Sundaram Finance Ltd Management Discussions.

GLOBAL ECONOMY

The financial year 2020-21 (FY21) was fraught with uncertainty across the globe as the once-in-a-century COVID-19 pandemic led to a significant loss of lives and livelihoods globally. This had a devastating impact on global growth that witnessed a contraction of 3.5% year on year (YOY). The IMF notes that "the adverse impact has been severe on women, youth, the poor, informally employed, and those who work in contact-intensive sectors." Countries, however, were quick to respond with sizeable stimulus measures. A total of US$30 trillion has been spent by countries across the world on fiscal and monetary stimuli spanning FY21 to offset the impact of the pandemic. The IMF estimates that the impact could have been at least three times worse "if not for extraordinary policy support." These policy measures and the gradual phased reopening of activity witnessed a sharp pickup in consumption, of which pent-up demand played a large part in the initial phases, moving back to pre-pandemic levels of activity on the back of rising vaccinations. While advanced economies, except China which grew in 2020, are expected to return to their pre-COVID GDP levels this year, all emerging economies and low-income countries are not expected to do so till 2023.

The global economic growth for 2021 is expected to be 5.5-6%, although a high degree of uncertainty surrounds this estimate. The recovery paths of different countries are expected to be substantially different. Most emerging economies have seen a significant setback to their poverty reduction efforts of the past few years. In light of differential impact and recovery trajectories between advanced and emerging economies, greater international collaboration will likely be crucial on both the economic and healthcare fronts (particularly related to vaccines) and the economic prospects will depend largely on the global communitys ability and willingness to fight the virus-increased resilience on the back of vaccinations and adherence to safety protocols will accelerate global progress, while new variants and strains that prolong the pandemic will depress global economic growth.

INDIAN ECONOMY

The first wave of COVID-19 infections in India spanned nearly the entire FY21 and caused significant economic disruption. The onset of the pandemic in India in the first quarter of FY21 was met with a series of national lockdowns that led to a sharp drop in activity. The contact-sensitive services segment was the most impacted and the largely informal nature of this segment in India, further worsened the economic impact on the nation. All told, the toll on Indias economy has been severe and the provisional estimates show a GDP growth in FY21 of (7.3)% YOY.

In response, the government and the RBI announced a slew of fiscal and monetary measures to overcome the difficulties caused by the national lockdowns. The year witnessed a number of government initiatives in the series of fiscally prudent Atma Nirbhar Bharat Abhiyan packages, including for agriculture and allied infrastructure. The key aspects of these measures started with food and health support during the lockdown. This was expanded on and followed up with other packages for MSMEs, NBFCs, migrant workers, agriculture, social sector funding, festival allowances and state government support. One notable highlight was the extension of the production-linked incentive (PLI) scheme to ten sectors. This is likely to have laid a key foundation for substantial capital expenditure and increased competitiveness for Indian industry in the years ahead.

In all, the Atma Nirbhar Bharat Abhiyan package of measures totalled Rs.17.2 lakh crores in support. While these announcements were timely, they were largely focused on supply-side support and longer-term reforms. Demand-side measures were not quite as large as the stimulus packages seen in developed economies; the Indian government and policy makers seemed to privilege fiscal prudence over nearterm economic stimulus.

The fiscal deficit for the 2020-21 was projected at 3.5% at the start of the year. However, the large loss of revenue for the centre due to the stringent COVID-19 related restrictions had led the government to target a higher fiscal slippage of 9.5% of GDP. The pickup in tax revenues during the last quarter is expected to bring down this deficit to just under 8%. Into the fiscal year 2021-22, the government has projected a fiscal deficit target of 6.8%. This is likely to worsen given the vicious second wave and the associated set of lockdowns leading to likely revenue shortfalls in the first quarter of FY22.

On the external front, the drop in growth had a positive rub-off on the currency. The sizeable stimulus measures in the western economies led to a constant inflow of money into emerging economies. India stood differentiated on its inherent strength and received large FII and FDI inflows in FY21. This stabilised the rupee that saw an appreciation of 2.6% against the dollar, ending the fiscal year at 73.1. The RBI cashed in on this opportunity and added $103bn to its forex reserves that currently stand at $579bn. Indias current account balance however, recorded a deficit of 0.2% of GDP after recording surplus (1.7% of GDP) during the three quarters ended December 2020.

The RBI more than compensated for the lack of substantial demand-side fiscal support through accommodative monetary policy to lessen the burden on borrowers and make abundant liquidity available during the difficult period of the pandemic. Starting the last week of March 2020, the RBI cut its key policy Repo rate by 115 basis points to 4% and cut the cash reserve ratio (CRR) by 100 basis points. Through various other liquidity tools like the long-term repo operations (LTRO), targeted long term repo operations (TLTRO), open market purchases (OMO), special liquidity to mutual funds and others, RBI infused a total liquidity of Rs.12.7 lakh crores into the system, resulting in a significant reduction in interest rates. The measures of extended regulatory forbearance, easing of asset classification norms, relaxation to banks on commercial real estate, moratorium extensions, introduction of a resolution framework, particularly for the MSME segment, and rationalisation of risk weights for individual housing, all helped ease systemic stress. To top it all, in the early weeks of the financial year 2021-22, the RBI introduced a government security acquisition program (G-SAP) that would work to keep market rates further in check besides ensuring an assured secondary market purchase limit of securities by RBI.

The financial year 2020-21 also witnessed the passing of bills on agricultural reform and labour laws. The bills on agriculture were set to do away with the inter-state and intrastate restrictions imposed earlier on sale of agricultural produce. In addition, the easing of contract farming laws is intended to enable greater participation from the private sector in procurement, storage, and transportation of agricultural produce, all of which were expected to unlock inefficiencies in the agricultural value chain. However, these bills currently remain suspended owing to large scale protests from farmers and other interest groups. The changes to the labour laws have been appreciated by the business community as it gives them the flexibility to deal with their employee workforce without compulsory notification to the government and facilitates the ease of doing business, even though the cost of establishment would substantially increase on account of changes in definition of "wages" and the associated emphasis on retiral savings as opposed to take-home pay.

AUTOMOTIVE SECTOR

The automotive sector was already witnessing bouts of weakness even before the commencement of financial year 2020-21. The onset of the COVID-19 pandemic only deepened the fall in this sector. The commercial vehicles (CV) segment was the worst affected, given its close linkages to overall economic growth. Even though the second half of the year was encouraging, on the whole, the sharp drop in economic activity and a postponement of the capex cycle led to a 28% YOY drop in MHCV volumes and a 17% YOY drop in LCV volumes. Increased e-commerce sales and brick- and-mortar businesses adopting door delivery enabled a ramp up in SCV sales, which partially cushioned the drop in volumes.

The financial year 2020-21 was a very strong year for tractors. Three consecutive years of good harvests, increased government spending in rural India, strong agricultural output and elevated farmer sentiment resulted in a 27% YOY growth in tractor sales volumes. Agriculture as an industry and rural India in general, were relatively unaffected by the pandemic, unlike urban India which bore the brunt of it. While concerns around job losses and weakness in urban demand appeared to be two key reasons that led to a 13% YOY decline in twowheeler volumes, the increased need for personal mobility by first-time owners led to a much lesser impact on passenger vehicle (PV) volumes that contracted by a mere 2% YOY. However, within the PV segment, utility vehicles witnessed growth of 8% YOY, as customers with higher income profiles were relatively less affected by the pandemic.

OPERATING & FINANCIAL PERFORMANCE

Your Companys disbursements at Rs.11,741 cr. (PY Rs.15,176 cr.) were down by 22.63% during the year under review, reflecting the marked decline in sales across the automotive sector owing to multiple factors as also the elevated risk perceptions in light of the pandemic-induced disruptions. Disbursements against Commercial Vehicles declined 41% in unit terms as compared to the market drop of 21%; disbursements against passenger cars and utility vehicles declined 3%, almost mirroring the overall market which was lower by 2%. Gross receivables managed by your Company as of March 31, 2021, stood at Rs.35,736 cr., as against Rs.35,088 cr., showing a marginal growth over the previous year. Your Companys tight rein on operating costs and its ability to raise resources at competitive rates enabled it to maintain its margins at a reasonably healthy level.

Reflecting the economic slowdown and the cash flow strains faced by its customers, your Companys delinquencies increased during the year. However, your Companys superior credit standards and systematic collections and recovery efforts ensured best-in-class performance on asset quality. Stage-3 assets, Gross and Net of ECL provisions, stood at 1.84% (PY 2.47%) and 1.01% (PY 1.65%) respectively, as at 31st March, 2021.

RBI, as part of the COVID relief, had announced various measures like additional credit relief, moratorium, and restructuring, aimed at alleviating the financial hardships for individuals and small business customers. Your Company extended the moratorium and restructuring support for providing timely relief to such customers. In addition, your Company also extended financing support to its MSME customers through the ECLGS window announced by the Government of India as part of the Atma Nirbhar Bharat Abhiyan package.

Your Company has been maintaining comfortable liquidity in the form of liquid investments and undrawn bank limits, to meet its maturing liabilities and did not opt for moratorium in respect of its debt obligations to its lenders.

Your Company registered a net profit of Rs. 809 cr. compared to Rs. 724 cr. in the previous year, a growth of 12%. Excluding the one-time gain of Rs. 53 cr. (on sale of equity shares in Sundaram Finance Holdings Ltd.) last year, net profit grew by 21% on a like-to-like basis. Your Companys net worth stood at Rs.6,179 cr., as on 31.3.2021. Capital adequacy (CRAR) at 22.06% was comfortably higher than the statutory requirement of 15%.

There are no significant changes in key financial ratios of the Company for F.Y. 2020-21 as compared to F.Y. 2019-20, except for the following:

Net Profit Margin (%)

Return on Net Worth(%)

March 2021 March 2020 Variance March 2021 March 2020 Variance
Ratios 20.15% 18.44% 9.33% 13.80% 13.67% 0.93%

RESOURCE MOBILISATION

a) Deposits

During the year, your Company mobilised fresh deposits aggregating to Rs. 708.52 cr. Renewal of deposits during the year amounted to Rs.1345.58 cr. representing 81% of the matured deposits of Rs.1631.16 cr. Deposits outstanding at the year-end were at Rs.4020.99 cr. as against Rs.3676.19 cr. in the previous year. The net accretion for the financial year was Rs.344.81 cr. As at 31st March 2021, 4090 TDRs amounting to Rs.36.06 cr. had matured for payment and were due to be claimed or renewed. After close followup, these figures are currently 3243 and Rs.24.53 cr. respectively. Continuous efforts are being made to arrange for repayment or renewal of these deposits. There has been no default in repayment of deposits or payment of interest thereon during the year. Investor Relation Services - Deposits continue to enjoy the ISO 9001:2015 Certification from Bureau Veritas (India) Private Limited.

During the year, your Companys outstanding deposits crossed Rs.4000 cr. As part of the digital initiative to provide support to depositors, your Company launched Online services to its depositors through Customer Portal / Mobile APP in September 2020.

b) Term Funding

During the year, your Company raised term funding from Banks, Mutual funds, Insurance companies and others in the form of non-convertible debentures and term loans to the tune of Rs.7526 cr., across varying tenors.

c) Bank Finance

As part of the overall funding plan, your Companys working capital limits with consortium banks were retained at Rs.3000 cr. During the year, your Company also issued several tranches of commercial paper aggregating to Rs.6500 cr. The maximum amount of outstanding commercial papers at any time was Rs.4475 cr. and the amount outstanding at the end of the year was Rs.2025 cr.

d) Assets Securitised / Assigned

During the year, your Company raised resources to the extent of Rs.493.70 cr. through securitisation and assignment of receivables.

CREDIT RATINGS

Your Companys long term credit ratings have been retained at "AAA" (Highest Degree of Safety) with a "Stable Outlook", by both ICRA and CRISIL. The short-term borrowings (including commercial paper) are rated "A1+" (very strong degree of safety) by both ICRA and CRISIL. Fixed Deposits are rated "AAA" (Highest Credit Quality) by both ICRA and CRISIL.

COVID-19

The widespread disruption caused by the nationwide lockdown posed several challenges both in terms of people safety and technology. As a customer-facing business, your Company had to quickly reorient its approach and processes to respond to the emerging situation. While the primary objective was to ensure the safety of employees, customers, associates and other partners, it was vitally important to ensure that customer service levels were not compromised. Taking a cue from developments in other parts of the country, your Company took a number of steps to enable a "Work from home environment, ahead of the lockdown imposed by various state governments depending on the situation in the respective states. This included putting in place adequate IT security measures to safeguard the technology environment, while providing access to nearly 3000 users on a real time basis. This ensured continuity of operations and service to customers, especially our depositors. All deposit maturities as well as redemption of other liabilities were met on or before due dates.

All borrowers were kept regularly informed about the regulatory developments, especially regarding the grant of moratorium. This was done entirely using digital methods and last mile servicing was done by our employees using telephones and digital communications. The digital tools deployed were enhanced to improve the customer experience.

Detailed safety protocols were put in place to ensure that operating procedures including deep cleaning and fumigation, educating and training the staff to wear masks, importance of social distancing and hand sanitisation/washing with soap and avoiding physical contact. These are being reinforced and communicated to all our employees continuously, using digital technology. A vaccination drive was conducted in your Companys head office and coordinated efforts continue to ensure all employees, especially frontline staff, are vaccinated at the earliest.

OUTLOOK

The pandemic has caused significant economic damage. However, the central government, stretching itself within its framework of prudence, and the swift and frequent RBI policy measures have greatly helped to contain the negative impact. Initial projections for FY22 indicated an appreciable spurt in growth, in the range of 11-13% YOY. However, the second wave of the pandemic that has hit the country suddenly and with an unexpectedly high intensity has crippled economic activity in the first quarter of FY22. Infection levels have been at over four times that witnessed in the first wave. Mortality in absolute numbers has been correspondingly higher (although the mortality rate has remained between 1% and 1.5%). Worryingly, the second wave has spread wider into semi-urban and rural India. And to complicate matters, the pace of vaccinations has seen a sharp drop both on account of supply shortages of vaccines and vaccine hesitancy amongst citizens.

The lockdowns and associated restrictions that have been triggered in the states are likely to shave-off at least 150250bps from the FY22 GDP growth projection. The second wave has peaked in May and, optimistically, the economic damage from this wave of the pandemic could well be contained in the June quarter. This could then lead to a faster leg of recovery through a layer of pent-up demand led sales that could bolster full year growth numbers.

Realistically, Indias economic recovery in FY22 will be marked by a high degree of uncertainty. The countrys ability to mobilise vaccines at scale, ramp up the pace of vaccinations, and the speedy containment of virus spread in rural India will all be major determinants of consumer confidence returning and consequently of faster economic recovery. Continued adherence to safety protocols and minimising super-spreader events will ensure any subsequent "waves" are contained to ripples. The emergence of newer variants and strains of the virus will trigger disruptions which could depress consumer sentiment and consequently, economic activity.

Given how sensitive the commercial vehicle (CV) sector is to economic momentum, this segment is likely to take a while to recover. A dramatic turnaround seems unlikely. Even the expected recovery in second half of FY22 on the back of a 3-year downcycle may get pushed out. However, if the second wave is effectively contained within the first quarter of this financial year, there could be some support the sector may receive on the side-lines. The governments resolve to invest over Rs.100 lakh crore behind infrastructure through the National Infrastructure Pipeline should provide support to construction equipment as well as tippers, within the MHCV segment. Continued growth of e-commerce sales and direct- to-home models across sectors are expected to support the LSCV segment growth. Rising global agricultural prices and a good monsoon are most likely to help hold up growth in rural India and as a result, in tractors and farm equipment sales. However, the second waves significant inroads into rural India could soften growth in the tractor and farm equipment segment. It is expected that the need for personal mobility will continue to drive demand for passenger cars and utility vehicles. However, supply side challenges due to global shortage of semiconductors as well as rising commodity prices across steel and fuel are likely to dampen the recovery in demand.

INTERNAL FINANCIAL CONTROLS

The Company has a well-established internal financial control and risk management framework to ensure the highest standards of integrity and transparency in its operations and a strong corporate governance structure. Appropriate controls are in place to ensure:

a) the orderly and efficient conduct of business, including adherence to policies;

b) safeguarding of assets;

c) prevention and detection of frauds/errors;

d) accuracy and completeness of accounting records; and

e) timely preparation of reliable financial information.

The Board has adopted policies and procedures to ensure compliance and oversight to the implementation of its internal financial control and risk management framework.

RISK MANAGEMENT

Your Company has built a robust risk management framework over the years. Engaged as it is in retail financing, the Company has to manage various risks, including credit risk, liquidity risk, interest rate risk and operational risk. The Risk Management Committee and the Asset Liability Management Committee review and monitor these risks on a regular basis.

The primary objectives of the Risk Management Committee include:

i) To assist the Board in fulfilling its corporate governance oversight responsibilities with regard to the identification, evaluation and mitigation of strategic, operational, and external environment risks;

ii) To monitor and approve the enterprise risk management framework and associated practices of the Company;

iii) To periodically assess risks to the effective execution of business strategy by reviewing key leading indicators in this regard; and

iv) To periodically review the risk management processes and practices of the Company and ensure that the Company is taking the appropriate measures to achieve prudent balance between risk and reward in both ongoing and new business activities.

The primary responsibility of ALCO (Asset Liability Committee) includes:

i) Monitoring and advising on Liquidity risk management;

ii) Management of market risks;

iii) Funding and capital planning;

iv) Profit planning and growth projection; and

v) Forecasting and analysing What if scenario and preparation of contingency plans primary focus of ALCO on Liquidity and Interest Rate risks as stipulated under RBI guidelines.

The Company manages credit risk through stringent credit norms established through several decades of experience in retail lending and continues to follow the time-tested practice of personally assessing every borrower, before committing to a credit exposure. The Company monitors AIM on an ongoing basis to mitigate liquidity risk, while interest rate risks arising out of maturity mismatch of assets and liabilities are managed through regular monitoring of the maturity profiles. The Company also measures the interest rate risk by the duration gap method.

Operational risks can arise due to changes in business environment or changes in processes, affecting the control effectiveness. The internal audit team reviews the processes and controls to ensure the design effectiveness and adequacy of controls to mitigate risk. A stable and experienced risk management team and the Treasury team provide much- needed continuity and expertise in managing the dynamic changes in the market environment. Your Company has well- documented standard operating procedures for all processes to ensure superior control over transaction processing and regulatory compliance and periodical review of the same ensures that the risks including technology risks are under control. While meeting the strategic objectives is the primary goal, your Companys values and culture that are enshrined in the Sundaram Way of doing business and the obligations and commitment to our customers, employees, deposit holders and the community around us are the foundations on which its risk framework rests.

Your Company has additionally taken steps to adopt the Enterprise Risk Management (ERM) framework and map with the internal financial controls. This will assist in several ways to identify and mitigate risk besides acting as a safety monitoring mechanism.

The detailed Risk Management Framework of your Company has been furnished in the Notes to the Accounts under Note 38, for your information.

Your Company has implemented the policy on Liquidity Coverage Ratio with effect from 1st December 2020, as mandated by RBI. RBI introduced the Liquidity Risk Management framework for NBFCs in the year 2019-20. During the year, the Board of Directors approved the Liquidity Risk Management Policy and implemented the Liquidity coverage ratio (ICR). Your Company will maintain a sufficient liquidity buffer in terms of ICR and ensure adequate High Quality Liquid Assets (HQLA) in line with regulatory norms in order to prudently manage any potential acute liquidity stress scenarios.

INTERNAL AUDIT

Your Companys internal audit department independently evaluates the adequacy of control measures on a periodic basis and recommends improvements, wherever appropriate to suit the changes in business and control environment. The effectiveness and efficiency of the controls, and the design are regularly measured through process reviews and risk assessment. The Internal Audit team plays a vital role in monitoring the effectiveness of the Standard Operating Procedures and makes extensive use of software and analytical tools which enables effective offsite or remote auditing. A robust process that includes a continuous learning mechanism ensures that the Internal Audit team regularly updates its skills and knowledge base in order to analyse, assess, mitigate and continuously monitor the controls and guard against inadequacies including various risks that could pose a threat to your Companys strategic objectives, as part of key pillar or 3rd line of defence. Systematic identification of risks, red flags and early warning signals on a proactive basis enables quick decision-making on strengthening and redesigning the controls where required, through agile audit plans. The internal audit function is fully geared to meet the emerging challenges in the post COVID-19 era.

The internal audit department is staffed by highly qualified and experienced personnel and reports directly to the Audit Committee of the Board. The Audit Committee regularly reviews the audit findings as well as the adequacy and effectiveness of the internal control measures.

Additionally, an Information Security Assurance Service is also provided by independent external professionals. Based on their recommendations, the Company has implemented a number of control measures both in operational and IT-related areas, apart from information security related measures.

To ensure adequate strengthening of controls surrounding information security and mitigate technology risks, external information systems auditors carry out periodical and continuous reviews on both network and application systems. They work along with Internal Audit teams to ensure adequate independence while reviewing IT applications infrastructure and network management.

In the wake of COVID-19, the Internal Audit team along with the information systems auditors are redefining the scope of coverage to address future risks as part of the risk mitigation strategy and to facilitate strengthening of the internal IT control systems in line with the regulatory requirements.

INFORMATION TECHNOLOGY

Your Company is strictly following the IT Framework Master Directions laid down by RBI and conducts resilience drills regularly to safeguard the customers and shareholders data.

The IT Strategy Committee of your Company is periodically monitoring the robustness of your Companys infrastructure and its processes to protect the IT landscape. This committee also shares its expertise in strengthening various measures implemented by your Companys strong technology team.

Your Company has a state-of-the-art Data Centre catering not only to its own needs but also to those of its subsidiaries and associates, with a capacity of over 300 servers, managed by professionals providing 24/7 support, with over 99.99% uptime. The Data Centre is accredited for ISO/IEC 27001:2013 by TUV Rheinland for Information Security Management System. The Disaster Recovery Site for all critical applications is hosted at a separate facility located in a different seismic zone, with near real-time data replication. Your Company continues to invest in various new technologies, software tools and monitoring mechanisms to improvise and modernize the IT Infrastructure. Your Company has engaged in regular discussions with external consultants, industry experts to reinforce Information & Cyber Security methodologies. Periodic vulnerability assessment and penetration testing were carried out on the infrastructure to ascertain the effectiveness of the practices laid down by your Company.

With proficiency in a variety of technologies, our in-house IT team has proven capability to develop and maintain complex business applications that cater to the Companys operations and business functions. Your Company employs technology not only to enrich the jobs of our employees, but also to aid decision-making, provide better controls, manage risk, and enhance our customers experience. The end-to-end process of credit to the retail segment has been substantially digitised through mobile-enabled applications, credit decisioning automation that provides approval in under 30 seconds at the point-of-sale and direct payment into the dealers bank accounts via a "straight to bank" payment solution. Collections processes are automated through a homegrown "mCollect" application that enables monitoring, follow-up and resolution of all past-due accounts digitally. A range of digital payment solutions have been enabled for customers to transact electronically to update their accounts. These digital technology capabilities of your Company were put to test during the Covid-19 pandemic and succeeded in supporting both customers and staff during the lockdown and work from home phases of the pandemic. Significant investments continue to be made in technology to expand the automation of processes, augment the digital interfaces for customers and employees and enable delivery of the unique Rs.Sundaram Experience to customers. The modernization of IT application platforms to ensure reliability and minimise any risks of obsolescence is also a priority.

Your Company is in a relationship-centric business relying on physical interactions with customers and other stakeholders. The digital strategy has consciously been adopted to augment these relationships and for resources to be digitally available for customers, as and when they need them.

For and on behalf of the Board
Chennai 600 002 S VIJI
28.05.2021 Chairman