2022

Total Income

2,010.03

1,567.08

Finance cost

595.28

509.29

Net income

1,414.75

1,057.79

Operating expenses

803.05

604.61

Pre-provisioning operating profit

611.70

453.18

Net loss on derecognition of financial instruments

10.87

-

Impairment on financial instruments

(144.53)

68.61

Profit before exceptional item and tax

745.36

384.57

Exceptional items

21.21

-

Profit before tax

766.57

384.57

Profit after tax

584.94

293.20

Other comprehensive income

1.36

1.64

Total comprehensive income

586.30

294.84

Details of significant changes in key financial ratios:

• Standalone Debt Equity ratio has increased from 1.18 as on March 31, 2022 to 1.73 as on March 31, 2023. This represents an increase of 46.61%.

Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof:

• At standalone level, Return on Assets (ROA) increased from 2.7% in FY 2021-22 to 4.4% in FY 2022-23 and Return on Equity (ROE) increased from 5.7% in FY2021-22 to 9.7% in FY2022-23. This is primarily on account of the following reasons:

a. Rise in disbursements supported by launch of new products.

b. Significant reduction in Cost of Borrowing and improved Credit Rating resulting in healthy NIM; and

c. Better collection performance resulting in lower Credit Cost

BUSINESS - STRATEGY AND OUTLOOK:

Key Initiatives FY 2023:

Last year, our Company added five new products to the offerings viz. Supply Chain Finance (SCF), Merchant Cash Advance, Digital Consumer Finance, Machinery Loan and Medical Equipment Loan. We also tied up

with various fin-techs for various digital loans under the Direct Digital Program (DDP). To suit the contemporary ¦equirements of the target segment, we are adding new products such as EMI cards and Co-branded Credit Cards to our diversified basket of products. These products will be driven with complete transparency in product features.

Differentiating by offering superior customer value and experience through minimal paperwork and a 100% end to end digital capability, with 24*7 service availability through digital means we have managed to secure one of the best NPS score in the industry of 54. rhere has been a significant reduction in TAT through :lexible and agile backend operations.

dentifying the right quality of borrowers, constant monitoring of possible early warning signals and ponservative underwriting standards has helped to maintain robust asset and credit quality.

Drawing up an optimum mix of instruments and diversified sources has resulted in an optimum cost pf borrowing and helped us to maintain an adequate iquidity surplus.

People and their progress have always been paramount and fundamental to our Company. With new incentive models, enhanced ESOP coverage and tailored learning and development programs, the culture and people have become instrumental to our organisational growth.

Pre-owned Cars Finance (POC)

Under the secured portion, the Pre-Owned Car segment (POC) saw an 84% annual growth in disbursement (2,071 Crore vs 1,125 Crore).

Total Assets Under Management (AUM) for POC increased by 24% to 2,690 Crore as on March 31, 2023 from 2,164 Crore as of March 31, 2022. Due to several factors that we have discussed earlier in industry overview section, the Pre-owned cars segment has significant potential to continuously grow in the near future and thus we expect similar growth in this portfolio going forward as well.

Unsecured Loans

Unsecured loan portfolio comprised Business Loans (BL), Personal Loans (PL), Loan to professionals (LTP) and Supply Chain Finance (SCF). The disbursement from these products grew by ~2.85x to 11,052 Crore in FY23 from 2,873 Crore in FY22.

Total Assets Under Management (AUM) for unsecured loans increased by 162% to 8,153 Crore as on March 31, 2023 from 3,110 Crore as on March 31, 2022. Unsecured loans constituted 51% of the overall Loan Assets as on March 31, 2023 as compared to 26% as on March 31, 2022. We have earlier given guidance of Secured to Unsecured ratio of 40:60, which as per our estimate, will be achieved comfortably.

During FY23, Supply Chain Finance was introduced in the product portfolio. In its debut, SCF amounted to 1,313 Crore of disbursal for the year.

Loan Against Property (LAP)

LAP saw consistent quarterly growth during the year. LAP closed at 1,952 Crore of disbursement for FY23 as compared to 507 Crore for FY22 since we commenced our LAP business in the later part of FY22 in selected locations covering the top business locations. Choice of locations was basis industry delinquencies and potential validated through credit bureau. As opposed to traditional LAP lending which struggles with manual workflows, digital adoption has helped us to scale this segment successfully.

Total AUM for LAP increased by 138% to 2,559 Crore as on March 31, 2023, as compared to 1,075 Crore as on March 31, 2022.

Branch Networks

As of March 31, 2023, we have 85 branches spread across 19 states as against 242 in the last year. The rationalisation in the branches is mainly on account of concentrated focus upon urban and semi-urban

areas, shutting down non-profitable branches and due to increased focus on digital footprint. The existing branches are also equipped with digital infrastructure like self-service kiosks in line with the digital objective of our organisation. We are looking to expand into newer untapped areas that hold great potential of credit appetite.

SWOT ANALYSIS:

Opportunities, Challenges and Outlook: Strengths

Digital First with Technology at its core: Complete digital end-to-end process with backend built to process high volumes of transactions at lightning speed gives us the edge. Digital adoption has resulted in lower TATs, minimal and digital paperwork and improved customer experience and value.

Robust Capital Management: Healthy CRAR of 39% vs the regulatory requirement of 15% and optimum funding mix of instruments and diversified sources has kept the cost of capital at a minimal level. CARE has upgraded the long-term rating to ‘AAA (Stable)? from ‘AA+ (Stable)?. CRISIL has also upgraded the long term rating assigned to debt instruments and bank facilities to ‘CRISIL AAA (Stable)? from ‘CRISIL AA+(Stable)?.

Brand Strength & Strong Leadership: Our company is a flagship financial arm of Cyrus Poonawalla Group with shared brand identity, values, and business expertise. Our organisation is professionally scaled by a seasoned and competent leadership team with values and strong policy control.

Direct & Digital led distribution model: In-house sourcing of customers through own branches, call centers, social media and other digital platforms which results in faster and efficient customer acquisition and improved asset quality. Digital adoption empowers multiple tie-ups, alliances and partnerships enabling us to be a digital community leader in financing.

Weakness

Improved Focus on New Products & Monitoring:

During FY23 many new products were launched, and newer products are in the pipeline for FY24. A close monitoring and performance of these products plus holistic introduction of new products like EMI card and Co-branded credit cards remains instrumental.

Opportunities

Demographical Tailwinds: India remains one of the

fastest growing economies with enhanced credit consumption spend and ever-increasing awareness of

digital credit availability. With youth, even mid-aged individuals have become tech-savvy and have started accepting the use of credit.

Largest and Fastest Growing Addressable Market:

Consumer and MSME financing is growing at a pacy rate and so is the opportunity to tap in their requirements. Pre-owned cars, digital personal loans, loan against property and business loans opens more diversification opportunities.

New Age Digital Lending: Technology as seen since history is ever evolving and fast paced and so are the ideas in this age. Partnering with fin-techs, adoption of newer technology will always remain clinical for our organisation.

Threats

Tighter Monetary Norms: Due to the global economic conditions, inflation has managed to surge above normal levels. Most of the economists expected a 25bps increase in the repo rate from 6.5% at the start of Q1FY24 but the RBI kept it unchanged and may raise it from 25 bps to 50 bps in the coming quarters. In the short term, this may result in higher borrowing costs and slower credit growth.

Stiff Competition: The NBFC industry has opened upto many new age fin-techs and startups that have innovative and quickly scalable products. A shift from traditional bank credit to NBFCs open space for new entrants which can mop up a decent market share.

Geopolitical Risks: Rising tensions between advanced economies can give rise to political and economic instability and can result in financial fragmentation. This causes commodity prices to rise, eventually driving up inflation and interest rates.

RISK MANAGEMENT:

Our Company has put in place a comprehensive Integrated Risk Management (IRM) policy which is approved by the Board and is periodically reviewed.

The IRM policy acts as an umbrella policy which defines the overall risk management framework. This covers all risk families including but not limited to Credit Risk, Market & Liquidity Risk, Compliance Risk, Operational Risk, Reputational Risk and Financial Risk. The said framework facilitates identification, measurement, mitigation and reporting of risks through constant monitoring of Key Risk Indicators (KRI) within our organisation. Involvement of our Senior Management team in implementation of the IRM framework ensures achievement of overall organisational objectives across all business units.

The risk management infrastructure operates on five key principles:

1. Objectively constructed Risk Appetite Statement covering all key aspects of a lending business;

2. Independent governance and risk management oversight;

3. Establishment of forward-looking strategic risk assessment with pre-emptive credit and liquidity interventions, to ensure proactive early action in the event of emerging market adversity;

4. Maintenance of well-documented risk policies with performance guardrails; and

5. Extensive use of risk and business analytics, and credit bureau as an integral part of decisionmaking process.

The Risk Management Department is headed by the Chief Risk Officer, who is responsible for overseeing the risk functions including credit risk, market risk, compliance risk, operational risk, reputational risk and financial risk across all businesses, products and processes.

Credit Risk

We adopted an independent approval process guided by product policies, customer selection criteria, credit acceptance criteria and other credit underwriting processes for sanctioning and booking each loan. This allows each customer to be independently assessed based on both financial and non- financial measures.

All credit policies are clearly documented and approved by the Risk Management Committee of the Board. Credit policies are reviewed on a periodic basis driven by changes in macro-economic, industry/ segment and credit bureau data in addition to internal portfolio performance.

There is a well-documented Credit Risk Management Policy in place which describes different aspects of credit risk and its management framework in our organisation. The policy details exposure norms, sensitive sector norms, portfolio guardrails, regulatory restriction on loans and advances, among other parameters.

Credit approval and administration is managed through a judicious use of Credit Rule Engine, assessment by seasoned credit appraisal experts and an appropriate delegation of credit authority. Portfolio quality improvement is a constant exercise. We continuously monitor the loan portfolio through various indicators, which helps identify any early signs of stress enabling

us to proactively manage our portfolio credit quality. We also carry out hind-sighting exercise to make appropriate interventions in the Credit Policy to further improve the portfolio quality and reduce the ultimate losses.

Operational Risk Management

The operational risk framework is designed to cover all functions and verticals towards identifying the key risks in the underlying processes.

The framework, at its core, has the following elements:

1. Documented Operational Risk Management Policy;

2. Well defined Governance Structure;

3. Use of Identification & Monitoring tools and Control Self- Assessment (RCSA), Key Risk Indicators (KRIs);

4. Standardised reporting templates, reporting structure and frequency; and

5. Regular workshops and training for enhancing awareness and risk culture.

We adopted the globally accepted 3-lines of defense approach to risk management.

First line of defense - Each function / vertical undergoes transaction testing to evaluate internal compliance and thereby lay down processes for further improvement. Thus, the approach is "bottom-up", ensuring acceptance of findings and faster adoption of corrective actions, if any, to ensure mitigation of perceived risks.

Second line of defense - Independent risk management vertical supports the first line in developing risk mitigation strategies and provides oversight through regular monitoring. All key risks are presented to the Risk Management Committee on a quarterly basis.

Third line of defense - Internal Audit conducts periodic risk-based audits of all functions and processes to provide an independent assurance to the Audit Committee.

In FY23, the Operational Risk (OR) team has helped to identify, assess, monitor and mitigate risks across the organisation. RCSA exercises, Internal Finance Control (‘IFC?) testing and KRI monitoring have been conducted for key business units / support functions, and action plans have been developed to plug process gaps. Branch review process has been rolled out during the year to check process adherence at branches, identify gaps and ensure suitable mitigation plan is put in place to enhance overall control environment. The OR team helps senior management monitor risks through quarterly reporting of OR information to the Operational Risk Management Committee (ORMC) and the RMC.

Fraud Risk Management

Fraud can undermine the effective functioning and divert scarce and valuable resources of the organisation. Moreover, fraudulent and corrupt behavior can seriously damage reputation and diminish trust to deliver results in an accountable and transparent manner. To combat fraud, our organisation has an effective governance framework for preventing, identifying, reporting and effectively dealing with fraud and other forms of corruption. We are consistently putting efforts to prevent, detect and contain frauds. We have a dedicated Fraud Risk Management Unit (FRMU) to monitor, investigate, detect and prevent frauds. The unit has been further strengthened during FY23.

We are committed to preventing, identifying and addressing all acts of fraud against our organisation, whether committed by the staff members or other personnel or by third parties. We have zero tolerance for fraud. To this effect, we are committed to raising awareness of fraud risks, implementing controls aimed at preventing fraud, and establishing and maintaining procedures applicable to the detection of fraud.

As a second line of defense Fraud Risk Management, monitors & checks compliance and reports all fraud risks in the institution on an ongoing basis. The FRMU reports to the Chief Risk Officer. All frauds as specified by the regulator are being monitored by the Audit Committee and Board of Directors.

The roles and responsibility of FRMU are highlighted below.

Component

Principle

Control Environment

• Fraud Risk Operating manual is developed and reviewed periodically.

• All processes are being reviewed through ORM and Fraud risk to mitigate un-foreseen gaps.

• Cross functional training.

Risk assessment

• Comprehensive fraud risk assessments are done in support of ORM.

• Processes are being reviewed to plug the gaps.

• Learning through investigations is shared to mitigate the open risks for more effective policy.

Information & communication

• We have established a communication process to obtain information about potential fraud through whistle blower policy and has deployed a coordinate approach to investigation and corrective action to address fraud appropriately and in a timely manner.

Monitoring

• All frauds are reported to the regulator and are reviewed by the Audit Committee as well as Board of Directors.

Market Risk

Market risk is the risk that the values of ‘on? or ‘off? balance sheet positions will be adversely affected by movements in market prices, changes in the interest rate, foreign exchange rates, and equity and commodity prices. We have a Board approved Market Risk Management Policy in place.

We invest in fixed income securities with the primary objective of liquidity management. We have identified key risks associated with fixed income securities viz. interest rate risk and default risk and invests primarily in securities having negligible to low default risk along with appropriate duration to mitigate interest rate risk.

Foreign exchange risk

Our Company does not have any exposure to foreign exchange risk, since its disbursements as well as borrowings are in Indian rupees.

Liquidity risk management

Any mismatch in tenures of borrowed and disbursed funds may result in liquidity risk and thereby impact our ability to meet its obligations and business objectives. Thus, it is imperative that there exists nil or minimal mismatch between the tenure of borrowed funds and assets funded. We have endeavored to maintain appropriate asset liability maturity regarding its tenure and interest rates.

We have adopted prudent fund management practices and have worked meticulously to diversify our borrowing profile thereby repeatedly enhancing the set of institutions we borrow from. Such diversified and stable funding sources emanate from several segments of lenders such as Public & Private Sector Banks, Insurance Companies, Mutual Funds, Pension Funds, Financial Institutions including Corporates and Foreign Portfolio Investors due to our impeccable record

in servicing our debt obligations on time. In addition to this, we have also tapped the securitisation/assignment market. Our company has diversified liquidity mix and exhibits adequate levels of unutilised bank limits, partly drawn bank lines, on balance sheet liquidity in form Fixed deposit, liquid and overnight funds to effectively mitigate and manage liquidity risk at optimum level.

We have our Asset Liability Management Committee (ALCO) in place, which periodically reviews the asset- liability positions, cost of borrowings, cost of funds, and sensitivity of forecasted cash flows including Stress Testing over both, short and long-term time horizons. It accordingly recommends for corrective measures to bridge the gaps if any. The ALCO reviews the changes in the economic environment and financial markets and suggests suitable strategies for effective resource management. This results in proper planning on an ongoing basis with respect to managing various financial risks viz. asset-liability risk, foreign currency risk, and liquidity risk.

Our Company has a comfortable liquidity position by way of available Bank lines and maintains investments in HQLA securities and further supported by funds raised through Term Loans, Secured Debentures and other instruments. The external rating of our Company has also been upgraded to "AAA" which further enhances the Company?s ability to raise funds at competitive rates.

People Risk

We provide a conducive work environment for our employees that enables them to perform well and hone their skills. Our policies are designed to ensure a healthy and safe workplace, free from discrimination or harassment. People are the Company?s most valuable asset, and it is committed to attract, engage, and retain talent to create long-term value for our customers and stakeholders.

People risks that the Company focuses on includes following:

Inadequate availability of skilled manpower:

• Limited availability of candidates with appropriate skillset, experience, and culture fitment

Productivity Risk:

• Longer learning curve leading to low output

• Time taken to hire/replace the required manpower hampering installed capacity.

Succession planning:

• Risk to business continuity due to lack of leadership succession

We are proactive in identifying and addressing risk aspects around people and addressing them in a timely and comprehensive manner.

Internal Capital Adequacy Assessment Process (ICAAP)

We have adopted the ICAAP framework as enunciated in the Scale Based Regulation framework. As part of the risk assessment under ICAAP framework, we have quantified capital requirement for all material risks that it is exposed to and stress scenarios pertaining to these risks. Our Company has identified material risks which may impact our earnings, capital, and reputation. We have undertaken our first ICAAP exercise and have assessed capital requirements considering all the material risks as well as stress testing scenarios. The exercise indicates that our company has sufficient capital cushion available to meet its capital requirements after factoring in material risks as well as stress testing scenarios.

INTERNAL CONTROL SYSTEM:

We have an adequate system of internal controls in place commensurate with the nature of our business and size of our operations. We have documented our policies, controls, and procedures, covering all financial and operating activities. Internal controls include IT general controls, IT application controls, controls designed to provide a reasonable assurance regarding reliability on financial reporting, monitoring of operations for our efficiency and effectiveness, protecting assets from unauthorised use or losses, compliances with regulations, prevention, and detection of fraudulent activities, etc. We continue our efforts to align all our processes and controls with leading practices.

A well-established, independent Internal Audit function provides independent assurance on our Company?s

system of internal controls, risk management and governance processes, including its subsidiaries. The scope and authority of the Internal Audit division is derived from the Internal Audit Charter, duly approved by the Audit Committee. To maintain independence of Internal Audit, the Chief Internal Auditor (CIA) reports functionally to the Audit Committee. Internal Audit prepares an annual audit plan following a risk- based audit approach, which is approved by the Audit Committee. The Audit Committee reviews the annual audit plan, the significant audit findings, and the updated status of implementation of management action plan on quarterly basis.

We have a system of internal control over financial reporting that adequately addresses the risk that a material misstatement in our Company?s financial statements would not be prevented or detected on a timely basis and that these controls are operating effectively.

HUMAN RESOURCE - PEOPLE COUNT AT EVERY STEP:

Our organisation went through a transformation phase throughout FY 2023 where the focus was on building the business portfolio through higher employee productivity, efficiencies in the systems and processes, and aligning the employees with the vision and mission of the organisation. Regular communication with the employees through different forms and frequencies of connects and tried to ensure that the employees were able to focus on their core jobs. The HR team also worked on focused learning interventions, launch of people policies, HR technology developments and strengthening of compliance and governance mechanisms.

1. Candidate and New Joiner Experience - As a premier NBFC in the cou ntry, we are at the forefront of I ndia?s growth. We believe in building strong partnership with stakeholders to attract and acquire the right talent at the right time for the current needs and future growth of our organisation. Adopted best- in-class hiring practices to onboard quality talent; covering the entire landscape of our hiring to ensure quality and compliance. We have launched Embark - our pre-onboarding connect program, a step towards employer branding. We are also working towards recruitment marketing, market intelligence and inspiring career growth.

All new joiners undergo through an organisational induction on their day of joining and through the required regulatory and organisation mandated courses to ensure they could seamlessly integrate with our values and culture.

Launched a 180-day engagement framework for a continuous connect with new joiners through one- on-one discussions and surveys.

2. Launch and cascade of Competencies - We identified and launched the behavioural competencies across the entire employee base. The behavioural competencies define the way each employee is supposed to conduct themselves in their dealing with customers, colleagues, and all stakeholders. The behavioural competencies will form the core of all people decisions in the organisation.

3. Communicate to Change - Communication of changes formed an integral part of the HR communication strategy. Throughout FY23, the HR team had group and one-on-one connects with the employees to communicate these changes. HR also facilitated organisation-wide change communication through organisation and departmental town halls.

4. Talent Recognition and Growth - A robust Reward & Recognition framework ensured that the performing talent was recognised. From newjoiners to vintage employees, performers were recognised in internal public forums, encouraging others to step up their performance and be recognised. For employee growth, Internal Job Postings (IJP) were published regularly, allowing both vertical and horizontal cross-functional growth.

5. Performance monitoring - Periodic performance monitoring is an important tool to eliminate surprises at the end of the financial year when performance appraisal is done.

6. Improving Leadership and Managerial Capabilities - To future proof the organisation, we invested in leadership and managerial capabilities of the midmanagement level. Six e-learning courses with topics around leading, decoding and managing teams, decision making, effective communication, executing solutions, etc. were launched in partnership with Harappa for employees in Senior Manager to Associate Vice President levels.

We have also embarked on the journey to identify critical roles and talents in our organisation.

7. HR Automation - The launch of HRMS cycle in one platform incorporates multiple HR functionalities covering all the aspects of employee lifecycle (from recruitment module to alumni portal). A "one platform solution" across various employee transactions made it simple to use, navigate, transition, and learn. Most of the platform features have also been replicated in the mobile application for employees to manage self and team member

activities without having to log into the web portal and get the latest organisation level updates and announcements on the go. Easy to use application, enhanced features for engagement, user friendly interface and rigorous adoption sponsored with strong support from Leadership team resulted in 98.9% of employees using the mobile application with a footfall of 176.42% employee logins throughout the year.

8. Employee Engagement - Employee engagement was a round-the-year endeavour for our organisation to ensure we connect with employees and address their concerns. We also give the employees critical updates about the organisation to keep them up- to-date on the various developments. Fun@Work campaigns were conducted throughout the year to keep the employees motivated.

9. Policies - In line with our endeavor to promote employee centricity, dynamic employee transitions were accompanied by policies which promoted learning, career development, flexibility, and growth opportunities (Learning & Development and IJP policies), promotion of employee wellbeing (revamped Leave Policy), building an inclusive culture (DNI policy), excellence in delivery and driving high performance standard (Rewards & Recognition policy).

10. Number of employees employed as on March 31, 2023 stood at 2452.

CAUTIONARY STATEMENT:

Statements in the Management Discussion and Analysis, describing our Company?s objectives, outlook, opportunities, and expectations may constitute "Forward Looking Statements" within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied expectations or projections, among others. Several factors make a significant difference to our Company?s operations including the government regulations, taxation and economic scenario affecting demand and supply, natural calamity and other such factors over which our Company does not have any direct control.