PTC India Financial Services Ltd Management Discussions

Industry Scenario

"Entities such as PTC India Financial Services Ltd have been attempting to look beyond opportunities in the power sector and create a pan infrastructure portfolio with limited success." (Excerpts from the Report of the Task Force National Infrastructure Pipeline (NIP) of Niti Ayog)

PFS over the years has moved away from the traditional power business of thermal and hydro and built a book around green and sustainable business and other govt focused sectors such as ports, transmission, HAM Road projects etc. The focus will continue to be on green sustainable sunshine sector. While a large part of AUM constitutes renewable and road business, with the advent of new sectors like E-mobility, water management; waste of energy; HAM projects in various sectors including road, water; airports; ports; transmission and many more. With government focus on revival of the economy infrastructure sector will play a pivotal role and we will continue to see huge funding opportunities in this sector in the next few years.

India is the fastest-growing large economy in the world driven by key structural reforms focusing on huge capex investment in infra sectors. It is impossible to overstate how important infrastructure is to economic progress. The key to acceleration and long-term sustainability of economic growth is to invest in high-quality infrastructure. This benefits the productivity and efficiency of Indian manufacturing enterprises, according to the empirical findings. It also encourages agricultural and rural development and plays a key part in reducing poverty. Additionally, empirical data supports the idea that Indias infrastructure will contribute to the countrys overall economic growth.

International Monetary Fund (IMF) expects Indias growth forecast for 2024-25 to 6.5% on the back of strong domestic demand and a rising working-age population, supported by increased public investment in infrastructure and a pickup in private investment. Power, roads, telecommunications, railways, irrigation and urban infra accounted for majority of the infrastructure investment. Centre and States are the major funding sources with participation from the private sector. Under the Budget 2024, capital investment outlay for infrastructure is provided a humongous 11.11 lakh Crore The Government of Indias policy to improve logistics infrastructure, incentives to facilitate industrial production, and measures to improve farmers income will support the countrys accelerated economic growth. Government of India has retained its focus on fiscal consolidation and implemented structural reforms for further growth in the infrastructure sector in general.

A new evaluation of the prospects for the world economy is being conducted amid the unsettling calm that currently reigns. Global financial markets volatility has decreased, while threats to financial stability from a few banks failing in some industrialized economies have increased. Following its resilience to numerous and frequently converging shocks in 2022, including the war in Ukraine, persistently elevated food and energy inflation, and the tightening of financial conditions in response to aggressive and synchronized monetary policy tightening worldwide, available projections point to a weaker outlook for the global economy in 2023 and 2024. High debt levels caused great distress in the weakest nations. The conflict has derailed the recovery from the COVID-19 pandemic, with the adverse effects on the terms of trade reducing consumer purchasing power, and the higher inflation forcing central banks to tighten monetary policy.

In Dec 2019, Government of India has envisaged expenditure of 25.90 Lakh Crore (USD 3101.09 Billion) on aggregating 9,798 Infrastructure projects till FY2025 under National Infrastructure Pipeline (NIP) to build infrastructure projects and drive economic growth, energy, roads, railways and urban projects are estimated to account for the bulk of projects (around 70%) etc.

Investments in building and upgrading physical infrastructure, especially in synergy with the ease of doing business initiatives, remain pivotal to increase efficiency and costs. The governments focus on building infrastructure of the future has been evident given the slew of initiatives launched. The US$

1.3 trillion national master plan for infrastructure, Gati Shakti, has been a forerunner to bring about systemic and effective reforms in the sector, and has already shown a significant headway. Out of the above, the government has allocated 1 trillion for providing 50-year tenure interest-free loans to the state governments for catalyzing investments, which would further lead to creation of infrastructure projects at the local level.

A major component of the governments campaign to create an Atmanirbhar Bharat is the PLI Schemes. The PLI Scheme is made to encourage increased production for a small number of suitable anchor businesses in each of the chosen sectors who will spend money on R&D, equipment, and technology. The formation of a broad supplier base for the anchor units developed under the strategy, which will result in a significant increase in primary and secondary job opportunities, will have positive spillover effects as well.

The Governments policy to increase private sector participation, with the Government permitting 100% Foreign Direct Investment (FDI) has proved to be a boon for the infrastructure industry with many private players entering the business through the public-private partnership (PPP) model. Indian infrastructure sector is facing a paradigm shift moving towards timely completion of projects as against the general phenomenon of delay in completion of projects due to the delay in obtaining approval and clearances, lack of co-ordination between various departments and the resultant delay in project completion. The mix of Public Private Participation model is continuously increasing, thereby, increasing confidence, support and investment in the infrastructure sector. The Public Private Partnership Appraisal Committee (PPPAC), the apex body for appraisal of PPP projects in the Central Sector has streamlined appraisal mechanism to ensure speedy appraisal of projects, eliminate delays, adopt international best practices and have uniformity in appraisal mechanism and guidelines. The PPPAC is chaired by Secretary, Department of Economic Affairs (DEA) with Secretaries of Department of Expenditure, Department of Legal Affairs, the Sponsoring Ministry/Department and CEO, NITI Aayog as members to consider and appraise the proposals for Central Sector PPP Projects. NBFCs have grown in importance in recent years, playing an essential role in providing finance to individuals and enterprises that are under served by traditional banks. This is particularly true in rural and semi-urban areas, where NBFCs have filled the void left by banks. The ability of NBFCs to be flexible in their lending processes is one of their primary advantages. Unlike banks, which have rigid lending criteria, NBFCs can be flexible in their lending operations to suit the requirement of their clients. This has made them an appealing choice for people seeking more personalized financial services. They are financial institutions that offer a variety of banking services such as loans, credit facilities, and investments.

The Report of the Task Force National Infrastructure Pipeline (NIP) expects that out of the total sources of funding for the National Investment pipeline, 15%-17% of the funding is expected to come from the NBFCs and the balance is expected to come from a judicious mix of Centre-State Budget, PSUs, Banks, Equity, Bond markets etc. Capital outlay by Public Sector NBFCs are therefore projected to grow at 12% and the private sector NBFCs are projected to grow at 15% given the lower base. NBFCs have played a crucial role as one of the key contributors to Indias economy by providing a fillip to infrastructure, employment generation, wealth creation and access to financial services for the rural and weaker sections of society.

In the last few years, NBFCs have contributed more to infrastructure lending than banks. As Indias economy grows further, requirement for credit is bound to surge, and NBFCs, along with banks, can act as the key credit facilitators, which is likely to give a strong push to the growth and development of the Indian economy. Infrastructure Finance Companies (IFCs) are likely to post 10%-12% loan growth in FY25 on rising credit demand and renewed government efforts to revive public works projects. Banks are lending to NBFCs again, thanks to increased credit demand and better asset quality, which is causing an increase in lending. The banks share in the funding mix of NBFCs has jumped from 47.5 per cent in December 2018 to 55.1 per cent in March 2024. Similarly, the long-term funds provided by banks and AIFs have increased from 40.7% to 45.9% in the same period. This is because of increased loan demand, stable asset quality trends, and improved collection effectiveness.

In addition to developing world class infrastructure, India is also committed to meeting its commitments under the Nationally Determined Contributions (NDCs) submitted by countries under the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC) which represent pledges on climate action that seek to limit global warming to well below 2?C, preferably to 1.5 ?C, over pre-industrial levels. Thus a balance between development and growth leading to sustainable development has not only remained a buzzword but has become a modus operandi for many businesses across the globe. Climate change has today emerged as an unprecedented existential crisis. Emerging countries like India will need greater access to green finance and appropriate green instruments to facilitate this transition particularly to support climate change vulnerabilities. As overwhelming as the challenges are, PFSs unshakable belief that business possesses immense capability to make a transformational contribution has become a driving force behind making sustainability the bedrock of our business strategy, leading towards sustainable and inclusive growth in a unified dimension. PFS has been a carbon positive company for the last decade and is driven by the commitments under the nationally determined contributions. Pursuing a proactive strategy of decarbonization PFS is increasing its renewable energy footprint in answering green infrastructure by scaling up carbon neutral projects and ensuring in all our business verticals. PFS is now scaling up the efforts in E-mobility sector, which would enable us to move a step closer towards meeting our Countrys ambitious targets under the NDCs sustainable development goals within the energy, transportation, roads and water treatment projects.

Renewable Energy Sector Outlook

Energy consumption in the country has almost doubled since 2000 and is set to grow further. This calls for huge investments over the next few years. It also entails segment specific reforms in power generation, transmission and distribution and storage, to ensure uninterrupted power supply to urban and rural areas and meet the massive infrastructure needs of what may soon become the worlds most populous country.

The level of availability and accessibility of affordable and quality power is also one of the main determinants of the quality of life. India is the third largest producer after China and USA and second largest consumer of electricity in the world and had an installed power capacity of 444.76 GW as of May 2024. Electricity demand in the country has increased rapidly and is expected to rise further in the years to come. In order to meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required.

According to the amended Nationally Determined Contributions (NDC), India is now committed to achieving around half of total installed capacity from non-fossil fuel-based energy resources by 2030. Furthermore, the government selected four renewable energy implementing agencies (REIAs) to establish a well-defined pathway for its tender issuance goals. The Ministry of New and Renewable Energy (MNRE) selected SECI, the National Thermal Power Corporation (NTPC), Satluj Jal Vidyut Nigam (SJVN) and the National Hydroelectric Power Company (NHPC) with mandated FY2024 renewable energy issuance targets of 15GW, 15GW, 10GW and 10GW respectively, to implement its annual 50GW trajectory. It is to be noticed that the above four had collectively tendered renewable energy capacity of more than 69 GW thereby surpassing the set target for the calendar year.

One of the key pillars for the inclusive sustainable growth of the nation is generation of power from renewable sources which is crucial for the economic growth and sustainable development. The Government of Indias focus on attaining ‘Power for all has accelerated capacity addition mainly through renewable sources in the country.

India has set up an ambitious target of 280 GW of installed solar capacity by 2030. Further, the government has also decided to invite bidders to bid on 50 GW of renewable energy capacity per year for the next five years i.e., from FY-24 till FY-28. These annual bids of ISTS (Inter-State Transmission) connected renewable energy capacity will also include development of wind power capacity of at least 10 GW per annum. Commitments made at the COP26 summit such as increasing non-fossil fuel power capacity to 500 GW and meeting 50 percent energy requirement through renewables by 2030, strengthen prospects for the renewable energy sector. There remains large under-development solar, wind and hybrid capacities of more than 55 GW.

The India Renewable Sector is having limitation in terms of Indias grid infrastructure, which requires a significant revamp to accommodate the fluctuating and intermittent nature of power from renewables. Other major challenges are Indias EPC capability to carry out execution of solar and wind projects at a scale of 50s to 100s of GW per year, acquisition of land for large- scale renewable projects where India owns fertile land farms for agricultural use. The availability of adequate funding avenues at cost competitive rates remains critical to achieve these capacity targets.

Govt. of India made an additional allocation of 19,500 crore in the budget for PLI scheme for domestic manufacture of high efficiency modules (with priority to fully integrated manufacturing units from polysilicon to solar PV modules) which will provide further opportunities for PFS to partner in the sun-shine sector as a credible partner for the overall development of the sector.

Power Transmission Sector Outlook

The countrys power transmission sector has witnessed unprecedented growth in the past five years. Further, both operational and financial performances of the transmission utilities have witnessed an improvement in the past few years. The transmission system has expanded over the years for evacuation of power for evacuation of power from generating stations to load centre through Intra State and Inter State Transmission System. During April-March 2024, 14203 ckm of transmission lines were set up, which was below the target of 16682 ckm in FY24. In FY23, 14625 ckm of transmission lines were set up. Length of transmission lines have grown at a CAGR of 3.15% from FY18 to FY24. Annualized growth in FY24 and FY23 was at 3.05% and 3.2% respectively.

With the transmission line capacity addition of 14,203 ckm & transformation capacity addition of 70,728 MVA in FY 23-24, the total transmission line in ckm stands at 194,599 ckm and transformer capacity addition of 654512 MVA from FY-15 till FY-23, the country has become one of the largest synchronous interconnected electricity grids in the world with 4,71,817 ckm of transmission line and 11,85,058 MVA of transformation capacity (as on Apr23). Besides, inter-regional capacity increased by whopping 212% to 1,12,250 MW since 2014. The above transmission capacity addition has benefitted in development of power sector in the country. Further, Government of India has focused on development of green and dedicated corridor for evacuation of generated power from renewable energy projects. The augmentation of transmission and distribution network capacity is required to meet the generation demand from various sources, which will lead to enough business potential in the sector for PFS in coming years. The tentative transmission line and capacity addition is expected to be 105,000 ckm and 595,000 MVA respectively during 2027-32. The plan outlines a substantial investment of 4.75 trillion by 2027 for developing transmission infrastructure.

Ministry of Power has accepted the Recommendations of the Task Force Report to adopt the Future-Ready Transmission System in India. The Task Force has recommended Centralized Remote Monitoring, Operation of Substations including SCADA (supervisory control and data acquisition), Flexible AC Transmission devices (FACTs), Cyber Security, Drones & Robots in construction/inspection of transmission assets etc. A future-ready transmission system can help improve grid stability by enabling the integration of advanced technologies such as smart grids, energy storage systems, and demand response systems.

The Intra-State Transmission System (InSTS) under GEC-I scheme is being implemented by eight renewable rich States, namely Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan and Tamil Nadu. The scheme is implemented by respective State Transmission Utilities (STUs). The scheme is for setting up approx. 9700 ckm transmission lines and 22600 MVA substations in order to facilitate integration of approx. 24 GW of renewable generation capacity. The total project cost is 10141.68 crore with funding mechanism consisting of 40% Central Financial Assistance from MNRE ( 4056.67 crores), 40% loan from KfW Germany (EUR 500 Million) and 20% Equity from STU.

Going forward, an estimated 2.6 trillion investment is required in the transmission sector to meet future peak load. The private sector is expected to play an important role in achieving the countrys grid expansion targets as competitive bidding gains momentum at both interstate and intra-state levels. Several grid expansion programmes such as the GEC and cross-border links are underway to expand the physical grid infrastructure. Further, transmission utilities, at the central and state level, are expected to invest significantly in new technologies to make grids more reliable, resilient, secure and smart. The sector is also expected to immensely benefit from major policy reforms including the Electricity Act amendments and the Tariff Policy amendments.

Roads and Highways Sector Outlook

Roads are part of an integrated multimodal system of transport which influences the pace, structure and pattern of economic development. Road provides crucial links to airports, railway stations, ports and other logistical hubs and acts as a catalyst for economic growth by playing a critical role in the supply chain management. In terms of the worlds largest road network, India is currently second only to the United States. China has fallen to third place as India road network has grew 59 per cent in the last 9 years to become the second largest only after USA. The countrys road infrastructure now stands at 1,45,240 km as compared to 91287 km in 2013-14. The share of roads sector investment in the overall infrastructure investment was ~17% between fiscals 2019 and 2022, rising at ~19% CAGR. As part of bolstering infrastructure in the country, which aims to become a USD 5 trillion economy in the coming times, building high quality roads and ensuring smooth connectivity is a key priority.

This road network delivers 60% of the countrys commodities and 87% of its passenger traffic in India. National highways, expressways, state highways, main district roads, other district roads, and village roads make up Indias road network. While national highway building has been a priority, state highways, district roads, and rural roads continue to account for the majority of the road network.

The market for roads and highways in India is expected to increase at a CAGR of 36.16% between 2016 and 2025, owing to increasing government measures to upgrade the countrys transportation infrastructure. The National Highways Authority of India (NHAI) is expected to raise 15,000 crore via Investment Trusts (InvITs) in FY24.

The total expenditure of the Road Transport and Highway Ministry in 2023-24 is estimated at 2,70,435 crore. This is 25% higher than the revised estimates for 2022-23. The highest expenditure (60% of the total expenditure) is towards NHAI. In 2023-24, NHAI is allocated 1,62,207 crore, all of which is budgetary support. NHAI has a high debt burden due to increased borrowings in the past few years. Upon the recommendations of several Committees, the Ministry has increased the budgetary allocation towards NHAI, and reduced its need to borrow from the market.

PM Gati Shakti National Master Plan to encompass the engines for economic transformation, seamless multimodal connectivity, and logistics efficiency. Expressways to be augmented in 2023-24 to facilitate faster movement of people and goods.

Sustainability Infra Sector Outlook

Few of the sunshine green sustainable sectors that PFS will additional focus on going forward will include e-mobility, sewage treatment, waste management etc. PFS has the policy to prioritise for new arising infrastructure sector projects and look forward to funds those projects. Green or Sustainable Infrastructure is gaining popularity which has opened the way to look for opportunities to fund new sector like E-Mobility, Sewage Treatment Plant, Waste Management projects, Desalinization of water, E-Waste Management etc. PFS is shifting its focus towards sustainable infrastructure projects.

E-Mobility: Transportation is a basic requirement of modern life. it also contributes significantly to greenhouse gas emissions. It is expected that the transportation account for around 20%-25% of all energy-related greenhouse gas emissions. It has become essential to adopt electric car to curb the carbon emission. It is also critical to transition to electric vehicles (EV) in order to satisfy national emission targets and the global 1.5-degree Celsius climate change objective. Fortunately, over 50% of Indian states have EV policies that provide perks such as monetary subsidies for EV purchases, exemption from road tax, car registration costs, and reduced EV loan interest rates. Furthermore, the policies encompass measures for public transit. The future of E mobility is set to shift as a result of climatic change, growing fuel prices, and urban transportation issues. According to NITI Aayog and Rocky Mountain Institute, Indias EV market could touch US$152.2 billion by 2030. Moreover, about 80% of two- and three-wheelers and 50% of the countrys four-wheelers would be electric vehicles. This trend demonstrates an enormous possibility for Financial Institution to look funding of viable projects.

Indias electric vehicle sector achieves record sales across all vehicle segments, accounting around 5.50% of total car sales. In FY2024, India witnessed a significant surge in electric vehicle (EV) sales, reaching a total of 17,52,406 units, marking a robust year-on-year (y-o-y) growth of 40.31% compared to the previous fiscal year across all vehicle classes. Annual EV sales crossed 1.7 million vehicles in FY2024, with more than 55% of the share accounted for by registered electric two-wheelers (E2W), followed by passenger electric three-wheeler (E3W P) with ~32% market share. Also, on an annual basis, E-Bus sales witnessed a jump of 84% in FY2024 over that in FY2023. Tata Motors, JBM Auto, and Olectra Greentech were the top 3 E-Bus players accounting for more than 75% of market share in E-bus category.

PFS has been a pioneer in funding one of the first projects in the electric vehicle public transportation sector by assisting manufacturing and operations of more than 350 e-Buses across 6 major cities in the country. PFS intends to leverage its experience in funding this sun-shine sector by funding more projects leading to reduction in vehicular pollution and sustainable development.

Waste Water Treatment: The India wastewater treatment plants market stood at USD 2.6 billion in 2020 and is further projected to reach USD 5.3 billion by the year 2027, growing at the CAGR of 10.8% in the forecast period. Indias wastewater treatment plants market is growing rapidly due to stringent government regulations in India and increasing water pollution. Further, NMCG is the Cabinet approved nodal agency has laid out a total outlay of 20,000 crore for implementing Namami Gange in India for cleaning, rejuvenation, and protection of the river Ganga. A total of 153 sewerage infrastructure projects have been sanctioned in eight (8) States (Uttarakhand, Uttar Pradesh, Bihar, Jharkhand, West Bengal, Delhi, Haryana, and Himachal Pradesh) till date to create/rehabilitate 5065 MLD sewage treatment capacities and Sewer network of 4972 Km at a cost of 23,305 crore along Ganga and its tributaries. Out of 153 sewerage infrastructure projects, 56 projects are completed which have created, ~670 MLD sewage treatment capacity and are presently in operation. There is a budgetary allocation of 65,549 crores in FY 23 under various program of Sewage and Waste water Treatment across India.

Solid Waste Management: The Indian waste management market is witnessing a healthy growth rate, owing to the high population density and increased industrial activity, which is generating high amounts of wastes, both hazardous and non-hazardous. Waste Type includes Municipal Solid Waste, Hazardous Waste, E-waste, Plastic Waste, Bio-Medical Waste. The Indian waste management industry offers huge potential, as only 30% of the 75% recyclable waste is being recycled currently. Shortage of proper policies for collection, disposal, and recycling and the lack of efficient infrastructure are few of the many reasons leading to poor waste management in the country. Many companies are coming up with innovative ideas to manage wastes, as well as convert them into valuable resources. While the above sector will be the focus for PFS, the company will continue to look to diversify its portfolio in green and sustainable businesses like green hydrogen etc.

Financial and Operational Performance

In FY 2023-24 the total income decreased by 2.61% from 797.08 crore in FY 2022-23 to 776.28 crore. However, this got offset significantly by decrease in finance cost by 5.08% to 409.99 crore as compared to 431.91 crore in FY 2022-23. In FY 23-24, the Spread on earning portfolio has decreased to 2.68% from 2.83% and NIM on earning portfolio has improved from 4.23% to 4.82%. The other expenses increased by 70.10% to 34.87 crore during FY 2023-24 as compared to 20.50 crore in FY 2022-23, the increase in expenses is majorly on account of derecognition of financial instrument of 15.24 crore Other income increased by 150% to 15.50 crore during FY 2023-24 compared to 6.20 crore in FY 2022-23 as the income received from security receipts Provision for Impairment on Financial Instruments has been increased to 87.57 crore in FY 2023-24 from 80.69 crore in FY 2022-23.

During FY 2023-24, PFS received fresh sanctions of long-term loans of

100 crore from Indian Overseas Bank which was a new lender to Company. During the year , the Debt/ Equity ratio of the Company improved to 1.54 from 2.09 in FY 2022-23. Further, the ratio of long-term borrowings to short-term borrowings has remain same to 98:2 in FY 2023-24 as against 98:2 in FY 2022-23. The company is contemplating to maintain majority of its borrowings in for of long term credit lines to have better ALM and cash flow. The Company has maintained sufficient liquidity in the form of High Quality Liquid Assets (HQLA) as per RBI guidelines and undrawn lines of credit to meet its financial obligations. However, the Company is in the process of raising credit lines/funds to improve the liquidity and achieve growth.

The profit before tax (PBT) for FY 2023-24 stood at 215.98 crore compared to

232.37 crore in FY 2022-23. The profit after tax (PAT) for FY 2023-24 stood at

160.75 crore against 175.81 crore in FY 2022-23.

As on 31^st March 2024, PFS exposure into Renewable (mainly Solar and Wind) Sector is about 20%, exposure into transmission sector is about 21%, exposure into Road sector is about 9% and exposure into other infra sectors including new emerging green sustainable area such electric mobility, sewage treatment is about 13%. In addition, PFS has outstanding loan of about 30% to various state owned distribution companies. Out of total portfolio of 5395 crores, term loan outstanding is 2441 crores for various infrastructure projects and corporate loan to state owned companies is 2532 crores and corporate loan to private sector is 422 crores.

During the FY 2023-24, with the focused efforts of the management, the portfolio quality improved. During the year gross NPAs have decreased from

716 crore to 489 crore and net NPAs have decreased from 306 crore to

142 crore For FY 2023-24,.

The Company is continuously focusing on resolving the stressed assets and the efforts are on to achieve better efficiency in coming years. Most of the NPA accounts primarily comprises of Thermal projects. The Company has shifted its focus on other areas including renewable energy because of which the companys exposure to thermal has reduced to 6.70% in FY 2023-24 in comparison to 18% as at FY 2018-19.

Risk Management

PFSs comprehensive risk management is overseen by the Board of Directors. The Risk Management Committee (RMC) is a Board-level committee that supervises the implementation of the risk strategy, has been formed as per the guidelines of Reserve Bank of India on Asset Liability Management/ Risk Management Systems. The RMC monitors compliance with risk parameters and aggregate exposures within the appetite set by the Board. It also reviews the enterprise-wide risk frameworks viz. Risk Appetite framework (RAF), Internal Capital Adequacy Assessment Process (ICAAP), and the stress testing framework for the PFSs borrowers. The RMC guides the development of policies, procedures, and systems, constantly assessing their suitability for our evolving business landscape.

Heading the independent Risk Management function is the Chief Risk Officer (CRO), who maintains regular communication with RMC members.

The Risk Management function is responsible for executing the approved risk strategy, developing policies, procedures, and systems to manage risks effectively. The risk management function of PFS is independent from business and reports directly to the Managing Director and Chief Executive Officer Given the nature of our business and the regulatory landscape, we are exposed to a spectrum of risks. Among our principal risks are credit, liquidity, operational, cybersecurity, and technology risks. Moreover, our operations encompass compliance and reputation risks. To manage these, weve instituted an overarching risk appetite framework. We have implemented specific policies, limits, and triggers tailored to each risk category to operationalise our risk appetite. Our structured management framework, the Internal Capital Adequacy Assessment Process (ICAAP), is designed to identify, assess, and manage all risks that could significantly affect our business, financial position, or capital adequacy. Ensuring informed decision-making, we regularly capture and report risk exposures, initiating appropriate mitigation measures.

PFS has an independent Internal Audit Department for assessing the adequacy and effectiveness of all internal controls, risk management practices, governance systems, and processes. We are intensifying our attention on non-financial risks by amplifying discussions within our Risk Management and Board committees. These discussions encompass compliance, personnel, technology, reputation risks, and others. This involves enhancing our policies, procedures, and risk assessment frameworks to effectively manage these risks, with an ongoing commitment to improvement.

Credit Risk

Credit Risk is the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. Losses stem from outright default or reduction in portfolio value. PFS has a comprehensive credit risk architecture, policies, procedures, and systems for managing credit risk in its wholesale lending businesses. In wholesale loans, credit risk is managed by capping exposures based on borrower group, industry, credit rating grades and country among others. This is backed by portfolio diversification, stringent credit approval processes, periodic post-disbursement monitoring and remedial measures. PFS has ensured strong asset quality through volatile times in the lending environment by stringently adhering to prudent norms and institutionalised processes.

Liquidity Risk

Liquidity risk is the risk that the PFS may not be able to meet its financial obligations as they fall due without incurring unacceptable losses. PFSs liquidity and interest rate risk management framework is spelt out through a well defined Board approved Asset Liability Management Policy and Interest Rate Policy. The Asset Liability Committee (ALCO) is a decision-making unit responsible for implementing the liquidity risk management strategy of PFS in line with its risk management objectives and ensures adherence to the risk tolerance / limits set by the Board. ALCO reviews the policys implementation and monitoring of limits. The LCR, a global standard, is also used to measure your PFSs liquidity position. LCR seeks to ensure that PFS has an adequate stock of unencumbered High-Quality Liquid Assets (HQLA) that can be converted into cash easily and immediately to meet its liquidity needs under a 30-day calendar liquidity stress scenario.

Operational Risk

This is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It also includes risk of loss due to legal risk but excludes strategic and reputational risk.

PFS is strengthening Operational Risk Management Framework wherein under the framework, the PFS has three lines of defence. The first line of defence is the business line (including support and operations). The first line is primarily responsible for developing risk mitigation strategies in managing operational risk for their respective units. The second line of defence is the Risk Management Function which is responsible for implementing the operational risk management framework across PFS. It designs and develops tools required for implementing the framework including policies and processes, guidelines towards implementation and maintenance of the framework. In order to achieve the aforesaid objective pertaining to operational risk management framework, the Risk Management function guides and oversees the functioning, implementation, and maintenance of operational risk management activities of PFS. Internal Audit is the third line of defence. The internal audit team reviews the effectiveness of governance, risk management and internal controls within PFS.

Policy for Investment of Surplus Funds

The policy of investment of surplus funds i.e. treasury policy provides the framework for managing investment of surplus funds. Realizing that the purpose of mobilization of resources in the Company is to finance equity as well as loans to various infrastructure projects, the prime focus is to deploy surplus funds with a view to ensure that the capital is not eroded and that surplus funds earn optimal returns.

Internal Control Systems & Their Adequacy

The Company has established procedures for an effective internal control. The policies and procedures have been laid down with an objective to provide reasonable assurance that assets of the Company are safeguarded from risks of unauthorised use / disposition and the transactions are recorded and reported with proprietary, accuracy and speed. These aspects are regularly reviewed during internal audit and statutory audit. During the year, such controls were tested and no material weakness in their operating effectiveness was observed. However, the Board of Directors has identified some improvement areas in internal controls and the Company is in process of further strengthening its internal control system. The Finance and Accounts function of the Company is adequately staffed with experienced and qualified personnel. The Audit Committee and Board of Directors review the operational and financial performance of the company at regular intervals.

Human Resources

The Company has committed, loyal, experienced and dedicated team. The Company promotes an atmosphere which encourages learning and informal communication within the organisation. The Company is having Performance Management System to objectively measure the performance of the individual and the organization. The overall remuneration structure is linked with such system. The other required safety norms are being followed throughout the company. Regular employee strength as on 31^st March, 2024 stood at Forty Five (45).

Changes in Key Financial Ratios

The key changes in applicable financial Ratios are as follows:

S No. Particulars	2023-24	2022-23	Change in %	Reason of change
1 Debt equity ratio	1.54	2.09	-26.32%	Company has prepaid its part borrowing out of cash flow generated from prepayment of its loans by borrowers.
2 Operating profit margin	26.35%	28.60%	-7.87%	Operating profit margin is decreased on account of the addition in impairment on loan portfolio and increase in other expenses
3 Net profit	16074.90 (in lakhs)	17580.72 (in lakhs)	-8.57%	In addition to the impairment and partially increase in other expense, Net profit has been reduced
4 Return on net worth	6.45%	7.47%	-13.65%	On account of above stated reasons, return on net worth is reduced.