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ECONOMIC OVERVIEW:

Global Economy:

Titled A Rocky Recovery, the IMFs World Economic Outlook - April 2023 reported that on the surface, the global economy appears poised for a gradual recovery from the devastation caused by the pandemic and, later, the conflict between Russia and Ukraine. The reopening of the Chinese economy has also contributed to the rebound and supply-chain disruptions have been unwinding, while the dislocations to energy and food markets caused by the war are receding. However, it also observed that below the surface turbulence is building, and the situation is quite fragile, as evidenced by the recent bout of banking instability.

The IMF forecast that global growth will bottom out at 2.8% in 2023 before rising modestly to 3.0% in 2024. It also expects global inflation to decrease, although more slowly than initially anticipated, from 8.7% in 2022 to 7.0% in 2023 and 4.9% in 2024.

Indian Economy:

Despite the distressed global economic landscape, the Indian economy is expected to grow at a robust 7% (in real terms) during the year ending March 2023, after posting a growth of 8.7% in FY 2021-22 according to the Economic Survey - 2023.

Some of the growth drivers were the credit growth to the MSME sector, which was remarkably high, at over 30.5% on average, during Jan-Nov 2022. The capex of the central government, which increased by 63.4% in the first eight months of FY 2022-23, was another growth driver of the Indian economy. The optimistic growth forecasts also stem from a number of positives like the rebound of private consumption, which led to a boost in production activity.

Outlook:

The Indian economy is expected to witness GDP growth of 6.0% to 6.8% in FY 2023-24, depending on the trajectory of economic and political developments globally, according to the Economic Survey 2023. The survey also projects a baseline GDP growth of 6.5% in real terms in FY 2023-24. The RBI projects headline inflation at 6.8% in FY 2022-23, which is outside its target range. A surge in the growth of exports in FY 2021-22 and the first half of FY 2022-23 resulted in acceleration in production.

INDUSTRY OVERVIEW:

Financial Services Industry:

The Indian financial services industry is a dynamic and evolving sector, poised for further growth and innovation. It is a vital component of the countrys economy, providing a range of financial products and services to individuals and businesses alike. The sector has seen significant growth in recent years, expanding into segments that were previously underserved or overlooked in a bid to promote financial inclusion. The industry is diverse, with a mix of traditional players such as commercial banks, insurance companies, and NBFCs, along with newer entities such as payment banks and small finance banks. The sector is well-regulated by the RBI, which has also allowed fintech companies to enter the fray, bringing innovation and efficiency to the industry. The adoption of digital technology has been a game-changer, enabling organisations to enhance customer engagement and deliver services with speed and transparency.

According to IBEF, rising incomes in India are driving the demand for financial services across income brackets. Further, there are over 2,100 fintechs operating currently, positioning India to become one of the largest digital markets, aided by the rapid expansion of mobile and internet.

NBFCs in India:

The Non-Banking Financial Companies (NBFCs) sector plays a significant role in the Indian economy, providing credit to individuals, small and medium-sized enterprises, and rural areas, among others. NBFCs have emerged as a key segment in the financial sector, bridging the gap between banks and borrowers who are underserved or excluded from traditional banking services. In recent years, the sector has witnessed significant growth, fuelled by a rise in demand for credit and the emergence of new players. The sectors resilience and ability to innovate have been tested during times of economic turmoil, such as the COVID-19 pandemic.

As the economy has moved past the impact of the pandemic, the NBFCs sector is anticipated to experience a substantial growth in both FY2023 and FY2024, following the rebound of the economy. ICRA Ratings predicts that during these fiscal years, the sector will witness a loan growth of 10-12% and a rise in profitability by 50 basis points. The PCA framework implemented by RBI has created a level playing field for NBFCs with banks, thus enhancing corporate governance and leading to sustainable growth in the sector.

Retail-focussed NBFCs are expected to grow by 12-14%, whereas housing finance companies are expected to grow at 10-12%, primarily due to an improvement in asset quality and an increase in overall credit demand. Microfinance and personal loans are likely to continue growing at a high pace and lead the growth chart.

The report reveals that the NBFC sector has witnessed an improvement in asset quality, with higher collections and a lower-than-anticipated share of restructured portfolio. ICRA envisages that the majority of stress from the restructured book is likely to be absorbed in FY 2022-23 and slippages are expected to remain range-bound.

The rising interest rates may put some pressure on net interest margins, but this impact has been offset by the limited rate hikes passed on to borrowers. With stable margins and moderation in credit cost, NBFCs are expected to report a return of 2.6-2.9% on managed assets in FY2023.

MSME Sector:

Micro, Small and Medium Enterprises (MSMEs) are a crucial contributor to the Indian economy, accounting for around 30% of the countrys GDP, 48% of its exports, 95% of industrial units, and 40% of employment in India. There are approximately 633.9 lakh MSME units in the country. Despite facing unprecedented challenges due to the pandemic, the MSMEs in India have evolved, grown, and emerged stronger. Forward-looking businesses in the segment have adopted new technologies, digitisation, and branding via online channels, breaking out of traditional ways of doing business.

A recent survey titled MSME Digital Readiness Survey 2022 by PayPal revealed that 52% of small businesses saw a favourable influence of digitalisation on their business once economies reopened after two years of the pandemic. To enable smaller companies to raise capital through the stock markets, both the BSE and the NSE have established separate trading platforms called SME exchanges. The founder of MSME, a micro-advisory platform, expects over 10,000 companies to list on the SME Exchange in the next five to ten years. Moreover, the Union Budget 2023 has announced several proposals to promote inclusive development and faster growth in the entrepreneurship ecosystem of the nation.

Key proposals for the MSME sector include budget allocation of around Rs.22,140 crore, tax incentives, subsidies, Rs.10,000 crore fund for technology and infrastructure development, a national-level mentorship programme, easier access to credit, and reforms to reduce the credit cost. Furthermore, the budget has established funds for promoting entrepreneurship and enterprise development in traditional sectors like agriculture and handicrafts along with skill building, creating a more enabling environment for MSMEs.

COMPANY OVERVIEW:

Frontier Capital Limited was founded in 1984 and is a registered Non-Banking Finance Company (NBFC) regulated by the Reserve Bank of India (RBI). The Company operates out of Mumbai and specialises in providing retail financing services to the lower and middle-income groups of society. Over the past two and a half decades, Frontier Capital Ltd has been dedicated to serving the financially underserved masses across urban, semi-urban, and rural areas, both in the formal and informal sectors of the economy.

The Companys revenue from operations for the financial year was Rs.31.23/- Lakhs and the previous years revenue from operations of Rs.111.11 Lakhs. Net Profit (PAT) is Rs.28.41 Lakhs.

Details of significant changes in Key Financial Ratios:

Ratio Numerator Denominator Current Period Previous Period % Change Reason
Capital to Risk- Weighted Assets Ratio Tier 1 Capital + Tier 2 Capital Risk-weighted Assets 91% 63% 44% Increase in NOF and decrease in loans
Tier I CRAR Tier 1 Capital Risk-weighted Assets 91% 63% 44% Increase in NOF and decrease in loans
Tier II CRAR Tier 2 Capital Risk-weighted Assets 0% 0% The Company does not have any Tier II Capital.
Liquidity Coverage Ratio Stock of High Quality Liquid Assets Total Net Cash Outflows over the next 30 calendar days 2452% 55% 4339% Increase in bank balance due to refund of loans

OPPORTUNITIES & THREATS:

The Company constantly monitors the external environments and internal situation so that it is aware of the opportunities and threats that emerge. This enables the Company to tap into the positive prospects that come its way while overcoming or bypassing the challenge of threats.

Opportunities:

• Diverse loan book and pan-India presence to accelerate growth

• Unique Business Model helps to minimise risk and operating cost

• Adequate capitalisation to support medium-term growth plans

• Brand recognition among lower income and middle income groups of the society spread across urban, semi urban and rural areas.

• Operates in underpenetrated business segment with huge growth potential

• Successful track record of catering to the MSME sector

• Initiatives by the Government to further boost MSME sector

Threats:

• Unpredictable policy changes by the Government

• Increasing competition from local and global players

• Higher exposure to semi-formal and informal sector customers

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has adequate internal controls and standardised operating processes that are envisaged to protect assets and business efficiency. The Company has established strong and well-entrenched internal control procedures commensurate with its size and operations and relevant to its broad domain of the lending business.

HUMAN RESOURCES:

The Company recognises the crucial role played by its employees in driving its growth and success. To this end, the Company prioritises providing a supportive work environment that fosters employee satisfaction and motivation to achieve both personal and professional goals. The Company has cultivated an inclusive work culture that values responsibility and instils a sense of pride in its employees, resulting in a high retention rate.

OUTLOOK:

NBFCs are becoming increasingly important players in the financial sector, as they cater to the needs of previously overlooked or underserved segments of the population. Their market share and product range are expected to expand as they target this vast and growing segment. Digital tools and technology are already being used by NBFCs to enhance their efficiency and customer outreach, and their clients will continue to use their services as they rise in economic status, provided they have positive experiences and are offered suitable products.

DISCLOSURE OF ACCOUNTING TREATMENT:

Till the quarter ended 31st December, 2022, the Company opted a prudent practice of amortising the income over the tenure of loans assigned instead of booking it upfront. This practice in managements view ensures true and fair financial position of the Company. The same is a deviation from the Ind AS 109 Financial Instruments. However, during the quarter ended March 31, 2023, the Company has received a directive from the Reserve Bank of India to book such gain upfront in the statement of profit and loss in accordance with Ind AS 109 instead of amortising it over the period of the underlying residual tenure of the assigned loan portfolio.

CAUTIONARY STATEMENT:

This document contains statements about expected future events, financial and operating results of Frontier Capital Ltd, which are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the assumptions, predictions, and other forward looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause assumptions, actual future results and events to differ materially from those expressed in the forward-looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications and risk factors referred to in the managements discussion and analysis of the Companys Annual Report FY 2022-23.