Poonawalla Fincorp Ltd Management Discussions

ECONOMIC OVERVIEW

Global economy

In CY 2023, the global economy displayed remarkable resilience and adaptability amidst challenges of slowing growth and an increasingly divergent economic environment. A notable recovery in the US economy, coupled with the robustness of major emerging markets, had a part to play in this bounce- back.

The faster-than-anticipated decline in inflation - to 6.8% over the year - contributed to an optimistic economic outlook. This decrease was facilitated by the easing of supply-side constraints, strict monetary policies, stable crude oil prices and moderating commodity prices. Global inflation is forecast to decline steadily, from 6.8% in CY 2023 to 5.9% in CY 2024 and 4.5% in CY 2025.

Alongside this, the year was also marked by significant policy shifts and tighter money supply. Interest rates also saw an upward trajectory - a response aimed at tempering inflation. Economies worldwide demonstrated commendable flexibility, navigating through the complexities of more assertive regulations, environmental concerns, and geopolitical tensions. These factors catalysed transformations across industries, encouraging a re-evaluation of traditional business practices and fostering innovation.

The advent and embracing of digitisation - with rapid advancements in AI, digital finance, and sustainable solutions - reshaped how businesses operate and deliver value to customers. The digitisation of money and the rise of embedded finance emerged, enhancing the efficiency and accessibility of financial services. Financial institutions and businesses across the board took steps to reassess and refine their strategies, focusing on resilience and sustainability.

Outlook

According to the International Monetary Fund (IMF), global growth is estimated at 3.2% in CY 2023 and is projected to continue at the same pace in CY 2024 and CY 2025. Such projections indicate steadying of the global economy, with monetary policies beginning to find a new equilibrium.

The optimism largely stems from improved growth prospects in mature economies, such as the United States and across parts of Eastern Europe. The U.S., in particular, has seen its growth forecast for CY 2024 adjusted to 2.7% and 1.9% for CY 2025. On the front of Emerging and Developing Economies, the outlook remains steady, albeit with a slight slowdown anticipated in countries like China. However, this

deceleration is expected to be a normalisation rather than a downturn, with overall growth hovering around 4% in the next two years, aligning closely with the pre- pandemic five-year average.

Growth in Developing Asian economies is projected to accelerate. At the same time, an upturn in growth is forecasted for regions such as the Middle East, North Africa and Sub-Saharan Africa, adding a layer of positive expectations to the global outlook. The evolving global dynamics underscore the need for vigilance and adaptability in navigating economic recovery in 2024 and beyond.

Decisive monetary policy actions, as well as improved monetary policy frameworks,

especially in emerging market economies, have helped anchor inflation expectations.

Source: World Economic Outlook Update, April 2024, IMF

Indian economy

Against a challenging global backdrop, India distinguishes itself as one of the fastest growing major economies - driven by robust domestic consumption, favourable demographics, and increasing disposable incomes. The governments strategic reforms, hefty investments in infrastructure - both physical and digital - and initiatives such as ‘Make in India and the Production-Linked Incentive (PLI) scheme have been pivotal in enhancing the countrys growth, resilience, and self-reliance.

The Indian economy has grown faster than anticipated, at a rate of 8.2%, in FY 2023-24. This growth was marked by a broad-based recovery of industrial sectors, especially manufacturing. The financial services sector in India has also acted as a catalyst for economic momentum. As a vital enabler of capital flow and investment, this sector has witnessed innovation and growth, particularly in fintech, digital banking, and inclusive finance. With the RBIs supportive regulatory framework and initiatives aimed at promoting financial inclusion and literacy, the financial services sector showed sustained growth.

Although retail inflation came down to 4.85% by the end of FY 2023-24 and remained within the RBIs tolerance band of +/-2 percentage points, it remained above the long-term target of 4%. This facilitated a stable interest rate environment conducive to long-

term investments and spending. The governments approach included focusing on onshoring and friend-shoring production, leveraging AI to maintain competitiveness in digital services, and surpassing non-fossil fuel power generation targets.

Outlook

The RBI heralds a promising trajectory for Indias GDP growth, expected to surpass the 7% mark. The gradual convergence of inflation to target levels by 2025 is anticipated to facilitate the adoption of more accommodating monetary policies. A focus on infrastructure, championed by public policies, is set to stimulate gross fixed capital formation. Moreover, an increase in rural demand, encouraged by government initiatives such as the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), is expected to boost consumption.

Within these optimistic economic conditions, the rapid digitalisation of financial services will play a role in enhancing financial inclusion by extending credit facilities to unbanked segments of the economy - thereby supporting the manufacturing sector which is pivotal in building dynamic ecosystems. This facilitates job creation and income enhancement, opening up avenues for consumption and infrastructure investment. By refining policy reforms

and fostering vertical markets, India is expected to elevate its participation in global value chains.

The infusion of foreign direct investment (FDI), combined with the expansion of digital infrastructure, provides a fertile ground for leading global tech and e-commerce companies to penetrate the Indian market. This is projected to revolutionise the consumer retail landscape in the next decade. With ongoing reforms in key areas like healthcare, energy security, micro, small and medium enterprises (MSMEs), India is steadfast on its path to sustained economic growth within the broader economic panorama.

INDUSTRY OVERVIEW

Non-banking financia! company (NBFC) industry overview

According to ICRA, the size of the NBFC industry is estimated to be around ^46 Trillion of which, the Retail NBFC sector (including HFC) contributes 55%

- which is around ^25.3 Trillion as of FY 2023-24. The industry is driven by digital innovation and a focus on underserved markets and has become a linchpin in the financial ecosystem - complementing the traditional banking system by channelling essential funds into diverse sectors.

The NBFC industry grew at 14-16%, while the Retail NBFC sector including HFC sector grew at 18-20% in FY 2023-24. Particularly noteworthy was the pronounced increase in credit appetite from the Micro, Small, and Medium Enterprises (MSME) sector. According to the MSME Pulse Report (February 2024), economic expansion has catalysed a surge in the need for commercial financing.

Further shaping the landscape in 2023 was a regulatory adjustment concerning the exposures of Scheduled Commercial Banks (SCBs) to NBFCs. The RBI announced an increase in risk weights on SCB exposures to NBFCs by 25 percentage points, over and above the risk weight associated with the given external rating, in all cases where the extant risk weight as per external rating of NBFCs is below 100%. The industry dynamics, marked by innovative financing and regulatory enhancements, position NBFCs as a key catalyst for Indias economic growth and financial inclusion.

Outlook

ICRA has adjusted its growth outlook for Retail NBFCs

- including Housing Finance Companies (HFCs) - forecasting a 16-18% increase from ^25.3 Trillion in FY 2023-24 to ^29.4 Trillion in FY 2024-25. This optimistic outlook is driven by robust growth across key areas. Asset quality is generally stable across most NBFCs, though unsecured and microfinance segments require vigilant monitoring for risks. The balance sheets are expected to show the effects of these trends, with increased regulatory compliance and risk management strengthening financial resilience.

The unsecured loan segment, including personal, consumption, small enterprise loans, and microfinance, is anticipated to see an expansion of 20% in FY 2024-25, growing to ^7.8 Trillion as compared to ^6.5 Trillion in FY 2023-24. Meanwhile, the secured segment, which includes vehicle finance, gold loans, and secured business loans, is expected to experience a growth of 16% increasing to ^13.8 Trillion in FY 2024-25, as compared to ^11.9 Trillion the previous year.

OVERVIEW OF UNDERLYING SEGMENTS

Automobile

The Indian automobile industry achieved impressive results in FY 2023-24, with domestic growth reaching 12.5%, totalling 2,38,53,463 units sold compared to 2,12,04,846 units the previous year, as reported by the Society of Indian Automobile Manufacturers (SIAM). The passenger vehicle (PV) segment saw an encouraging rise of over 8% in wholesales. The two- wheeler segment performed exceptionally well, with a 13% growth, reaching 1,79,74,365 units from 1,58,62,771 units in the FY 2022-23. The three- wheeler segment experienced outstanding progress, with domestic sales soaring by 41.5% to 6,91,749 units compared to 4,88,768 units the previous year. The commercial vehicle segment, however, grew modestly at 0.6%.

The rebound in the automobile sector was fuelled by the growing middle-class income and a young population that is increasingly embracing digital credit for automobile purchases. Government initiatives, including the ‘Make in India initiative and the Vehicle Scrappage Policy aimed at phasing out older, more polluting vehicles, are driving the industry forward.

The Indian Automobile market has a forecasted CAGR of 8.10% during the period leading up to 2027, according to Mordor Intelligence. At the same time, the Indian used car market is projected to grow from $31.62 Billion in 2024 to $63.87 Billion by 2029, with a CAGR of 15.10% during the forecast period (20242029). This surge is driven by factors like a higher preference for personal mobility post-pandemic, long waiting periods for new cars due to chip shortages, and attractive financing offers. Non-metro cities are predicted to contribute 70% of total used car sales by FY 2024-25, highlighting the growing demand across the country.

Pre-owned car loan market

Growth in Indias pre-owned car financing market is driven by increased demand for used vehicles, better financing options, and the involvement of both organised and unorganised players.

According to ICRA, the finance penetration of the pre-owned car market across India is projected to reach 25-35% by FY 2024-25. This is driven by the anticipated growth in the PV market. In FY 2023-24, the NBFC AUM for new PV segment grew by 17% to ^1.33 Trillion. Further, it is projected to grow by 15- 17% in FY 2024-25. At the same time, the NBFC AUM for used PV segment grew by 36% to ^0.7 Trillion and

anticipates a growth of 33-35% in FY 2024-25. This trend highlights a shift in consumer demand and a rise in used passenger vehicles.

As of 2023, about 75% of people in Tier 2 and 3 cities are opting for the convenience of car financing; in Metros & Tier 1 cities it is 60% (source: ET). An increasing number of young individuals are going for car loans. This growth can be attributed to the rise in the number of used-car dealers in non-metro regions and the increased accessibility of digital platforms for purchasing pre-owned vehicles. Various factors are driving this expansion, such as increasing disposable incomes, an emerging middle class, the growing demand for personal vehicles, and the availability of convenient financing alternatives.

MSME

The MSME sector contributes about 30% to the GDP, making up 43.6% of merchandise exports, and generating nearly 123 million jobs. The sector has seen a 33% increase in loan demand in FY 2023-24. At the same time, delinquencies are decreasing, with non-performing assets improving across all types of lenders and MSME borrowers, according to Deloitte.

The Governments targeted initiatives aimed at enhancing the competitiveness and sustainability of MSMEs have further boosted the sectors growth. With a notable share in the countrys export earnings, the MSME sector is vital in enhancing Indias global trade footprint.

Loan against properties (LAP), and small & medium enterprises (SME) loans

According to ICRA, the AUM in the NBFC-LAP and SME segments stood at ^3.4 Trillion as of Q2 FY24, reflecting a 15% expansion in H1 FY24 following a strong performance in FY 2022-23. This growth highlights the continued strong credit demand in these segments. NBFCs have successfully penetrated

rural markets, expanding their borrower base by attracting new-to-credit customers as well as those transitioning from microfinance and gold loans.

ICRA estimates a healthy AUM growth of 27-29% in FY 2023-24, before moderating to 18-20% in FY 2024-25. Concurrently, the gross stage 3 assets have shown a steady decline, dropping from 5.1% in FY 2020-21 to 2.8% in Q2 FY24, aided by effective

resolution and recovery of delinquent assets, credit losses, and the write-off of pandemic-related delinquencies, particularly in unsecured SME loans. This trend indicates improving asset quality and a positive outlook for the segment.

Personal loan

The personal-consumption loans segment is valued at ^3.3 Trillion in FY 2023-24 with growth to ^3.9 Trillion projected in FY 2024-25, according to ICRA. The increase is going to be driven by a healthy growth momentum in banks supported by their high base. Parallelly, NBFCs would also continue to display aggressive growth in their personal loan book.

Small ticket personal loan

In FY 2017-18, fintech companies were responsible for half of the small ticket personal loan volumes disbursed with a ticket size below ^1,00,000. Their dominance in this category has increased according to the Business Standard. The small ticket personal loan portfolio size has reached an impressive ^81,000 Crore by the end of September 2023. Among the key players in the market, NBFCs currently hold the largest market share at 34%, closely followed by fintech companies with a 33% share.

STANDALONE FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Profitability

The Company delivered a robust performance in FY 2023-24. During FY 2023-2024, the total income (before interest expenses and including fee and other income) stood at ^3,152 Crore, registering a strong growth of 57% YoY. Net Interest Margin increased by 51 bps to reach 11.2% for FY 2023-24.

Operating expenses grew by 0.5% YoY to ^807 Crore in FY 2023-24 from ^803 Crore in FY 2022-23. The Cost to Net Income Ratio improved by 2000 bps to 36.8% for FY 2023-24 as compared to 56.8% for FY 2022-23. Pre-provision operating profit grew by 127% to ^1,389 Crore as compared to ^612 Crore in FY 2022-23. Provisions for the year FY 2023-24 remained at ^72 Crore as compared to negative ^134 Crore in FY 2022-23.

Profit after Tax (excluding exceptional items) for FY 2023-24 grew by 83% to ^1,027 Crore as compared to ^561 Crore for FY 2022-23 and Profit after Tax (including exceptional items) grew by 251% to ^2,056 Crore as compared to ^585 Crore for FY 2022-23. The Return on Assets (%) excluding exceptional items for FY 2023-24 grew by 100 bps YoY to 5.24% as compared to 4.24% in FY 2022-23.

Disbursements and loan assets

Total disbursements for FY 2023-24 grew 111% YoY to ^33,289 Crore from ^15,751 Crore in FY 202223. Direct Digital Programme (DDP) continued a healthy trajectory, contributing 81% of the total disbursements in Q4 FY24 compared to 80% in Q3 FY24, 81% in Q2 FY24, 86% in Q1 FY24 and 81% in Q4 FY23.

The loan assets grew 55% YoY to ^25,003 Crore as on March 31, 2024, from ^16,143 Crore as on March 31, 2023. The loan assets are well diversified with MSME Lending constituting 37%, pre-owned car finance constituting 15%, personal and consumer loans and loan against property constituting 23% and 16% respectively. The growth in our loan assets is above our stated guidance of 35-40% growth.

Asset quality

The Gross Stage 3 Assets ratio improved by 28 bps during the year to 1.16% as on March 31, 2024, as compared to 1.44% as on March 31, 2023. Similarly, the Net Stage 3 Assets ratio improved by 19 bps to

0.59% as on March 31, 2024, as compared to 0.78% as on March 31, 2023.

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 ^3,932 Crore comprising available cash and cash equivalent, unutilised credit limits and partially undrawn term loans.

During the year, the Company has borrowed secured term loans of ^4,075 Crore from banks and financial institutions for an average tenor of 3 to 5 years. Besides public sector banks/financial institutions, incremental credit lines were received from private banks to diversify the borrowing base. The Company also raised commercial paper aggregating to ^9,750 Crore and ^500 Crore of secured non-convertible debentures were raised during the year through private placement basis.

By way of contingency funding, the Company 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.

During the year under review, the long-term ratings assigned to various debt instruments and bank facilities of the Company were upgraded to ‘AAA; Stable by CARE Ratings based on strong parentage, low leverage, improved asset quality, focused and

diversified product approach in retail segment and a strong senior management team. CRISIL also upgraded the long-term rating assigned to debt instruments and bank facilities to ‘AAA/Stable.

Financial highlights

Particulars	FY 2023-24	FY 2022-23
Total Income	3,151.82	2,010.03
Finance cost	955.10	595.28
Net income	2,196.72	1,414.75
Operating expenses	807.36	803.05
Pre-provisioning operating profit	1,389.36	611.70
Net loss on derecognition of financial instruments	-	10.87
Impairment on financial instruments	72.02	(144.53)
Profit before exceptional item and tax	1,317.34	745.36
Exceptional items	1,221.20	21.21
Profit before tax	2,538.54	766.57
Profit after tax	2,055.96	584.94
Other comprehensive income	0.83	1.36
Total comprehensive income	2,056.79	586.30
Details of key financial ratios on standalone basis
Ratios	FY 2023-24	FY 2022-23
Operating expenses to Net Income	36.8%	56.8%
Return on average assets (ROA)*	5.2%	4.2%
Return on average equity (ROE)*	13.4%	9.3%
Capital to risk-weightage asset ratio (CRAR)	33.80%	38.91%
of which, Tier I	32.28%	37.69%
of which, Tier II	1.52%	1.22%
*Excluding Exceptional Items
Ratios	FY 2023-24	FY 2022-23
Gross NPA	1.16%	1.44%
Net NPA	0.59%	0.78%
Debt equity ratio	1.86	1.73
Provisioning coverage ratio (PCR)	49.39%	46.19%
EPS - Basic P)	26.75	7.64
Diluted P)	26.43	7.57
EPS - Basic P)*	13.37	7.33
Diluted P)*	13.21	7.26

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

At a standalone level, Return on Assets (ROA) excluding exceptional items increased from 4.24% in FY 2022-23 to 5.24% in FY 2023-24 and Return on Equity (ROE) excluding exceptional items increased from 9.3% in FY 2022-23 to 13.4% in FY 2023-24. Following are the key contributors for the increase:

• Shift of AUM from discontinued and legacy products to personal & consumer and MSME segment resulted in higher yield. Also, while navigating a challenging monetary environment, the Company has been able to control its cost of borrowing through rating upgrades, dynamic liability management and strong relationships with lenders, which has resulted in expansion of Net Interest Margin (NIM).

• Strategic consolidation of branches towards a digital first model, leveraging technology to automate core operations and a focus on productivity has resulted in consistent decline in operating expenses (opex). As a result, the opex to net income ratio reduced by 2000 bps to 36.8% and opex to AUM decreased by 195 bps to 4.12% in the financial year.

• Our unique choice of rejection model to choose from existing to bureau, prime and super prime customers, diversified product suite, effective risk management & robust collection mechanism has resulted in lower credit cost.

BUSINESS REVIEW

At Poonawalla Fincorp Limited, we have enhanced our digital footprint and expanded product offerings as part of our strategy for sustainable growth. A key highlight of this period is the successful launch and scaling up of the Companys mobile application - which marks a step forward in shaping the financial landscape. This advancement is particularly noteworthy for its role in facilitating instant personal loans, thereby improving customer access to financial services.

We are broadening our financial offerings by launching innovative products, including a co-branded credit card with IndusInd Bank and an EMI card. These additions aim to deepen customer engagement by offering conveniences like zero joining fees and the flexibility to convert purchases into manageable instalments. They enhance the accessibility and convenience of financial solutions in line with the requirements of modern consumers.

In addition to these developments, our operational efficiency and digital transformation efforts have yielded remarkable results. With the completion of phase-II of our digital transformation, Poonawalla Fincorp has enhanced customer service capabilities through the use of WhatsApp as a customer engagement and service channel - handling over 70% of customer service requests.

Our strategic focus remains on the core segments of consumer and MSME lending, and prime bureau tested customers while providing optimum pricing, quick turnaround times, and superior customer service. We have also furthered the principles of ESG into our business processes and constituted a ESG committee to provide oversight. As Poonawalla Fincorp advances towards Vision 2025, we are well-positioned to capitalise on the opportunities presented by Indias robust economic growth and the increasing demand for credit across consumer and MSME segments.

Pre-owned cars finance (POC)

Under the secured portion, the POC segment saw an 17% annual growth in disbursement (^2,417 Crore vs ^2,071 Crore). Total Assets Under Management (AUM) for POC increased by 61% to ^3,647 Crore as on March 31, 2024, from ^2,266 Crore as of March 31, 2023.

Personal and consumer loans

Personal and Consumer loan disbursement grew by ~2.4x to ^14,526 Crore in FY 2023-24 from ^6,063 Crore in FY 2022-23. Total AUM increased by ~2.3x to ^5,855 Crore as on 31^st March 2024 from ^2,578 Crore as on March 31, 2023. This segment constituted 23% of the overall Loan Assets as on March 31, 2024, as compared to 16% as on March 31, 2023.

MSME loans

MSME lending portfolio comprised secured and unsecured Business Loans (BL), Loan to Professionals (LTP) and Supply Chain Finance (SCF). The disbursement from these products grew by ~2.63x to ^13,145 Crore in FY 2023-24 from ^4,989 Crore in FY 2022-23.

Total AUM for MSME loans increased by 76% to ^9,260 Crore as on March 31, 2024, from ^5,257 Crore as on March 31, 2023. MSME loans constituted 37% of the overall loan assets as on March 31, 2024, as compared to 33% as on March 31, 2023.

Loan against property (LAP)

LAP saw consistent growth during the year. LAP closed a figure of ^2,685 Crore of disbursement for FY 202324 as compared to ^1,673 Crore for FY 2022-23. 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 ~2.25x to ^4,072 Crore as on March 31, 2024, as compared to ^1,811 Crore as on March 31, 2023.

This segment constituted 16% of the overall loan assets as on March 31, 2024, as compared to 11% as on March 31, 2023

Focus areas for FY 2024-25

1. Non-conventional and branch-lite model:

Poonawalla Fincorp continues to pioneer a distinctive digital-led and branch-lite model, setting us apart from traditional financial models. This strategy reduces operating expenses while boosting operational efficiency. Our investments span all platforms, including web, app, and app- less interfaces like WhatsApp, ensuring digital accessibility for our customers.

2. Technology and innovation: Our commitment to employing state-of-the-art technologies enables a fully digital lending process, incorporating e-Sign, e-NACH, e-KYC, and more. We leverage Business Rules Engine (BRE) and algorithm- based lending approaches, enhanced by data analytics powered by AI and ML, to streamline operations and decision-making.

3. Differentiated product proposition: Our

innovative approach to lending includes offering loans without prepayment or hidden charges. We prioritise minimal documentation, lower interest rates, and flexible tenures, continually diversifying our product suite to meet evolving customer needs with innovative financial solutions.

4. Strong leadership and management:

Poonawalla Fincorp benefits from the support and visionary leadership of the Cyrus Poonawalla Group. Our management teams entrepreneurial spirit and strength are instrumental in driving our strategic objectives.

5. Targeting prime customer segment: Our

strategy focuses on attracting Prime and Super Prime Customers, steering clear of new-to-credit customer lending. This focus, supported by our low cost of borrowing, is crucial for maintaining superior asset quality and positioning us competitively in the market.

6. Industry-leading TAT: Leveraging advanced

technology and AI, we aim to maintain the industrys fastest Turn-Around Time (TAT) for loan disbursements. This efficiency is aimed at providing swift financial solutions to our customers, enhancing their experience and satisfaction.

SWOT ANALYSIS

Strengths

Digital innovation and technology integration

In FY 2023-24, our institution championed a digital- first strategy, leveraging state-of-the-art technology to establish a digital end-to-end process. Our advanced backend infrastructure is adept at managing high volumes of transactions with speed, setting us apart in the industry. This seamless integration of digital processes has been instrumental in significantly reducing Turn-Around Time (TAT), transitioning to digital and minimal paperwork, and enhancing customer experience and value.

Exemplary capital management

Our approach to capital management has been a highlight of the year, with a Capital to Risk (Weighted) Assets Ratio (CRAR) of 33.8%, well above the regulatory mandate of 15%. Through an optimised funding mix and diversified sources, we have effectively maintained a minimal level of capital cost. Recognition of our financial stability is reflected in the upgraded ratings by CARE to ‘AAA (Stable) from ‘AA+ (Stable) and by CRISIL to ‘CRISIL AAA (Stable) from ‘CRISIL AA+ (Stable).

Brand strength and leadership excellence

As the premier financial arm of the Cyrus Poonawalla Group, we continued to build on our shared brand identity, values, and business expertise in FY 2023-24. Our organisations strategic and professional growth is attributed to our seasoned leadership team, which exemplifies our core values and maintains rigorous policy control.

Direct and digital-led distribution model

Our innovative and direct distribution model leverages in-house channels such as branches, call centres, social media, and other digital platforms for customer acquisition. This approach has expedited the customer acquisition process and contributed to the improvement of asset quality. Our commitment to digital adoption has fostered numerous partnerships and alliances, reinforcing our leadership in digital financing solutions in FY 2023-24.

Weaknesses

Reflecting on FY 2023-24s experiences, it becomes apparent that the scope for enhancing our focus on the continuous monitoring and performance evaluation of new offerings is significant. The need for a more rigorous and holistic approach to the introduction and oversight of new products has been identified as a crucial area for improvement.

Opportunities

Demographic momentum and digital finance adoption

India continues to stand out as one of the worlds rapidly expanding economies, showcasing a robust increase in credit consumption and a growing awareness of digital finance solutions. The demographic landscape is evolving, with the younger population and mid- aged individuals becoming increasingly tech- savvy, demonstrating a greater openness towards utilising credit services. This shift presents a unique opportunity for us to broaden our reach and cater to this digitally inclined customer base in FY2025.

Expanding into the booming consumer and MSME finance markets

The sectors of consumer and MSME financing are experiencing rapid growth, highlighting a significant opportunity for our institution to meet the diverse financial needs of these segments. With the demand for financing solutions such as pre-owned car loans, digital personal loans, loans against property, and business loans on the rise, FY2025 offers a prime opportunity for further diversification and growth in these key areas.

Embracing the new era of digital lending

In keeping with the fast-paced evolution of technology and innovative financial solutions, the forthcoming year promises to be pivotal. Our commitment to forming partnerships with fintech companies and embracing the latest technological advancements will be instrumental in maintaining our competitive edge. The continuous exploration and integration of new-age digital lending solutions will be crucial for staying at the forefront of the dynamic financial services landscape in FY 2024-25.

Threats

Adjusting to stricter monetary policies

Amidst prevailing global economic uncertainties, inflation had escalated beyond customary levels. While initial forecasts by economists leaned towards a 25 basis points hike in the repo rate from an initial 6.5% at the beginning of Q1 FY24, the Reserve Bank of India opted for maintaining the status quo. The global scenario is still uncertain with elevated inflation. This has led to US Fed adopting a policy of elevated rates for a much longer period. Any possible impact and adjustments in our monetary policy could lead to elevated borrowing costs for longer and potentially decelerate the pace of credit expansion in the short term.

Navigating through intensified market competition

The NBFC sector is witnessing the entrance of numerous fin-techs and startups, characterised by their capacity for innovation and rapid scalability. This transition from traditional banking to NBFCs and alternative lending platforms is creating opportunities for new market entrants to capture significant market share, thereby intensifying the competitive landscape.

Geopolitical instabilities and economic impact

The escalating tensions among leading global economies pose the threat of political and economic instability, with potential repercussions including financial fragmentation. Such geopolitical

uncertainties are likely to influence commodity prices adversely, leading to further inflationary pressures and upward adjustments in interest rates. This complex geopolitical environment necessitates vigilance and adaptability to mitigate the associated risks.

RISK MANAGEMENT

The company has established a robust Integrated Risk Management (IRM) policy, endorsed by the Board and subject to regular review, to oversee and manage the spectrum of risks inherent in our operations. This framework encompasses a wide range of risk categories, including but not limited to credit risk, operational risk, market risk, liquidity risk, compliance risk, reputational risk, financial risk, and people risk. Central to our approach is the identification, measurement, mitigation and reporting of risks, supported by continuous monitoring of Key Risk Indicators (KRIs) to ensure organisational objectives are met across all business units.

The implementation of our IRM framework is spearheaded by our Senior Management team, reflecting our commitment to embedding risk management practices deeply within our corporate ethos. Our risk management strategy is built upon five foundational 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 decision- making process.

The leadership of our Risk Management Department is entrusted to the Chief Risk Officer (CRO), who plays a pivotal role in guiding the organisations risk management policies and practices. The CRO is charged with the oversight of all risk dimensions- including credit, operational, market, liquidity, reputational, compliance, financial and people risks- across all businesses, products, and processes. This structure ensures a cohesive and integrated approach to risk management, safeguarding the Companys integrity and financial health.

i) Credit risk

Our institution has established a sophisticated approach to managing credit risk, ensuring that every loan sanction and booking is governed by an independent approval process. This process is guided by nuanced product policies, stringent customer selection criteria, precise credit acceptance standards, and a thorough credit underwriting framework. Through this approach, we are able to conduct a comprehensive assessment of each customer, taking into account both financial and non-financial metrics to ensure a balanced evaluation.

Management of the risk Credit policy framework

All credit policies within our organisation are documented and receive formal approval from the Risk Management Committee of the Board. To remain responsive to evolving macro- economic conditions, industry trends, segment- specific dynamics, and insights from credit bureau data, alongside our own internal portfolio performance, these policies are subject to regular review and updates.

Credit Risk Management Policy

We have developed a detailed Credit Risk Management Policy that articulates the various facets of credit risk and outlines our management framework. The policy encompasses exposure norms, identifies sensitive sectors, sets portfolio guardrails, and details regulatory restrictions on loans and advances, among other critical parameters.

Credit approval and administration

Our credit approval and administrative processes leverage a Credit Rule Engine, combined with the expertise of seasoned credit appraisal professionals, and an effective delegation of credit authority. This approach ensures judicious management of credit approvals.

Portfolio quality monitoring

The enhancement of portfolio quality is an ongoing endeavour. We employ continuous monitoring of our loan portfolio using a variety of indicators to promptly identify any early warning signs of stress. This approach allows us to maintain the superior quality of our portfolio credit. Additionally, we engage in hind-sighting exercises to identify and implement necessary interventions in our Credit Policy. Such measures

are aimed at further enhancing portfolio quality and minimising potential losses, ensuring our institutions resilience and financial stability.

ii) Operational risk

I n FY 2023-24, our Operational Risk (OR) team played a crucial role in identifying, assessing, monitoring, and mitigating risks throughout the organisation. Through Risk and Control Self-Assessment (RCSA) exercises, Internal Finance Control (IFC) testing, KRI monitoring, and the implementation of action plans to address process gaps, we have strengthened our operational risk management.

The OR team supports senior management in risk oversight by providing quarterly operational risk updates to the Operational Risk Management Committee (ORMC) and the Risk Management Committee (RMC).

Management of the risk

Operational Risk Management Policy

We have instituted a well-documented Operational Risk Management Policy that serves as the encapsulation of our approach, providing clear guidelines and procedures for identifying, assessing, and mitigating operational risks.

Governance structure

A robust governance structure guides our operational risk management efforts, defining roles, responsibilities, and accountability across the organisation to ensure effective oversight and implementation of risk mitigation strategies.

Identification and monitoring tools

Our use of sophisticated identification and monitoring tools, including Risk and Control Self-Assessment (RCSA) and Key Risk Indicators (KRIs), facilitates ongoing vigilance and proactive management of potential risks.

Reporting and communication

Standardised reporting templates and a structured reporting frequency ensure consistent communication of operational risk information. This framework supports transparency and facilitates informed decision-making at all levels of the organization.

Culture of risk awareness

Through regular workshops and training sessions, we foster a culture of risk awareness and encourage a proactive stance towards risk

management among our employees, enhancing

our overall risk culture.

‘Three Lines of Defence approach

1. First Line of Defence: At the operational level, functions and verticals engage in transaction testing to evaluate compliance internally, initiating "bottom-up" process improvements. This approach fosters ownership and swift implementation of corrective actions to mitigate identified risks.

2. Second Line of Defence: An independent risk management vertical collaborates with the first line to develop risk mitigation strategies and maintain oversight through continuous monitoring. Key risks are systematically reviewed by the Risk Management Committee on a quarterly basis.

3. Third Line of Defence: Our Internal Audit team conducts periodic risk-based audits across all functions and processes, offering an independent evaluation and assurance to the Audit Committee regarding the effectiveness of risk management practices.

iii) Fraud risk

Fraud can undermine effective functioning and divert scarce and valuable resources of the organisation. Moreover, fraudulent and corrupt behaviour can seriously damage reputation and diminish trust to deliver results in an accountable and transparent manner.

Management of the risk

We have a dedicated Fraud Risk Management Unit (FRMU) that monitors, investigates, detects, and prevents fraud. Strengthened further during FY 2023-24, this unit is committed to preventing, identifying, and addressing all acts of fraud against our organisation with zero tolerance, whether committed by staff, other personnel, or third parties. We raise fraud risk awareness, implement preventive controls, and maintain detection procedures. As a second line of defence, the FRMU monitors compliance and reports all fraud risks to the Chief Risk Officer. All specified frauds are monitored by the Audit Committee and Board of Directors.

The roles and responsibility of Fraud Risk Management Unit

Component	Principal
Control Environment	• Fraud Risk Operating manual is developed and reviewed periodically.
	• All processes are being reviewed through ORM and Fraud risk to mitigate unforeseen 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 open risks for more effective policy.
Information and communication	• We have established a communication process to obtain information about potential fraud through whistleblower policy and have deployed a coordinated 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.

iv) Market risk

Market risk has the potential to adversely impact our financial positions due to fluctuations in market prices, - including changes in interest rates, foreign exchange rates, and equity and commodity prices. To safeguard the organisation against these uncertainties, we adhere to a Market Risk Management Policy that has been approved by our Board.

Management of the risk

To manage the liquidity of our portfolio effectively while minimising market risk, we focus our investments on fixed income securities. This strategy is primarily aimed at liquidity management, with a keen awareness of the key risks inherent to fixed income investments,

namely interest rate risk and default risk. Our investment approach is carefully calibrated to prioritise securities that present negligible to low default risk. Additionally, we employ strategic duration targeting to mitigate the impact of interest rate fluctuations, ensuring that our investment practices are aligned with our risk appetite and overall financial health objectives.

v) Foreign exchange risk

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

vi) Liquidity risk

Liquidity risk arises from mismatches in the maturities of our borrowed and disbursed funds,

potentially affecting our ability to fulfil obligations and achieve business goals. It is crucial to ensure minimal disparity between the tenure of borrowed funds and the assets they finance. Our efforts are geared towards maintaining an optimal asset-liability match in terms of both tenure and interest rates, thereby safeguarding our financial stability and operational fluidity.

Management of the risk

Our approach to managing liquidity risk is guided by rigorous fund management practices and a focused effort on diversifying our borrowing portfolio. This diversification strategy enhances the resilience of our funding sources and expands our lender base across various segments, including public and private sector banks, insurance companies, mutual funds, pension funds, financial institutions, corporates, and foreign portfolio investors.

In pursuit of liquidity risk mitigation, the Company has cultivated a diversified liquidity mix, characterised by a level of unutilised bank limits, partially drawn bank lines, and on- balance-sheet liquidity reserves such as fixed deposits, liquid funds, and overnight funds. These measures collectively contribute to our capability to manage liquidity risk at an optimal level efficiently.

Central to our liquidity risk management framework is the Asset Liability Management Committee (ALCO). The ALCO convenes quarterly meeting to review our asset-liability position, borrowing costs, fund costs, and the sensitivity of projected cash flows, including conducting stress testing across short and long-term horizons. Based on its assessments, the ALCO proposes corrective actions to address any identified gaps. Additionally, the ALCO remains attuned to changes in the economic landscape and financial markets, formulating recommendations for effective resource allocation. This forward- looking approach ensures continuous alignment with our financial risk management objectives, encompassing asset-liability, foreign currency, and liquidity risk management. Being a "AAA" rated company further enhances our ability to raise funds at competitive rates.

vii) People risk

Recognising that our workforce is our most invaluable asset, we prioritise fostering a work environment conducive to both the professional growth and well-being of our employees. Our

organisational policies are designed to ensure a workplace that is healthy and safe while being inclusive and free from any form of discrimination or harassment. This commitment to our employees enables us to attract, engage, and retain top talent, thereby creating enduring value for our customers and stakeholders alike.

Management of the risk Skilled manpower availability

We actively address the challenge of sourcing candidates who possess the requisite skill set and experience while aligning with our organisational culture. This involves leveraging innovative recruitment strategies and developing partnerships with educational institutions to tap into a broader talent pool.

Productivity risk

To mitigate productivity risks associated with longer learning curves and the time-intensive nature of hiring or replacing personnel, we have instituted comprehensive onboarding and training programmes. These initiatives are designed to accelerate proficiency and ensure that new hires contribute effectively to a shorter timeframe.

Succession planning

Understanding the importance of leadership continuity for business sustainability, we have developed a structured approach to succession planning. This strategy includes identifying potential leadership gaps and nurturing a pipeline of internal candidates equipped to assume these roles when the need arises.

viii) Cybersecurity risk

We recognise cybersecurity risk as a critical concern - reflecting the potential for unauthorised data access by unethical hackers. This could lead to financial, reputational, and legal repercussions. The advent of sophisticated threats like zero-click viruses and spyware such as Pegasus shows the evolving complexity of cybersecurity challenges. To safeguard against these vulnerabilities, the Company has instituted a robust risk management framework centred on employee awareness and preventive training.

Management of the risk

Employee awareness and training

Our cybersecurity strategy is rooted in comprehensive training aimed at educating

employees about digital safety practices. The training programmes cover safe digital behaviours, awareness of phishing and vishing scams, and the importance of avoiding downloads from unverified sources. Simulated phishing exercises are conducted to test and reinforce these practices among the staff.

Executive training

Specialised training sessions are held for CXOs and senior management, focusing on high-level fraud risks and artificial intelligence tools for security enhancement. These targeted sessions equip the Companys leaders with the knowledge to navigate the cyber threat landscape effectively.

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 the Company is exposed to and stress scenarios pertaining to these risks. The recent ICAAP exercise indicates that the 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 the 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 the 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 the Companys system of internal controls, risk management and governance processes. The scope and authority of the Internal Audit division is derived from the Internal Audit Charter, duly approved by the Audit Committee. To maintain the 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 the management action plan on a quarterly basis.

We have a system of internal control over financial reporting that adequately addresses the risk that a material misstatement in the Companys 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

The Human Resources (HR) department plays a crucial role in driving organisational success. The transformational journey of HR within an organisation involves implementing best practices to ensure the development and growth of both employees and the Company. Below are some of the key aspects of HRs transformational journey that contribute to PFLs success.

Aligning HR strategy with organisation goals

One of the fundamental steps to enable the transformational journey of PFL was to align the people strategy to the organisation goals and Vision 2025. It was imperative for the human resources team to understand the organisational objectives and challenges, thereby designing appropriate strategies that would accelerate the adoption of the same. Following are a few of the strategic interventions that we undertook to enable the growth journey while staying aligned to our value framework - CREDIT.

Cultivating a culture of transparency

Given our agile growth path, maintaining transparency, and ensuring regular mechanisms to connect with our people were critical to achieving our vision. Multiple programmes were established to create an environment where employees feel empowered to voice their opinions, share feedback, and raise concerns without fear of reprisal. Continuous engagement and communication provided clarity, direction, and confidence to achieve our goals.

We have created platforms to engage all employee segments through management and leadership connect, AI-based tools, surveys, policies, and red ressal forums. These interventions have strengthened our values of transparency and collaboration, driving the organisation towards its growth journey.

Productivity and performance culture

Given our diverse talent, it was vital to align our employees and enable them to meet the dynamic expectations required to achieve our vision. Evolving our performance culture by enhancing productivity and reward strategies was critical. Various interventions focused on Business Enablement and Productivity Enhancement were undertaken to boost individual and team performance and enhance market presence through structured channel engagement.

Another critical aspect was celebrating and rewarding our top performers through various recognition programmes at the individual, team, and branch levels. Structured reward and recognition programmes, along with wealth creation opportunities through our ESOP programme, have strengthened the sense of inclusion, ownership, and a healthy entrepreneurial culture.

To ensure our employees remain productive while maintaining mental, physical, and personal well- being, we conceptualised and designed the Wellness 360 platform. This platform caters to all wellness needs, supporting our employees as they work towards achieving organisational goals.

Fostering a culture of continuous learning and strengthening leadership

Continuous reskilling and upskilling were essential to enable our employees to achieve the desired organisational goals. Our learning and development strategy included various initiatives encompassing competencies, leadership, product knowledge, functional expertise, and technology skills. Significant efforts and budget have been invested in fostering an entrepreneurial and digital mindset through external and internal interventions.

While we hire talent through competency-based assessments, we also reinforce our competencies and values through diverse L&D initiatives. We designed multiple opportunities for employees to excel and advance their careers alongside driving organisational growth.

Our learning programmes addressed individual development plans for all mid-management and above, further strengthening organisational goals and driving high performance. We promote a coaching culture by facilitating coaching conversations between our CXOs and high-potential talent.

Leveraging technology for HR innovation and analytics

To strengthen the efficiency of HR and enable the function to adapt to an agile environment, we invested

extensively in HR technology and analytics. The introduction of AI-based tools to recruit and connect with our employees has provided real-time insights into our peoples pulse. Our analytical capabilities have enabled us to identify critical gaps and establish stronger capacity planning mechanisms, retention strategies, learning needs, and high-potential engagement interventions.

Building a strong employer brand

By aligning our HR strategy with business goals, our HR transformational journey has involved implementing best practices that drive organisational growth and employee engagement. We believe that by cultivating a positive employer brand, PFL can position itself as a desirable employer of choice and create a competitive advantage in the talent marketplace.

As a testament to our strategic alignment with organisational goals, we were recognised as a Great Place to Work 2024, one of Indias Best Workplaces in BFSI 2024, and one of Indias Best Workplaces in Health and Wellness 2024 by Great Place to Work.

The number of employees as of March 31, 2024, stood at 2,384.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis, describing the Companys 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 difference to the Companys operations including the government regulations, taxation and economic scenario affecting demand and supply, natural calamity and other such factors over which the Company does not have any direct control.

For and on behalf of the Board,
Abhay Bhutada	Sunil Samdani
Managing Director	Executive Director
DIN:03330542	DIN:10301175
Pune	Pune
April 29, 2024	April 29, 2024