Salem Erode Investments Ltd Management Discussions

Macroeconomic Overview

Despite three turbulent years which witnessed a global pandemic, supply chain disruptions, conflict in Ukraine and elevated interest rates to counter high inflation, India emerged as the fastest growing major economy of the world. Notwithstanding conflicts in Europe and Gaza and rising tensions in West Asia, a global recession that experts thought was imminent has not occurred. Indeed, the key indicators have turned positive: inflation is falling across all major countries; unemployment has not risen as economists thought it would; and the major central banks have put an end to monetary tightening, though they have not yet begun reducing their key interest rates.

According to the IMFs World Economic Outlook (April 2024), inflation is falling faster than expected in most regions; and it has forecasted global headline inflation to fall to 5.9% in 2024 and further to 4.5% in 2025, with the possibility of the 2025 forecast being further revised downwards.

In a milieu where the IMF has projected the worlds real GDP growth at 3.2% in 2024 and 3.2% in 2025, its forecasts for India are impressive: 6.8% in 2024 followed by yet another stint of 6.5% in 2025. Indeed, the IMF has placed India as the fastest growing major economy in the world.

With a fair degree of control over retail inflation despite high and growing domestic demand and significant government led capital expenditure, India has recorded robust growth in financial year 2024. The second advance estimate of national income released by the national statistics office (NSO) on 29th day of February 2024 has pegged real GDP growth in FY2024 to be 7.6% versus 7% (first revised estimate) in financial year 2023.

I. Industry structure and developments

a) Economic review

Global economic review & Outlook

The global economy is stabilizing, following several years of negative shocks. Global growth is projected to hold steady at 2.6 percent this year, despite flaring geopolitical tensions and high interest rates, before edging up to 2.7 percent in 202526 alongside modest expansions of trade and investment. Global inflation is expected to moderate at a slower clip than previously assumed, averaging 3.5 percent this year. Central banks in both advanced economies and emerging market and developing economies (EMDEs) are likely to remain cautious in easing policy. As such, markedly higher interest rates than prior to the pandemic are set to sustain for an extended period. Despite some improvement, the outlook remains subdued. Global growth over the forecast horizon is expected to be

nearly half a percentage point below its 2010-19 average, with a slower pace of expansion in economies comprising over 80 percent of the global population. EMDE growth is projected to moderate from 4.2 percent in 2023 to 4 percent in 2024. Amid heightened conflict and violence, prospects remain especially lackluster in many vulnerable economies?over half of fragile and conflict-affected economies will still be poorer in 2024 than on the eve of the pandemic. Risks have become more balanced but remain tilted to the downside. Escalating geopolitical tensions could lead to volatile commodity prices. In a context of elevated trade policy uncertainty, further trade fragmentation risks additional disruptions to trade networks. More persistent inflation could lead to higher-for-longer interest rates. Other risks include weaker-than anticipated activity in key economies and disasters related to climate change. Against this backdrop, policy makers face daunting challenges. Global efforts are needed to safeguard trade, support green and digital transitions, deliver debt relief, and improve food security. Still- pronounced inflation risks underscore the need for EMDE monetary policies to remain focused on price stability. High debt and elevated debt-servicing costs will require EMDE policy makers to balance sizable investment needs with fiscal sustainability. To meet development goals, policies are needed to raise productivity growth, improve the efficiency of public investment, build human capital, and close gender gaps in the labor market.

The unique structural characteristics of small states constrain their fiscal policy. They include high trade openness, limited economic diversification, narrow tax bases, obstacles to providing public goods and services at scale, and vulnerability to external shocks?particularly those arising from climate- change-related natural disasters and global recessions. Many small states, particularly micro states, rely heavily on external grants and non-tax sources for revenue. Meanwhile, government expenditure is skewed toward public wage bills and consumption of goods and services. As a result, small states experience higher fiscal volatility than other EMDEs, which heightens their policy challenges.

The pandemic and subsequent global shocks have compounded long-standing fiscal challenges by widening fiscal deficits and increasing public debt across small states. Government revenues in small states took a hit during the pandemic, especially in countries dependent on tourism. These revenues have been much slower to recover than in other EMDEs. Government spending also rose more in small states in the years following the pandemic than in other EMDEs. Thus, in

2020-23, around three-quarters of small states reported weaker primary balance-to-GDP ratios than their 5-year pre-pandemic average. Government debt-to GDP ratios also increased from already high levels in most small states, reflecting sustained fiscal deficits and large economic contractions followed by sluggish recoveries.

Worsening fiscal and debt positions in small states, coupled with increased vulnerability to external shocks, including from climate change, and the need to address long-standing development needs, demand action through both domestic policy measures and international support.

These obstacles are not insurmountable, however. Governments in small states retain the capacity to build fiscal resilience, with support from the international community. There is ample room to boost domestic revenues and improve spending efficiencies. Raising tax revenues requires small states to broaden tax bases; in some cases, introduce taxes that are widely used in other EMDEs; strengthen tax collection; and consider raising tax rates. Strengthening fiscal governance and financial management, and improving transparency and accountability frameworks, can significantly enhance expenditure efficiency, particularly in the large state-enterprise sectors in many of these countries. Better targeted social spending and subsidies could further increase fiscal space for governments to invest in human capital and build resilience to external shocks.

Small states should prioritize the establishment of rules-based fiscal frameworks tailored to their distinct characteristics and vulnerabilities. These frameworks should include fiscal rules that not only establish discipline but also allow countercyclical policy to manage the effects of frequent external shocks, especially those arising from natural disasters; fiscal councils to bolster fiscal discipline; and sovereign wealth funds that provide buffers against large shocks. Small states currently lacking access to adequate natural disaster insurance facilities could benefit from them to cushion the fiscal impact of natural disasters.

Small states will continue to require access to well-coordinated and tailored financial and technical assistance from the international community. These include financial support to help address debt challenges and support investment in climate change resilience, and technical assistance to help improve fiscal policy management, and the implementation of reforms.

Indian economic review & Outlook

The Indian economy is set to achieve nearly 7% growth in the financial year 2024-25, according to a report released by the Ministry of Finance. The report attributes this positive outlook to the robust domestic demand that has propelled the country to a growth rate exceeding 7% over the past three years.

I ndias economic performance in recent years demonstrates substantial growth, with a 7.2% expansion in 2022-23 and an

impressive 8.7% growth in 2021-22. The last financial year 202324, witnessed a growth rate of 7.3%, securing Indias position as the fastest-growing major economy.

The report credits the strength in domestic demand, driven by private consumption and investment, to government reforms and initiatives implemented over the past decade. Investments in both physical and digital infrastructure, along with measures to boost manufacturing, have bolstered the supply side, providing a significant boost to economic activity in the country.

According to the report, "In FY25, real GDP growth will likely be closer to 7 per cent," with the potential for the growth rate to surpass 7% by 2030.

The report highlights the ongoing expansion of digital infrastructure, improvements in institutional efficiency, technological progress through collaboration with foreign partners, accelerated human capital formation, and an increasingly favorable investment climate.

It projects that India is poised to become the third-largest economy globally in the next three years, reaching a GDP of USD 5 trillion.

The report states that "India can aspire to become a USD 7 trillion economy in the next six to seven years (by 2030)."

"This will be a significant milestone in the journey to delivering a quality of life and standard of living that match and exceed the aspirations of the Indian people"

Factors contributing to the optimistic economic outlook include firm GDP growth forecasts, manageable inflation levels, political stability at the central government level, and indications that the central bank has concluded its tightening of monetary policy.

)) Industry review

I ndias diversified financial services sector is undergoing rapid expansion and evolution as new companies enter the market with distinct offerings. The industry expansion is supported by rising income, technological innovations in fintech, and digital payments domain, reforms by the government and growing opportunities for higher penetration. However, challenges remain in terms of financial literacy and access and utilization of formal credit.

NBFCs have emerged as the crucial source of finance for a large segment of the population, including SMEs and economically unserved and underserved people. They have managed to cater to the diverse needs of the borrowers in the fastest and most efficient manner, considering their vast geographical scope, understanding of the various financial requirements of the people, and extremely fast turnaround times.

NBFCs play an important role in credit intermediation, providing last-mile credit delivery with the help of technology. They

are critical to the financial inclusion process, complementing the banking system by supporting the growth of millions of MSMEs, and independently employing people. Over the years, NBFCs have seen a rising credit-to-GDP ratio ("credit intensity") and a growing role in credit provisioning vis-a-vis scheduled commercial banks.

The NBFC sector continued to witness an upward trend in credit growth between September 2022 and September 2023. The gross advances grew by 20.8% a substantial increase from 10.8% a year ago. This growth was predominantly fuelled by a strong increase in personal loans (32.5% growth) and lending to agriculture industry (43.7% growth).

Credit growth of NBFCs outpaced that of banks. Disbursements by NBFCs (excluding Infra-NBFCs) remained higher than prepandemic levels for the first half of FY2024 on the back of strong consumption demand. Moreover, collection efficiency of NBFCs was healthy in the first half of FY2024 and is expected to stay robust on the back of improved economic activity and a favourable outlook for most sectors. Further, the NBFC sectors momentum has been augmented by the proliferation of digital lenders offering alternative financing options.

GNPA (Gross Non Performing Assets) of NBFCs improved by 110 bps (Basis Point) to 4.6% in FY2024 from 5.7% in FY2023 driven by higher credit demand and improved collection efficiencies. In line with the decline in GNPAs, the capital position of NBFCs remained robust. NBFCs remained comfortably capitalized despite a fall in overall levels due to strong business growth. The Capital to Risk (Weighted) Assets Ratio (CRAR) of 27.6% at the end of September 2023 rose 20 bps from September 2022 levels. This remains well above the regulatory requirement of 15%. NIMs (net interest margin) grew to 4.3% in FY2024 vs 4.1% in FY2023.

As per RBI data, NBFCs have achieved a marked improvement in its key financial ratios in FY2023. Return on Asset has improved by 80 bps to 2.6% in March 2023 from 1.8% in March 2022. Similarly, it witnessed 320 bps improvement in ROE. NIM has seen a positive upward trend from 4.1% in March 2022 to 4.3% in March 2023.

II. Opportunities and Threats

Analysis of Indian NBFC sector are as follows:

Opportunity

NBFCs can offer loans to those individuals/entities that cannot get loans from a traditional bank

NBFCs have their own unique way to assess the creditworthiness of the people and grant them loans with light paperwork. In case of micro, small, and medium enterprises, loans are granted to them based on their invoices due for payment. Nowadays, banks are very cautious about creditworthiness of the customers and do not easily provide loans due to the rise in Non-Performing Assets (NPA). Due to this, NBFCs have seen a hike in the loan requests and they can charge higher interest

rates while providing loan to the customers. In order to skip the complications of complying with the requisites banks put on the customers, they are ready to pay the additional interest charges to NBFCs for loans.

New Credit Customers

New credit customers are one of the biggest opportunities for NBFCs. New credit customers are those individuals who belong to the rural sector and have not borrowed from any financial institution previously. The ground presence of banks and other credit financial services are limited in the rural areas. The banks which are present in rural areas are regulated by legislation. Therefore, the individuals in rural areas have to rely on banking and credit history while applying for a loan. The banks cannot offer loan facilities to individuals who do not qualify for it. For such individuals, NBFCs are a blessing. The new credit customers have emerged as a lucrative segment for the NBFCs.

GOI has less strict rules for NBFCs due to which they can enjoy flexibility

GOI has exempted NBFCs from the hard rules and regulations which are mandatory for the traditional banks, keeping in mind the financial needs of the people. NBFCs get to enjoy flexibility in the rules for paperwork and other restrictions due to which many entrepreneurs put their interest in these financial institutions. GOI has provided many opportunities for the establishment of NBFCs in the Indian market. The NBFCs are eligible for a foreign investment of up to 100%. The SARFAESI Act powers NBFCs to take the hypothecated assets in possession and sell them. If already sold, the third party has to surrender the hypothecated asset.

NBFCs are contributing to Indias GDP by facilitating credit access, supporting investment, and contributing to various sectors. The diverse range of services offered by NBFCs have contributed to the overall growth and resilience of the Indian economy. This is why the Indian Government has taken many initiatives to protect the interests of NBFCs and help them to emerge. NBFCs are in the business of profit. The contributions made by the NBFCs in the growth of the Indian economy highlights how well NBFCs have been functioning.

Threats

NBFC seems like a profitable business idea but setting it up isnt easy. It can be really complicated. In addition to this, despite the opportunities and support received by the NBFCs, the challenges faced by these institutional organizations are numerous. Some of the problems faced by the NBFCs are mentioned below:

Refinancing NBFCs

Many NBFCs face challenges when it comes to refinancing. Banks, capital markets and sometimes the competitors are the major sources of refinancing. Refinancing is an important element for NBFCs efficient working as well as the sustainability of growth. But in the present scenario, refinancing is not a

favorable option for the sustainability of growth for the NBFCs. Many banks are unwilling to fund NBFCs because theyre afraid that the funds will be used for refinancing the debt and not for business.

NBFC License

Another major challenge faced is the process for NBFC license. It is not an easy process to obtain this license and requires approvals and a lot of documents and paperwork. The required documentation differs for each kind of NBFC and the process of obtaining this license requires compliance with multiple regulations. Many restrictions and limitations have been put forth by RBI before this license can be obtained.

Even though GOI has shown its support for NBFCs on numerous occasions, the process for setting up an NBFC is complex since such a financial institution directly affects the general masses and so, the government cannot permit any imperfections and flaws in this field. The Board of Directors must contain experienced persons with financial background and not have a criminal record. Another criterion to obtain this license involves having a minimum owned fund of Rs. 2 crores which shouldnt be borrowed.

New to Credit Customers

There is no doubt that the new to credit customers provide opportunities for NBFCs. But they can also be a challenge for these financial institutions. Theres always risk associated with doing business with customers who are indulging in services for the first time. Also, manpower is necessary for NBFCs to educate and regulate these customers.

Statutory Tools

Another challenge faced by NBFCs is that there are no tools available for statutory recovery. Due to this, there is a negative impact on NBFCs functioning.

Limited Leverage Ratio

Small NBFCs do not have to maintain CRAR (Capital Adequacy Ratio) but they do have some restrictions upon them. They cannot exceed the leverage ratio beyond 7. Due to this, NBFCs have to depend on banks and other financial institutions to comply with the financial demand which creates a hassle to them. In lieu of this borrowed money, these financial institutions and banks carry out due diligence on the NBFCs which can be very challenging.

Several Bodies

At present, NBFCs have many representative bodies. Since the NBFC sector is still in the stage of development, the presence of representative bodies poses a challenge for the NBFCs. It is necessary to ensure that all the segments of NBFCs are represented adequately in an apex body in a manner that promotes NBFCs balanced growth. The various segments of NBFC must be developed in a harmonized manner which can be achieved through the set up of a single representative body.

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.

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

The Company has set up 3 new branches in the state of Odisha along with 16 new branches in the state of Tamil Nadu with additional 6 more branches in Tamil Nadu in the current financial year thus making total branch strength of 38 branches across India as compared to 16 branches in the last financial year. The Company has achieved an increase of 50% branches and will be setting up more branches in various parts of the Country. In the last financial year the Company had planned a target of setting 50 branches across the Country, however the Company was able to set 38 branches only but as there are more branches lined up in new states other than Tamil Nadu and Odisha, the Company expects to achieve the said target in the near future. The total employee strength has increased from 46 employees in the last financial year to 144 employees at present, thus resulting to an increase of three times more than 100% of its total workforce. The operations of the Company is increasing day by day thereby increasing the business simultaneously. The Company is slowly trying to establish and make its own identity instead of working under the shade and name of its Holding Company, ICL Fincorp Limited.

The commercial operations during the year under report were progressive. The Company has earned an income of Rs. 4,13,95,010/- (Rupees Four Crores Thirteen Lakhs Ninety Five Thousand and Ten Only) as compared to Rs. 4,03,01,278/- (Rupees Four Crores Three Lakhs One Thousand and Two Hundred and Seventy Eight Only) during the previous year. The total expenditure of the Company for the year was Rs. 5,91,04,835/- (Rupees Five Crores Ninety One Lakhs Four Thousand Eight hundred and Thirty Five Only) as compared to Rs. 4,11,44,020/- (Rupees Four Crores Eleven Lakhs Forty Four Thousand and Twenty Only). The Company incurred net loss of Rs. 1,82,25,205/- (Rupees One Crore Eighty Two Lakhs Twenty Five Thousand Two Hundred and Five Only) as against net loss of Rs.9,66,755/- (Rupees Nine Lakhs Sixty Six Thousand Seven Hundred and Fifty Five Only) during the previous

financial year. The Company had to incur loss in this financial year in comparison to previous financial year due to increase in the operations of the Company which led to opening of more branches and employees resulting into finance cost, administrative and other normal expenses of the Company. Your Directors are targeting more growth and expansion in future due to which certain expenses are unavoidable at present. Moreover the Company believes in sacrificing today for a better tomorrow.

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 2.71% 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. The expenses increased 43.65% y.o.y compared to 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. 16.78 crores in financial year 2023-24 compared to Rs. 28.53

crores in the previous year.

Gold Loan Assets under management

The Company achieved a gold loan asset under management of Rs. 8.80 crores during the financial year compared to Rs. 8.76 crores in the previous year.

Revenue

The total income grew by 2.71% to reach Rs. 4.14 Crores during the financial year compared to Rs. 4.03 crores in the previous year.

Profit/Loss after tax ("PAT")

There is a nominal Net Loss of Rs. 182.25 lakhs during the year compared to Net Loss after Tax of Rs. 9.67 lakhs in the previous year.

Earnings per Share ("EPS")

As it is a Net loss there were 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 31,2024 is 128 employees.

IX. Details of significant changes in key financial ratios

Ratios	As at 31.03.24	As at 31.03.23	% change	Reason for variance
Debtors Turnover	0.18	0.14	30.51	Variation due to decrease in debtors
Inventory Turnover	N.A.	N.A.	N.A.	-
Interest Coverage Ratio	0.43	1.21	-63.96	Loss during the year 23-24 has resulted in the variance
Current Ratio	3.50	4.77	-26.62	Increase in Current Liabilities
Debt Equity Ratio	0.97	0.53	84.91	Increase on the Total Debt
Operating Profit Margin (%)	-0.04	0.36	-111.96	Reduced profit (loss) during the year
Net Profit Margin (%)	-0.43	-0.02	1945.93	Loss reported during the year
Leverage Ratio	1.06	0.57	85.96	Increase in financial liabilities
Capital Adequacy Ratio	49.04	19.05	157.43	Increase in Tier I capital
Tier I Capital	16,36,08,555.53	65318747.10	150.48	Increase in Tier I capital/Decrease in Loans to Companies in same group

X. Details of any change in Return on Net Worth

The net worth of the Company as on March 31, 2024 is Rs. 22.15 Crores when compared to Rs. 23.92 Crores in the previous year and the percentage of change is (7.32)%, the reason for the same being Net loss made during the year & increase in the Liabilities (Trade Payables, Debt Securities, Other Financial Liabilities 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.

By order of Board of Directors,

For Salem Erode Investments Limited

	Sd/-	Sd/-
	K. G. Anilkumar	Umadevi Anilkumar
Place: Chennai	Managing Director	Director
Date: 27.08.2024	(DIN: 00766739)	(DIN: 06434467)