Salem Erode Investments Ltd Management Discussions

I. Industry structure and developments

a) Economic review

Global economic review

Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russias invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.

Outlook

Global trade remains under pressure due to geopolitical tensions, weakening global demand and tighter monetary and fiscal policies. The volume of global trade in goods and services is forecast to grow by 2.3 percent in 2023, well below the pandemic trend. The Federal Reserve, the European Central Bank and central banks in other developed countries have continued to raise interest rates in 2023, but at a slower pace than last year, which saw the most aggressive monetary tightening in decades. The banking sector turmoil in the United States and Europe has added new uncertainties and challenges for monetary policy. Although swift and decisive actions by regulators helped contain financial stability risks, vulnerabilities in the global financial architecture and the measures taken to contain them will likely dampen credit and investment growth going forward.

Indian economic review

Indias growth continues to be resilient despite some signs of moderation in growth, says the World Bank. Although significant challenges remain in the global environment, India was one of the fastest growing economies in the world. The overall growth remains robust and is estimated to be 6.9 percent for the full year with real GDP growing 7.7 percent year-on-year during the first three quarters of fiscal year 2022/23. There were some signs of moderation in the second half of FY 22/23. Growth was underpinned by strong investment activity bolstered by the governments capex push and buoyant private consumption, particularly among higher income earners. Inflation remained high, averaging around 6.7 percent in FY22/23 but the current-account deficit narrowed in Q3 on the back of strong growth in service exports and easing global commodity prices.

The World Bank has revised its FY23/24 GDP forecast to 6.3 percent from 6.6 percent (December 2022). Growth is expected to be constrained by slower consumption growth and challenging external conditions. Rising borrowing costs and slower income growth will weigh on private consumption growth, and government consumption is projected to grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures.

It is projected to decline to an average of 5.2 percent in FY23/24, amid easing global commodity prices and some moderation in domestic demand. The Reserve Bank of India has withdrawn accommodative measures to rein in inflation by hiking the policy interest rate. Indias financial sector also remains strong, buoyed by improvements in asset quality and robust private-sector credit growth.

The central government is likely to meet its fiscal deficit target of 5.9 percent of GDP in FY23/24 and combined with consolidation in state government deficits, the general government deficit is also projected to decline. As a result, the debt-to-GDP ratio is projected to stabilize. On the external front, the current account deficit is projected to narrow to 2.1 percent of GDP from an estimated 3 percent in FY22/23 on the back of robust service exports and a narrowing merchandise trade deficit.

Outlook

Indias recovery from the pandemic was relatively quick, and growth in the upcoming year will be supported by solid domestic demand and a pickup in capital investment. Incipient signs of a new private sector capital formation cycle are visible and more importantly, compensating for the private sectors caution in capital expenditure, the government raised capital expenditure substantially. According to the Economic Survey 2022-2023, budgeted capital expenditure rose 2.7 times in the last seven years, from FY16 to FY23, re-invigorating the Capex cycle. In Union Budget 2023-24, Capital investment outlay has being increased steeply for the third year in a row by 33 per cent to Rs. 10 lakh crore, which would be 3.3 per cent of GDP. This will be almost three times the outlay in 2019-20. Structural reforms such as the introduction of the Goods and Services Tax and the Insolvency and Bankruptcy Code enhanced the efficiency and transparency of the economy and ensured financial discipline and better compliance.

Strong domestic demand amidst high commodity prices may raise Indias total import bill and contribute to widen CAD. These may be exacerbated by subduing export growth on account of slackening global demand and the Indian currency may come under depreciation pressure due to widening CAD. Entrenched inflation may prolong the tightening cycle, and therefore, borrowing costs may stay ‘higher for longer. In such a scenario, global economy may be characterized by low growth in FY24 and will also impact the Indian Economy. However, the oil prices may stay low and Indias CAD may be better than currently projected.

b) Industry review

In 2023 - 24, NBFCs will play a larger role in supporting the socioeconomic construct of the Indian economy. The opportunity for credit penetration still remains very high in India The world seems to be recovering from the aftermath of the challenges posed in the last few years. Overall despite the challenges, India has emerged as a bright spot in terms of economic growth amidst an outlook of global slowdown. Recently, The World Bank has reported that India is better positioned to navigate global headwinds and handle global spillovers, as compared to other major emerging economies. The uptick in demand during the festive season is another reason which makes us optimistic.

Non-Banking Finance Companies (NBFCs) provide key liquidity in the financial system. While banks cover 14 per cent of the financial demand, NBFCs and other private lenders cover 80% of the financial demand. NBFC covers the segment of society not easily covered by banks. NBFCs do so by direct contact with clients, thus reducing the role of intermediaries, red tape and sourcing costs.

CRISIL recently reported that riding on macroeconomic tailwinds, NBFCs are expected to see their AUM grow 11-12% — a four-year high — to Rs 13 lakh crore by the end of this fiscal. Also, it is heartening to see that the RBI and policymakers recognise the contribution of NBFCs in supporting real economic activity and meeting the credit demand, especially reaching the unbanked. The recent RBI Scale based norms is another welcome step for the industry that will elevate the status of NBFCs in line with several other public sector NBFCs. Under these revised norms, we expect to attain more operational flexibility to meet the increasing credit demand and aid Indias economic growth.

A large number of our population remains largely unfamiliar with technology and face unique challenges in financial literacy. When it comes to serving the underbanked, Indian NBFCs and fintechs are leveraging technology and innovation to drive the financial inclusion agenda.

According to ICRAs recent report, in 2023 non-bank lenders will focus on reviving growth by improving asset quality supported by increasing retail demand and liquidity. As part of the same, MSME sector and other developing sectors will witness increased participation from NBFCs. Also, with the introduction of 5G services in the country more NBFCs will tap into exploring Artificial Intelligence and Machine Learning for offering services or fullfledged applications.

Gold loan industry has now gained respectability, as compared to 15-20 years back, and the persisting competition in the gold loan industry suggests it is a growing industry. While the sector will continue to face competition from banks, NBFCs will continue to play a vital role due to its deeper reach, ability to offer more flexibility, personalized services and innovative digital solutions. Gold loans have played an important part during the pandemic and will continue to be an important source of credit to MSMEs, agri sector, small businesses, unorganized sector and this is also evident from the steady demand for gold loans.

To keep this momentum of growth going in 2023 as well, it is important to address the key challenges faced by the NBFC sector. One such challenge is the recent revision of securitization norms by RBI which state that loans with residual maturity of less than 365 days cannot be securitized. This might create an impact on the level of securitization, as gold loans, MFI loans are of shorter duration.

II. Opportunities and Threats

SWOT analysis of Indian NBFC sector are as follows:

Strength

NBFCs are permitted to offer numerous financial products and services including personal loans, vehicle loans, hire purchase loans, housing loans, infrastructure finance, gold loans, microfinance, money transfer, insurance, credit card services, education funding and other financial related services. The diversity of products and services offered enables them to focus on under-served populations of the economy and reach all parts of the Country within a short span of time.

Weakness

NBFCs are required to follow lot of acts, rules and regulations like Companies Act, 2013, various regulations issued by the Reserve Bank of India and the Securities & Exchange Board of India, labour laws etc. and that too are changing in continuous manner. Rising competition from banks and retention of employees are another major weakness to every NBFCs.

Opportunity

NBFCs can provide diversified and innovative financial products and services to serve different needs of all the levels of the society. Further, NBFCs can save huge time and cost in near future, as all services are moving into digital world.

Threats

Cost of raising funds to run businesses are high for financial institutions. Further, the Act doesnt provide any option to take deposits from the public. Obviously, future waves of pandemic and global uncertainty due to war, politics etc. are another major threats to the NBFC sector.

III. Segment–wise or product-wise performance

The detailed information on gold loan segment of the Company is detailed in the Para II (a) of the Directors Report.

IV. Outlook

Your Company is confident that its existing capacities and investments would serve well to expand its businesses throughout India in coming years. Your Company is in the process of starting new vertical of businesses like vehicle finance, credit cards etc.

V. Risks and concerns

All material risks and mitigation measures are described in para XVI of the Directors Report.

VI. Internal control systems and their adequacy

Internal control systems and adequacy are detailed in para X (k) of the Directors Report as above.

VII. Financial performance with respect to operational performance

a) Operational review

During the year the Covid 19 pandemic withered away and became an endemic and general expectation was that the businesses will be back to normal. But the unfortunate developments due to the ongoing war in Ukraine has affected each and every country in the globe. However, India did avert any major impact, even though the inflation went up. Your Company did also register a nominal growth in Gold Loan segment. Last year it had ventured into Odisha state and opened 2 new branches there.

The Gold Loan Business which is the core portfolio of the Company has seen a nominal growth compared to the previous year as result of new branch additions and increased operational activities.

The operational revenue increased by 43.58% y.o.y. However, the expenses have also increased due to additional Manpower, Finance costs due to debenture allotment and higher depreciation due to new fixed assets addition. In addition to the normal expenses the Company has also spent an amount of Rs. 10 lakhs towards CSR activities during the year. As a result the expenses increased 1.40 times y.o.y compared to the previous year. As a result, a Net loss of 9.46 lakhs was reported compared to Net profit of Rs.71.33 lakhs during the previous year.

During this financial year also the Company continued the private placement of Secured Non-Convertible Debentures for fund sourcing.

Financial review

Gross Loans under management

The Company has a gross loan asset under management of Rs. 28.53 crores in financial year 2022-23 compared to Rs. 28.82 crores in the previous year.

Gold Loan Assets under management

The Company achieved a gold loan asset under management of Rs. 8.76 crores during the financial year compared to Rs. 8.63 crores in the previous year.

Revenue

The total income grew by 43.58% y-o-y to reach Rs. 4.03 Crores during the financial year compared to Rs. 2.81 crores in the previous year.

Pro_t/Loss after tax ("PAT")

There is a nominal Net Loss of Rs. 9.46 lakhs during the year compared to Net Profit after Tax of Rs. 71.33 lakhs.

Earnings per Share ("EPS")

As it is a Net loss there are no EPS during the year.

VIII. Human Resources

Your Company treats its "Human Resources" as one of its most important assets. Your Company continuously invest in attraction, retention and development of talent on an ongoing basis. A number of programs that provide focused people attention are currently underway. Your Company thrust is on the promotion of talent internally through job rotation and job enlargement. Number of permanent employees as on March 31, 2023 is 17 employees.

IX. Details of significant changes in key financial ratios

Ratios	As at 31.03.23	As at 31.03.22	% change	Reason for variance
Debtors Turnover	0.14	0.11	26.29	Increase in turnover and decrease in debtors
Inventory Turnover	N.A.	N.A.	N.A.	-
Interest Coverage Ratio	1.21	7.14	-83.12	Loss during the year 22-23 has resulted in the variance
Current Ratio	4.47	8.77	-49.00	Increase in Current Liabilities
Debt Equity Ratio	0.53	0.50	525.63	Increase on the Total Debt
Operating Profit Margin (%)	0.36	0.71	-48.75	Reduced profit (loss) during the year
Net Profit Margin (%)	-0.02	38.99	-100.05	Loss reported during the year
Leverage Ratio	0.57	0.54	5.56	No significant change
Capital Adequacy Ratio	19.05%	18.52%	-	Increase in Tier I capital
Tier I Capital	65318747.10	6,07,12,162.16	28.31	Increase in Reserves & decrease in Loans to Companies in same group

*Note: There has been no significant change in Leverage ratio as compared to the financial year 2021-22.

X. Details of any change in Return on Net Worth

The net worth of the Company as on March 31, 2023 is Rs. 24,16,69,138/- when compared to Rs. 24,11,55,140/- and the percentage of change is 0.21%, the reason for the same being Net loss made during the year & increase in the assets (loans, cash & bank balances etc.)

XI. Cautionary Statement

In this Management Discussion and Analysis Report, certain forward-looking statements may be made based on various assumptions about the Companys present and future business strategies, the environment in which it operates and other factors. Risks and uncertainties can cause actual results and information to differ materially from those stated or implied. Among these risks and uncertainties are the effect of economic and political conditions in India and abroad, volatility in interest rates and the securities market, new government regulations and policies that may impact the Companys businesses and its ability to implement its strategies. The information contained herein is as of the date referenced and the Company has no obligation to update it. Market data and other information have been obtained from sources deemed trustworthy by the Company or it has been estimated internally, but the accuracy or completeness cant be guaranteed.

For Salem Erode Investments Limited

	Sd/-	Sd/-
	K.G. Anilkumar	Umadevi Anilkumar
Place: Irinjalakuda	Managing Director	Director
Date: 13.06.2023	(DIN: 00766739)	(DIN: 06434467)