Step Two Corporation Ltd Management Discussions

About Step Two Corporation Limited

Step Two Corporation Limited (‘STCL) is a non-deposit taking Non-Banking Financial Company (NBFC-ND) registered with the Reserve Bank of India (RBI). It is engaged in the business of investments and lending

Industry and Economic Scenario 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.

Indian economy

Against a challenging global backdrop, India distinguishes itself as one of the fastest growing major economics - 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.

INDUSTRY OVERVIEW

Non-banking financial 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 202324. 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 1820% 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.

Financial Performance

Balance Sheet

- Total net fixed assets for FY2023-24 stood at Rs. 0.69 lacs compared to Rs.0.54 lacs in FY2022-23

- Net worth stood at Rs. 564.59 lacs as on 31st March, 2024 compared to Rs. 594.45 lacs as on 31st March, 2023, a decrease of 10.53%.

Profit and loss statement

- Revenues from operations stood at Rs. 84.15 lacs in FY2023-24 compared to Rs. 90.38 lacs in FY2022-23

- EBITDA increased to Rs. (46.35) lacs in FY2023-24 compared to Rs. 67.40 lacs in FY2022-23

- Loss after tax was witnessed at Rs. (29.86) lacs in FY2023-24 compared to Rs.49.55 lacs in FY2022-23

- Depreciation and amortisation stood at Rs. 0.21 lacs in FY2023-24 compared to Rs.0.11 lacs in FY2022-23

Key financial ratio - Significant changes and explanations

* Figures for Debtors Turnover (Days), Inventory Turnover and Interest Coverage Ratio have not been stated since the Company had Nil Debtors, Inventory and Interest Expense.

Risk Management

The Company aims to operate within an effective risk management framework to actively manage all the material risks faced by the organization and make it resilient to shocks in a rapidly changing environment. It aims to establish consistent approach in management of risks and strives to reach the efficient frontier of risk and return for the organization and its shareholders.

Broad categories of risk faced by the Company are credit, liquidity and interest rate risk. The risk management policies are well defined for various risk categories supplemented by periodic monitoring through the Board. Central to our approach is the identification, measurement, mitigation and reporting of risks, supported by continuous monitoring of Key Risk Indicators to ensure organisational objectives are met across all business units.

Evolving Regulatory Landscape

Over the past few years, financial services as a sector has come under increased scrutiny and therefore, greater regulatory supervision. This is especially true for NBFCs, as over the years, the sector has undergone considerable evolution in terms of size, complexity and interconnectedness within the financial sector. With a view to bridge the regulatory gaps between the Banks and NBFCs, NBFCs are now increasingly being subject to regulations and guidelines at par with banks.

Opportunities and Threats

Non-Banking Financial Companies ("NBFCs") remain one of the most important pillars for ushering financial inclusion in India, reaching out to a hitherto under/unserved populace and in the process leading to "formalization" of the credit demand.

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 midaged individuals becoming increasingly techsavvy, 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.

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.

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.

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.

Internal control system and their adequacy

The Company has an effective internal control system, commensurate with its size and nature to ensure smooth business operation, including assurance of recording all the transaction details, ensuring regulatory compliance and protecting the Company assets from any kind of loss or misuse. It evaluates the adequacy of all internal controls and processes, and ensures strict adherence to clearly laid down processes and procedures as well as to the prescribed regulatory and legal framework. The Company has further strengthened its internal audit function by investing in domain specialists to increase effectiveness of controls. The Audit Committee of the Board of Directors reviews the internal audit reports and the adequacy and effectiveness of the internal controls.

Fulfilment of the RBIs norms and standards

STCL fulfils norms and standards laid down by the RBI relating to the recognition and provisioning of non-performing assets, capital adequacy, statutory liquidity ratio, etc.

Development in human resources

The Company continues to lay emphasis on people, its most valuable resource. In an increasingly competitive market for human resources, it seriously focuses on attracting and retaining the right talent. It provides equal opportunity to employees to deliver results.

Conclusion

Certain statements in the Management Discussion and Analysis describing the Companys objectives, predictions may be "forward-looking statements" within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward looking statements contained in this document due to various risks and uncertainties.