suryoday small finance bank ltd share price Management discussions

Global Environment (Global GDP Growth and Outlook)

The economic damage from the Russia-Ukraine conflict contributed to a significant slowdown in global growth in FY23 and added to inflation. Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest. In April, 2022 Global growth was projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. War-induced commodity price increases and broadening price pressures resulted in a rise in global inflation to 8.7 percent in 2022.

Several shocks hit the world economy middle of 2022 - already weakened by the pandemic - higher-than-expected inflation worldwide (especially in the United States and major European economies), triggering tighter financial conditions; a worse-than-anticipated slowdown in China resulting from COVID- 19 outbreaks and consequent lockdowns; and further negative spillovers from the war in Ukraine.

The year gone by also witnessed the failure of 3 US banks (First Republic Bank, Silicon Valley Bank, and Signature.) primarily due to the write- down of their investments resulting from spike in interest rates.

Europe was similarly affected with one of its largest Private Bank - Credit Suisse, the second-largest bank in Switzerland - suffering a collapse in March 2023.

Rising interest rates and the Russia-Ukraine war continues to weigh on global economic activity. Global inflation is expected to fall to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic levels.

Continued rise in government debt, prolonged low global GDP growth and expectations of higher interest rates for longer period on the back of stubborn inflation are fundamentally altering the sovereign credit profiles.

(Source: IMF, Insider, Investopedia)

Indian Economy (Outlook of Indian economy)

India is one of the fastest growing economies of the world and is poised to continue on this path, with an aspiration to reach a size of $5 trillion by 2025 and achieve a high middle-income status by 2047 (the centenary year of Indian independence). The growth of the past two decades has also led to India making remarkable progress in reducing extreme poverty. The country is estimated to have halved the share of the population living in extreme poverty, between 2011 and 2019. Indias aspiration to achieve high income status by 2047 shall be realized through a climate-resilient growth process that delivers broad-based gains, especially to the bottom half of the population. India will need to address the gaps in economic participation, including bringing more women into the workforce.

In 2022, India emerged as one of the fastest growing economies in the world, despite significant challenges in the global environment - including renewed disruptions of supply lines following the rise in geopolitical tensions, the synchronized tightening of global monetary policies, and inflationary pressures.

In FY22/23, Indias real GDP expanded at an estimated 6.9 percent. Growth was underpinned by robust domestic demand, strong investment activity bolstered by the governments push for investment in infrastructure, and buoyant private consumption.

The Indian government is persistent in pushing innovation in the banking sector introducing digital currency (CBDC) and fostering global partnerships in the space of UPI. Indias Unified Payments Interface (UPI) has revolutionized real-time payments and strived to increase its global reach in recent years.

(Source: World Bank)

Indian Banking Industry (Outlook of Banking sector in India)

Indias banking industry is an integral part of Indias growth ecosystem. The Banking industry has contributed significantly to economic growth. Indias banking sector is today sufficiently capitalized, with one of the lowest levels of NPAs in is history. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.

The Indian banking industry has witnessed the rollout of innovative banking models like payments and small finance banks. In recent years India has also focused on increasing financial inclusion, through various schemes like the Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana and roll- out of a payments bank by the ubiquitous India Post.

Additionally, development of several major public digital infrastructure, a rise of Indian NBFCs and fintechs have significantly enhanced Indias financial inclusion and helped fuel the credit consumption in the country.

The digital payments space has seen a massive boom over the past few years, growing at a compound annual growth rate (CAGR) of 30% (Source: PwC Report on Indian Payments Handbook).

The digital payments system in India has evolved the most among 25 countries with Indias Immediate Payment Service (IMPS) being the only system at level five in the Faster Payments Innovation Index (FPII).* (Source: IBEF)

Credit and debit cards payments continue to grow within the country. The emergence of new players with a focus on digital journeys, an expanding customer base in tier 3 and 4 locations are some of the factors driving this growth. With the Government pushing for better infrastructure, acquisition of PoS devices has seen a steady rise. Similarly, deployment of QR codes has also surged and is expected to reach 170 million by the end of FY 2025-26.

(Source: PWC - The Indian payments handbook - 2021-2026)

During FY23, HDFC Ltd. and HDFC Bank received regulatory approvals for their reverse-merger, creating one of the largest financial institutions globally.

Key Measures taken by the Union Government

Union Governments emphasis on capital expenditure (Capex) has continued during the year. The Centre has also incentivised the State Governments through interest-free loans and enhanced borrowing ceilings to prioritise their spending on Capex. The Governments Capex-led growth strategy will enable India to keep the growth-interest rate differential positive, leading to a sustainable debt to GDP in the medium run. The government has adopted a multi-pronged approach to tame the increase in price levels. Timely policy intervention by the government in housing sector, coupled with low home loan interest rates has propped up demand and attracted more buyers readily in the affordable segment in FY23.

The government has incorporated the National Bank for Financing Infrastructure and Development (NaBFID), the development financial institution focused to implement its ambitious plans for the infrastructure sector. NaBFID has raised Rs. 10,000 crore via maiden issuance of bonds. The central government-backed infrastructure financier, which began operations less than a year ago, is also looking to sanction 1 lakh crore loans this fiscal to both greenfield as well as brownfield assets in the key infra space.

Key Measures taken by the RBI

The RBI initiated its monetary tightening cycle in April 2022 and has since raised the repo rate by 2.25%, leading to moderation of surplus liquidity. While Indias retail inflation rate peaked at 7.8 per cent in April 2022, the overshoot of inflation in India however has been one of the lowest in the world. The RBIs anchoring of inflationary expectations through responsive monetary policy has helped guide the trajectory of inflation in the country. Retail inflation was back within RBIs target range by November 2022. By the end of the financial year in March, 2023 the inflation reached 15 months low to 5.66%.

The Reserve Bank of India (RBI) issued its master directions on regulatory framework for microfinance on March 14, 2022, The revised regulatory framework aims to provide a level playing field to all the players involved in microfinancing activities and at the same time protect the interest of borrowers in this segment by advising on permissible levels of indebtedness of borrowers and transparency standards worth respect to pricing of financial products.

Similarly, the RBI introduced the Digital Lending Guidelines on September 02, 2022 with a focus on customer protection and transparency with respect to the growing phenomenon of lending through digital channels and applications, facilitated by smartphone usage, fast-paced internet penetration and adoption of newer technologies. The guidelines set out various compliances to be followed by banks and NBFCs while engaging with third party service providers (who may assist with customer acquisition, underwriting support, portfolio monitoring and loan recovery) and lending through digital lending applications / platforms.

Business Segments Inclusive Finance:

As per MFI industry publication - Micrometer - the microfinance industry has a total loan portfolio of Rs. 3,48,339 Cr, as of 31 March, 2023. Total number of active loans accounts were 13 Cr with 6.6 Cr unique borrowers as on 31 March 2023.

Overall status of portfolio, unique borrowers and loan accounts

	31-Mar-22				31-Mar-23
Type of entity	No. of entities	Unique Borrowers (Cr)	Active loan accounts (Cr)	Portoflio O/s ( Cr)	No. of Entities	Unique Borrowers (Cr)	Active loan accounts (Cr)	Portfolio O/s ( cr)
NBFC-MFIs	84	2.7	4.2	1,00,407	82	2.9	5.1	1,38,310
Banks	12	2.9	4.3	1,14,051	13	3.2	4.7	1,19,133
SFBs	9	1.4	1.8	48,314	9	1.6	2	57,828
NBFCs	58	0.7	0.8	19,698	69	0.9	1	29,440
Others	39	0.1	0.2	2,971	38	0.1	0.2	3,629
Total	202	5.8	11.3	2,85,441	211	6.6	13	3,48,339
DPD	202		10.1	2,61,818	211		11.4	3,18,511
0 - 179

The portfolio of NBFC-MFIs has increased by 37.7% & banks by 4.5%, SFBs portfolio by 19.7%, NBFCs portfolio has increased by 49.5% & other MFIs have increased by 22.1% on a YoY basis.

Industry Trends FY 22-23

Micro Credit loan outstanding across lenders 31 March 2023

(Source: MFIN)

During FY 22-23, MFIs disbursed 3.1 Cr loans worth Rs. 1,30,563 Cr. Compared with FY 21-22, there has been a YoY increase of 41.1% in number of loans disbursed and 59.3% in loan amount disbursed. Top 10 MFIs in terms of loan amount disbursed accounted for 76.1% of industry disbursements in FY 22-23. Based on FY 22-23 data available for 47 NBFC MFI Members, loan amount disbursed through cashless mode is 99%. Out of 49 members who reported data on cashless disbursements, 42 have achieved 100% cashless disbursements.

The portfolio quality of SFBs has improved on a YoY basis as reflected by PAR >30 of 11.7% as on 31 March 2023, in comparison to 15% as on 31 March 2022.

Housing

Indias housing demand is expected to remain robust with structural-demographic tailwinds such as a large population base, a burgeoning middle class (emerging as the largest category of consumers), a rising pace of urbanisation (expected to increase from ~34% to ~52% by FY47), increasing trend towards home ownership, improving affordability and paucity of quality dwelling units for lower-income segments.

Indias home loan (HL) market, presently at around Rs. 2,60,000 crore (constituting about 17% of the overall credit) is expected to double in the next 5 years. This growth is expected on the back of improved affordability, rising urbanisation and penetration beyond Tier-I locations.

Banks are expected to continue to dominate the prime HL segment largely on account of advantage of lower cost of funds, structural shift in sourcing models and renewed focus on retail home loans. Developer funding, which underwent a tectonic shift in 2019, is once again within the radar of the banks and HFCs/NBFCs.

Affordable Housing:

Indias urban mortgage penetration remains significantly low at around 0.14 home loans per household. While housing demand continues to remain high, affordability and pace of urbanisation remain key for translating into housing purchases.

Various regulations and costly land parcels in urban areas have pushed up the ratio of house prices to annual income, reducing affordability, especially for low-income households. Improving the functioning of the housing market and addressing affordability are key challenges.

Affordable housing refers to housing units that are affordable for those with income below the average household income. In India, affordable housing is provided for low-income people, middle income people and economically weaker sections who have considerably low levels of income (urban areas). Affordable housing is currently driving home loan growth in India. As per FSIAPL, the affordable housing finance market is expected to be at about Rs. 12,50,000 crores (around 45% of the total home loan market size).

The affordable housing segment is expected to grow at a CAGR of 12% over the next 3 years with a clear commitment of the Union The Government to achieve Housing for All through budget allocation of 48,000 crores towards PM Awas Yojana, (FSIAPL).

Commercial vehicle loans

The Commercial Vehicle (CV) industry has grown steadily after the second wave of the COVID-19 pandemic. The industry has impressively grown across OEMs and is almost back to pre-pandemic levels. The bus segment has seen an impressive revival in this period followed by the Medium & Heavy Commercial Vehicles (M&HCV), Intermediate & Light Commercial Vehicle (I&LCV) and Small Commercial Vehicle (SCV) segments. As per Society of Indian Automobile Manufacturers (SIAM), the sales of Commercial Vehicles witnessed a 34.3% growth to 9,62,468 units in FY23 as against 7,16,566 units in FY22. As per the market report by Mordor Intelligence, the CV market is projected to grow at a CAGR of 8% over the next 5 years. This growth is expected from the increased activities in roads, mining, real estate and construction sectors, as well as focus on last-mile connectivity.

The steep increase in the price of new Commercial Vehicles has created a substantial market for the Used Commercial Vehicles. The demand for used commercial vehicles in the market is continuously growing especially among the First Time Users (FTU) and retail segment of customers due to the viability of the vehicle. This segment is further expected to grow significantly, since the expected regulations in the near future would further increase the price for new Commercial Vehicles.

Banks, NBFCs, OEM NBFCs continue to be the preferred choices for Commercial Vehicle financing. The growth in the market size has created a potential business opportunity for prudent financiers.

Secured Business Loans (SBL) / Loans Against Property (LAP)

In India, the Loan Against Property (LAP) market is segmented based on property type, type of loan, interest rate, source, tenure, region and company. LAP growth between FY16 to FY19 was driven by rising penetration of formal channels and higher comfort for lenders to lend. Lending against LAP was moderated during pandemic, as property prices where stagnating along with a moderation in availability of additional collateral to offer lenders. However, post pandemic, there has been a rise in property prices, which revived the market with additional top-up loan being offered to existing borrowers, supporting their working capital borrowing needs with an expansion in economic activity. It is estimated that the Indian LAP market is about a fourth of the housing finance market in 2023 (FSIAPL).

LAP remains a key form of availing credit by micro and small enterprises, where the behaviour for large ticket lending and lower ticket lending varies drastically. Historically, lending to services and retail sectors has performed better compared to that to the manufacturing and trading segments. Also, lower ticket segments (average ticket size < Rs. 5 million) have performed better compared to those with an average ticket size of above Rs. 10 million. The pricing in this market remains quite competitive due to banks remaining active in the high-ticket segment; also, lenders face a higher risk of balance transfers, thereby impacting customer retention. As per FSIAPL, the LAP market is expected to grow at around 11% CAGR till FY26.

Overview - Suryoday Bank (Brief Overview of banks performance)

Suryoday has stayed resilient through tough times and reached several new milestones during the year, that are highlighted below:

1. The retail assets portfolio increased by almost Rs. 700 crores.

2. The overall disbursements surged by 44.1% on a year-on-year basis to Rs. 5,083 crores.

3. Our pre-approved business loan product offering - Vikas Loan -, which is a pre-approved program, had a tremendous year as the portfolio grew almost 5 times and crossed Rs. 1200 crores during the last financial year. Vikas Loan portfolio has a collection efficiency of more than >99% and Standing Instruction Clearance of more than 90% respectively.

4. This growth combined with improvement in asset quality and management of stressed asset portfolio resulted in drastic reduction in GNPA to 3.1% in FY23 compared to 11.8% in the last financial year.

5. Increased interest income, stable cost of funds and stable operating cost levels resulted in profits of Rs. 78 crores for the year.

6. Deposits grew to Rs. 5,167 crores in FY23 compared to Rs. 3,849 crores in the last financial year.

Summary of P&L

	* Figures are in Rs Crs.
Particulars	FY23	FY22	YoY
Interest Earned	1,183.7	941.8	25.7%
Interest Expended	437.1	357.4	22.3%
NET INTEREST INCOME	746.6	584.5	27.7%
Other Income	97.4#	93.6	4.1%
NET TOTAL INCOME	844.0	678.0	24.5%
Operating Expenses	506.5	413.1	22.6%
Employee Expense	242.4	228.2	6.2%
Other Expense	264.2A	184.9	42.9%
OPERATING PROFIT	337.5	264.9	27.4%
Provisions and Contingencies	236.6	392.0	-39.6%
NET Profit Before Tax	100.9	-127.1	-
Tax	23.2	-34.1	-
Profit After Tax	77.7	-93.0	-

#After netting of MTM loss (FY23 - Rs. 35.4 crores)

AIncludes impact of loss of sale on stressed loans (FY23 - Rs. 21.5 crores)

Summary of Balance Sheet

	* Figures are in Rs Crs.
Particulars	FY23	FY22	YoY
Capital and Liabilities
Shareholders Fund	1,584.8	1,505.5	5.7%
Deposits	5,166.7	3,849.8	34.2%
Borrowings	2,765.4	2,551.3	8.4%
Other Liabilities and Provisions	344.4	273.8	25.8%
Total	9,861.2	8,180.5	20.5%
Assets
Fixed Assets	164.5	115.2	42.7%
Cash and Bank	833.1	977.1	-14.7%
Investments	2,570.2	2,057.7	24.9%
Advances	6,015.1	4,750.9	26.6%
Other Assets	278.4	279.5	-0.4%
Total Assets	9,861.2	8,180.5	20.5%

Summary of Key Financial Ratios

Particulars	FY23	FY22	YoY
Yield on Gross Loan Portfolio	19.30%	18.20%	110 bps
Cost of Deposits	6.90%	7.10%	-20 bps
Cost of Funds	6.70%	7.00%	-30 bps
NIM	9.50%	8.60%	90 bps
Cost to Income	60.00%	60.90%	-90 bps
CASA Ratio	17.10%	20.20%	-310 bps
GNPA Ratio	3.10%	11.80%	-870 bps
NNPA Ratio	1.50%	5.90%	-440 bps
Provision coverage Ratio (%)	51.50%	52.60%	-110 bps

Key Highlights for FY22-23

Asset and Deposit Business:

1. The Bank acquired 3.87 lakh new customers and expanded its customer base to 23.1 lakh smiling customers.

2. Our Gross Loan Portfolio increased by 20.8% Y-o-Y to Rs. 6,114 crores (Adjusted for portfolio sold to Asset Reconstruction Company ("ARC") ARC, growth stands at 29.2%). Inclusive Finance business contributes 61% of overall Loan book.

3. The Bank disbursed Rs. 5,083 crores during FY23 (up 44% Y-o-Y).

4. Vikas Loan has witnessed robust growth in AUM as well as customer base. The Vikas Loan portfolio and customer base grew almost 5 times Year-on-Year.

5. The Bank has decided to cover its unsecured book (as of March 2023 ~69% coverage) under the CGFMU credit guarantee scheme of CGTMSE, as a protection against possible future systemic credit shocks occasioned by global events and like.

6. Retail Assets grew to Rs. 2,371 crores (41% Y-o-Y growth)

7. During FY23, the Bank sold loans Non-Performing Assets worth Rs. 492 crores to an ARC on a Security Receipts consideration basis.

8. Deposits grew ~ 34% Y-o-Y to Rs. 5,167 crores. The proportion of granular retail deposits (including CASA) having ticket size of less than Rs. 50 lakh, as on March 2023, stood at 86%.

Business Performance:

9. Net interest income increased 28% Y-o-Y for the year ended 31 March 2023 to Rs. 746.6 crore.

10. Improvement in the overall asset quality led to a substantial profitability improvement for the year. The PAT for the year stood at Rs. 77.7 Crores.

Balance Sheet:

11. The Bank has continued to maintain a healthy Capital Adequacy Ratio of 33.7% and Tier-I ratio of 30.8%.

Financial Ratios:

12. Overall yields and NIM % increased by 110bps and 90bps respectively, supported by the increase of high yield Vikas Loan increase in paying portfolio on the back of improved asset quality.

13. Cost to income for FY23 was 60.0% as compared to 60.9% in FY22.

14. Our average cost of funds reduced by 10 basis points to 6.7% for FY23 due to the reduction in deposit rates and borrowing rates Year-on-Year. The cost of deposits witnessed an upward trend from Q4 of FY23 in line with the market.

Asset Quality:

15. GNPA stood at 3.1% as at 31 March 2023 compared to GNPA of 11.8% as at 31 March 2022.

16. NNPA stood at 1.5% as at 31 March 2023 as compared to 6.0% as at 31 March 2022.

17. Provision coverage ratio as on March 2023 was at 51.5%.

18. Overall collection efficiency stands at 102% as of March 2023.

Product Portfolio:

Suryoday continues to be a Bank of Choice for the ~0.6% Indian Household, providing access to financial markets and relevant credit products. It has been the Banks constant endeavor to build a strong and lasting relationship with our customers offering them products that help them in their time of need.

The Banks product portfolio includes advances to customers in unbanked and under-banked segments as well as deposit products. The Bank launched a Womens Saving product - Blossom - in FY23 curated to cater to the needs of women.

We aspire to build and leverage our proven distribution network in offering small ticket credit and savings solutions to the unbanked/ neo-banked aspirational customer segment, supported by our significant investment in technology.

Asset Products:

The Banks asset products are categorised into (i) loans for Inclusive Finance segment comprising loans to joint liability groups (JLGs); individuals in the form of Vikas Loan (ii) commercial vehicle loans; (iii) Mortgages and Micro Mortgages; (iv) loans to financial intermediary groups (FIGs); and (vi) other loans.

Categorisation is largely determined by customer profile, type of security (as applicable) and end-use.

The table below sets forth the Banks Gross Loan Portfolio by product category:

	As of 31st March
Particulars	2022		2023
	( crore)	% of total	( crore)	% of total
Inclusive Finance (JLGs)	3,387	67%	3,743	61%
Housing Loans (Including Micro Home Loans)	456	9%	642	11%
Secured Business Loans (LAP)	236	5%	405	7%
Commercial Vehicle Loans	340	7%	391	6%
Financial Intermediary Group (FIG) Loans	380	8%	688	11%
Unsecured Business Loans and Others*	264	5%	246	4%
Gross Loan Portfolio	5,063	100%	6,114	100%

*Other includes Staff Loan, Overdraft facilities, Individual Loans, Restructuring product, WCTL and FITL, BC overdraft Note: Figures may not add up due to rounding off

Inclusive Finance

Suryoday started as an NBFC engaged in the business of offering micro finance loans to the unbanked and underbanked sections of the country in 2009. This product is the flagship product of the Bank and contributes ~60% of the overall AUM. Inclusive Finance (IF) AUM grew 10% Y-o-Y with Business back at pre-pandemic levels.

IF offers two products viz., Group Loans known as Joint Liability Group (JLG) loans and Individual Loan known as Vikas Loan (VL). IF products are offered at ticket sizes ranging between Rs. 30,000 and Rs. 1,50,000 depending on the loan cycle and product type. Loans were predominantly offered to existing and previous customers of SSFB. In case of New-To-Bank customers, the Bank has been selective and has onboarded only customers with a good credit track record. In FY23, the total disbursement was Rs. 3,504 Cr with an average yield of 26.7%.

The Bank focused on investing and building digital capabilities for the next phase of growth. The Key Initiatives undertaken by the Bank in this regard included:

Digitization of operations:

The Bank implemented Sarathi App for Vikas Loan which enabled employees as well as verified and trusted channel partners to send digitized loan applications with detailed information for risk assessment. It also enabled performance of various pre-disbursement due diligence activities and verification.

We have also introduced a new feature which helps our customers to transfer funds into their Suryoday account through UPI / other payment systems by simply transferring the funds to "<Account Number>@Suryoday". This feature helps our customers to fund their account and make loan repayments without the need to visit the branch. This feature aids our collection efforts by enabling our Inclusive Finance customers to pay their EMI through digital medium instantly.

Focus on portfolio quality and Collection Efficiency of New Book:

The Bank has reorganized its IF business with deployment of around 500 dedicated collection officers during the financial year to enhance the collection efforts in relation to its portfolio impacted during COVID.

The collection efficiency for the year, capped at 1 EMI is 97% and the overall collection efficiency is 99%. Importantly, the Bank has maintained its collection efficiency in respect of portfolio generated after June 2021 at pre-pandemic levels.

Retail Assets:

The Bank has gradually built the secured Retail Asset book, which stood at ~39% of the March 2023 loan portfolio. To ensure that a secure and profitable portfolio is built, the Bank has seperate verticals within the Retail Asset business viz. Commercial Vehicles, Mortgage, Secured Business Loan and Financial Intermediary Group.

We are focused on ensuring that we build a secure and profitable portfolio by verticalization of business segments.

Commercial Vehicles (CV)

The Bank began its Commercial Vehicle financing business in FY18. As a strategy, the Bank is primarily operates in the re-financing of used vehicles market segment, focused on small fleet owners ensuring diversification of risk in its portfolio. During the financial year, the Bank also made its foray into Two-Wheeler Loans.

As of 31 March 2023, Gross Loan Portfolio in this segment was Rs. 391 crore, representing 6.4% of our total Gross Loan Portfolio. The ticket size for CV loans is between Rs. 2 Lakh to Rs. 50 Lakh, for a tenure of 1 year to 5 years with interest rates ranging between 11% to 16%.

The Bank has shifted its CV financing strategy from financing large vehicles and large fleet owners to offering finance for refinancing used / medium vehicles of very small fleet owners.

The Bank intends to offer an end-to-end digital customer experience, targeting to onboard a potentially large base of small and retail customers consuming our easy-to- avail small ticket loan facilities. The Bank focused more on the granular deals rather than big ticket size deals to reduce the risk of large defaults. Overall, the emphasis has been on expanding geographic footprint and improving customer experience.

Mortgage

In the housing segment the Banks loan offerings are aimed at self-employed and non-professionals, desiring to either purchase apartments or self-construct their property with a focus on non-agricultural town planning approved property (NATP). These loans are primarily distributed from the banking outlets of the Bank located in urban/ semi-urban areas. Loans are provided for purchase of house, construction of house, improvement/restoration/ extension of home.

With a total disbursement of Rs. 231 crore in FY23, the Gross Loan Portfolio as at March 31, 2023 stood at Rs. 555 crore, representing 9% of our total Gross Loan Portfolio.

During the year, our focus was to steadily build the Micro Home Loan (MHL) book which has an average ticket size of Rs. 5.0 lakhs and the total disbursement during FY23 stood at Rs. 81 crore resulting in the Gross Loan Portfolio of Rs. 87 crore as at March 31, 2023. The customers in this segment are typically first-time home buyers who intend to buy / construct their own dwelling unit.

Customers targeted in this segment typically have stable cash flows and belong to the informal segment or are involved in informal trade or commercial activity where income is not completely documented and requires field-based credit assessment. This segment has been far more resilient in terms of collections in comparison with other segments. Although the impact of moratorium saw the collection efficiency in the segment dip, it has since returned to normalcy.

The GNPA as at March 31, 2023 was 1.7%. Out of GNPA customers, 76% are paying.

Outlook: Mortgages segment continues to be a key focus segment going forward. We anticipate growth in this segment from areas where we have an existing presence as well from new geographies. Our focus will be to disburse loans to self-employed and salaried individuals for non-agricultural properties and in particular in the affordable housing segment and leverage our existing Inclusive Finance distribution network and customer base to source newer home loan customers.

Secured Business Loan

The Bank commenced secured business loan product (SBL) in FY17. The target customer profile for this segment has evolved over the last few years based on our experience and understanding of various customer segments the Bank has interacted with. This was supported by strengthening our underwriting policies and undertaking improved credit analysis prior to onboarding. The Bank continues to refine the asset quality of loans advanced under this segment by monitoring compliance with end-use restrictions.

The Gross Loan Portfolio as of March 31, 2023 was at Rs. 405 crore backed by disbursement of Rs. 258 crore in FY23, representing 6.6% of our total Gross Loan Portfolio. With ticket sizes between Rs. 15 and Rs. 25 lakhs, for a tenure of 5 to 12 years, and interest rates ranging between 12.75 % and 15.8%, the SBL product continues to be the focus area of the bank.

As on March 31, 2023 the GNPA in this product segment was 1.8%, however, the post pandemic portfolio has fared well in terms of collection efficiency in comparison to other segments and has a substantially lower GNPA.

Outlook: The Bank looks at focusing on this segment especially with the post-pandemic portfolio quality being substantially better. With strong underwriting policies and analytics-based risk management is place, the asset quality of this portfolio is expected to be good. The Bank also proposes to introduce Micro LAP product to cater to the customer segment.

Financial Intermediary Group Loans (FIG loans)

The Bank provides term loans to financial intermediaries i.e. NBFCs, MFIs and HFCs that further lend to retail customers in the form of housing finance, loans against property, supply chain finance, microfinance, vehicle finance and similar sectors. These loans are typically provided to entities that are predominately rated BBB (+/-) or better by a recognised credit rating agency.

As of 31 March 2023, Gross Loan Portfolio in this segment was Rs. 688 crore, representing 11% of our total Gross Loan Portfolio.

In FY23 FIG loans were offered at an average ticket size of Rs. 30 crore, for tenor ranging between 12 to 60 months interest rate ranging between 8.5% to 14%. In FY23 disbursements under this segment were Rs. 658 crore.

As of 31 March 2023, the Bank did not record any NPA for this product segment.

Deposit Franchise

The Bank has seen remarkable growth in its deposit franchise, over the last three years. Since its inception as a Bank, the strategy has been to focus on growing retail granular deposit franchise.

The CASA ratio stood at 17.1% as of 31 March 2023 compared to 20.2% as of 31 March 2022. However, in absolute terms, the CASA increased to Rs. 884 crore as at March 31, 2023 against Rs. 724 crore as at March 31, 2022 registering a Y-o-Y growth of 22%.

The Bank has managed to increase its CASA base in a gradual but sustained manner. The Bank proposes to leverage its asset-focused branch network through which it intends to grow the deposit franchise in the coming years.

Key Highlights during the year:

• Proportion of granular retail deposits (including CASA) with ticket size < Rs. 50 lakh was 86%

• Y-o-Y increase in CASA value by ~ 22%

Geographical presence

The Bank carries out its operations through banking outlets including URCs, the BC network, PoS terminals, and various digital channels, including internet banking through our website, phone banking through our call centre, and mobile banking through the mobile application. The Bank also focuses on banking through tablets and other devices as alternative delivery channels. As of 31 March 2023, the Bank operated 577 banking outlets across 15 states and Union territories.

The map below sets out certain information on the banking outlets as of 31 March 2023:

*104 branches in Tamil Nadu includes 2 branches in Puducherry Map not to scale. For illustrative purposes only.

Corporate Governance

The Board of the Bank is committed to maintaining the highest standards of corporate governance. In addition to having a continuous focus on corporate governance, the Board and the Bank management carries out, a comprehensive review and evaluation of its principles for corporate governance and its implementation.

Further, the Corporate Governance Policy of the Bank outlines the broad framework of governance through the Board of Directors and the various Board Committees. The committees deal with specific matters and the terms of reference of each Committee is defined.

As at 31 March,2023, there were nine (9) Committees of the Board as enlisted below:

Sr. No.	Name of the Committee
1	Audit Committee of Board
2	Risk Management Committee of Board
3	Nomination and Remuneration Committee
4	Stakeholders Relationship Committee
5	Corporate Social Responsibility Committee
6	IT Strategy Committee
7	Customer Service Committee
8	Credit Committee of Board
9	Special Committee of Board for Monitoring & Follow-up of cases of Frauds and Review of Wilful Defaulters (SCBF & RWD)*

• In the Board meeting held on March 24,2023, the name of Committee for Review of Wilful Defaults and High Value Frauds was changed to Special Committee of Board for Monitoring & Follow-up of cases of Frauds and Review of Wilful Defaulters (SCBF & RWD)

Human Resources

We have always endeavoured to create a culture based on inclusivity and respect. Our employees have been our ambassadors. During the year, we:

• Product, Process, Skill Development and New Hire Training programmes implemented across the organization through both virtual/online and classroom/offline modes.

• Training content prepared and delivered for Products, Soft Skills, Systems/Applications and Processes.

- Training content prepared and delivered for Products, Soft Skills, Systems/Applications and Processes.

- Cyber security Training being implemented a cross the organisation, and senior management and directors nominated for certification in Cybersecurity.

- Nomination of employees to various External Training Programmes for functional expertise.

- 76 employees from Risk, Credit, Audit and Finance departments enrolled for Capacity Building Certification programmes.

We also have different programs for employee engagement, including session with industry experts, healthcare experts etc. Over the year, the Banks attrition rate has been gradually moderating, displaying a sign of adequate motivating factors being provided to the employees and loyalty from the employees perspective. At the end of March 2023, the Bank had a total of 6,025 employees on its payroll. The employees are provided with maternity/paternity benefits and are covered under Health Insurance, Accident Insurance, Provident Fund, Gratuity Scheme, Etc.

Information Technology

Over the years, use of technology has enabled us to scale up our operations in an efficient manner. We have been digitizing our processes and automating our backend operations.

The Banks major functions, including customer experience, digital transaction processing, enterprise accounting, expense management, human resources management, process management, risk management, and governance are also supported by various technology platforms. With the use of technology, the Bank has created a paperless onboarding process for originating microfinance loans and opening bank accounts. The Bank has also enabled carrying out of customer onboarding and various transactions on handheld devices.

The Bank has also initiated engagements with certain fintech partners to leverage its digital platforms and reaching a wider network for both deposit and loan products. The Bank is investing in advanced analytics for use in identifying markets for geographical expansion, cross-sell/up-sell, pre-approved loans, credit risk analysis, delinquency prediction and early warning systems In FY 23 the bank has successfully migrated its Core Banking Solution from FIS Profile to Finacle.

Project PRAGYAN

The Bank implemented Finacle Core Banking Solution (CBS) during the year. The migration was achieved in a seamless eight-month implementation period. Finacle powers the Banks retail, corporate and payment engines in an on-premise model, supported by IBMs infrastructure stack. The migration was necessary since the legacy system was not capable of handling multiple products and high volume. The migration has also helped the Bank in reducing dependency on external vendors.

Corporate Social Responsibility

The Bank has adopted a Board approved Corporate Social Responsibility (CSR) policy that is focused on our core objective of financial inclusion for the unbanked and under-banked income groups. The endeavour is to serve the low-income households with focus on women and adolescent children. The CSR Committee identifies and recommends specific areas to focus on and periodically reviews the progress of the activities undertaken. The recent initiatives have been focused on financial literacy, preventive health and supplementary livelihoods.

Credit Rating

The Bank has a long-term rating of A (Stable) from ICRA for its Subordinated Debt (March 2023) and a short term rating of A1+ (A One Plus) for its CD issuance program from ICRA (March 2023) and CRISIL (Nov 2022).

Internal Controls

The Bank has in place three lines of defence for ensuring adherence to Internal Controls:

1) Business - functions on the laid down Policies and Processes approved at the appropriate level of authority.

2) Risk and Compliance - Monitors compliance with the laid down policies and processes as per the regulatory framework and the Banks risk appetite.

3) Internal Audit - Overviews quality and effectiveness of the internal controls and their adherence by the first line of defence, their monitoring by the second line of defence. The internal audit process is based on the Risk based Audit approach prescribed by the regulator and duly approved by the Audit Committee of the Board.

All the internal control functions work independently as per regulatory guidelines and report to the Audit Committee of the Board or the Risk Management Committee of the Board as applicable.

Cautionary Statement

This report and other statements - written and oral - that the Bank periodically makes contain forward-looking statements that set out anticipated results based on the managements plans and assumptions. The Bank has tried, wherever possible, to identify such statements by using words such as anticipate, estimate, expects, will, projects, intends, plans, believes, and words of similar substance in connection with any discussion of future performance. The Bank cannot guarantee that these forward-looking statements will be realised, although we have attempted to be prudent in our assumptions. The achievements of results are subject to risks, uncertainties, and even inaccurate assumptions. Readers should keep this in mind that in the event known or unknown risks or uncertainties materialise, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. The Bank undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

Financial Review

Income

Net Total income increased by 24.5% Y-o-Y from Rs. 678.0 crore in FY22 to Rs. 844.0 crore in FY23 primarily due to asset growth, realised yield improvement coupled with reduced cost of funds. There was also an increase in PSLC fee income and processing fees driven by increased disbursement. Broad reasons are discussed below.

Interest Earned

Interest earned increased by 25.7% from Rs. 941.8 crore in FY22 to Rs. 1,183.7 crore in FY23. Gross Loan Portfolio increased by 20.8% from Rs. 5,063 crore in FY 2022 to Rs. 6,114 (Adjusted for ARC is Rs. 6,541 crores with growth of 29.2%) crore in FY 2023 predominantly on the back of higher disbursements.

Other Income

Other income increased by 4.1% from Rs. 93.6 Cr in FY22 to Rs. 97.4 Cr in FY23. Despite substantial increase in processing fees and miscellaneous income, the growth was moderated due to one time recognition of MTM loss on investment book of 36.2 Crs.

Interest Expended

Interest expended increased by 22.3% from Rs. 357.4 crore in FY22 to Rs. 437.1 crore in FY23 due to hike in deposit rates.

Operating Expenses

Operating expenses increased by 22.6% from Rs. 413.1 crore in FY22 to Rs. 506.5 crore in FY23 primarily due to salary cost & depreciation increase.

Provisions and Contingencies

Provisions and contingencies decreased by 39.6% from Rs. 392 crores in FY22 to Rs. 236.6 crore in FY23. In FY23 primarily due to higher collections leading to lower provisions.

ARC Transaction

The Board at its meeting held on December 23, 2023, had approved the transfer of stressed loan portfolio (Financial Assets), including technically written-off loans to Asset Reconstruction Company ("ARC"). Accordingly, the Bank had conducted the bidding process in accordance with Swiss Challenge Method ("SCM") prescribed under RBI Master Direction dated September 24, 2021. The bidding process in accordance with SCM was concluded on December 28, 2022 and the Bank did not receive any counter Bid to the Base Binding Bid of Rs. 135.1 Crores from Edelweiss Asset Reconstruction Company Limited ("Edelweiss ARC") with respect to an identified pool of Financial Assets amounting to Rs. 492.05 Crores comprising of NPA and technically written-off accounts ("Stressed Portfolio"). Accordingly, the Board at its meeting held on December 28, 2022, approved Edelweiss ARC as the winner of Bid under SCM and pursuant to the Binding Bid received by the Bank from Edelweiss ARC in relation to sale of the identified pool of Stressed Portfolio, the Bank had completed the transaction.

Net profit

For the reasons discussed above, Net Profit for the year was Rs. 77.7 Crore compared to Net Loss of Rs. 93 crore in FY22.

Balance Sheet

Assets

The table below sets out the principal components of our assets as of the dates indicated:

	* Figures are in Rs Crs.
Particulars	FY23	FY22	YoY
Assets
Fixed Assets	164.5	115.2	42.7%
Cash and Bank	833.1	977.1	-14.7%
Investments	2,570.2	2,057.7	24.9%
Advances	6,015.1	4,750.9	26.6%
Other Assets	278.4	279.5	-0.4%
Total Assets	9,861.2	8,180.5	20.5%

Total assets increased by 20.5% from Rs. 8,180.5 crore as of 31 March 2022 to Rs. 9,861.2 crore as of 31 March 2023.

Advances

The following table sets forth a breakdown of total advances as of the dates indicated:

As of March 31 (Rupees in Crore)	Fiscal
	2022	2023
Cash credit, overdraft & loan repayable on demand	127	182
Term Loan	4,624	5,833
Total	4,751	6,015

Advances comprise micro banking (JLG) loans, home loans, commercial vehicle loans, secured and unsecured business loans and financial intermediary group loans.

Total advances increased by 20.7% from Rs. 5,063 crore as of 31 March 2022 to Rs. 6,114* crore as of 31 March 2023, primarily due to increase in disbursement and interest capitalization post moratorium.

Adjusted for ARC is Rs. 6,541 crores with growth of 29.2%

Fixed Assets

During FY23, the Bank had invested in Core Banking Solution which would cater to the Banks digital needs over the next few years. The Bank also made nominal investments in network expansion in FY23, since the focus was to improve asset quality and increase profitability. The Bank follows an asset-light model for its branches with IT equipments being obtained under operating lease from financing institutions.

Capital and Liabilities

The table below sets out the principal components of our shareholders funds and liabilities as of the dates indicated:

Particulars	FY23	FY22	YoY
Capital and Liabilities
Shareholders Fund	1,584.8	1,505.5	5.7%
Deposits	5,166.7	3,849.8	34.2%
Borrowings	2,765.4	2,551.3	8.4%
Other Liabilities and Provisions	344.4	273.8	25.8%
Total	9,861.2	8,180.5	20.5%

Total capital and liabilities increased by 20.5% from Rs. 8,180.5 crore as of 31 March 2022 to Rs. 9,861.2 crore as of 31 March 2023 primarily due to increase in borrowings and deposits.