Capital India Finance Ltd Management Discussions

Capital India Finance Limited ("Company") is a systemically important non-deposit taking non-banking financial company, duly registered with the Reserve Bank of India ("RBI") under Section 45 IA of the Reserve Bank of India Act, 1934. The Company has been in existence for more than two decades and is focused on providing the various financing solutions to its customers . The Company has diversified lending portfolio across retail, Small and Medium Enterprises (SMEs) and commercial customers with significant presence in urban and rural India.

1. Industry Structure and Developments:

Non-Banking Financial Companies ("NBFCs") are one of the most critical pillars for financial services in India. NBFCs play an important role in reaching out to a hitherto unserved / underserved segment of the economy and thereby, broad basing the formal lending ecosystem such as Micro, Small and Medium Enterprises (MSMEs), microfinance and other retail segments. NBFCs cater to the needs of both retail as well as commercial sectors and, at the same time, develop strong niches with their specialized credit delivery models where banks have found difficult to match the requirements of those segments and having larger players in India. NBFCs play a critical role in supporting economic growth across income levels, sectors as well as geographies, and in doing so, lead to more employment generation and greater wealth creation. NBFCs are harnessing technology to reinvent traditional business models and offer credit facilities in a faster, customised and more convenient way to the underbanked population of India. With the introduction of digital Know Your Customer (KYC) process, Video based Customer Identification Process (V-CIP) and digital loan agreements that make the borrowing an instant and hassle-free experience, NBFCs have started offering the right financial products to the consumers and the small businesses in a customised manner. The use of technology to optimise business processes also keeps cost overheads to the minimum, enabling credit to be availed at highly competitive interest rates.

In past few years, NBFCs have steadily gained prominence and visibility with NBFCs credit as proportion of scheduled commercial banks non-food credit rising sharply during 2014 to 2019. However, the challenging macroeconomic environment, weaker than expected demand, liquidity concerns, and lower investor confidence in the sector, led to a significant moderation in the financial performance FY 2019-20. While there were green shoots of recovery in the second half of the year. The spread of COVID-19 at the beginning of FY 2020-21, significantly altered the growth outlook. The whole country witnessed a partial restriction and lock down in the first quarter of financial year 2021-22 due to second wave of COVID - 19 which curtailed the hope for economic recovery. However, with the second wave hitting the country and the consistent rise in the number of new infections, there may again be significant disruption in the business operations affecting all segments retail as well as commercial. The financial services were severely hit during this time, as on one hand, the demand for credit plunged, and on the other hand, the quality of the book worsened. The government and regulators assess and address the economic downslide with various fiscal and monetary policy measures. With the focus on both protecting lives as well as livelihoods through mass vaccinations as well as micro-containment strategy, a faster economic recovery in the second wave is anticipated. Furthermore, the concerted efforts of the government along with the strong participation from private sector should go a long way in effectively handling the pandemic and its after-affects The government and regulators rolled out multiple measures to support the sector, however, most of the NBFCs turned conservative and limiting the growth and focused solely on collections and recovery. The impact on the vulnerable segments was disproportionately more, affecting their ability to generate cash flows and service their loans. The forex industry is in the evolution stage. RBI has come out with various sandboxes facility to test the outward remittance environment and to give the end users experience a pleasant one.

2. Opportunities and Threats: Opportunities:

NBFCs have played an important role by providing funding to the unbanked sector by catering to the diverse financial needs of the customers. Further, such companies play a critical role in participating in the development of an economy by providing a fillip to transportation, employment generation, wealth creation, bank credit in rural segments and to support financially weaker sections of the society. Emergency services like financial assistance and advisory services are also provided to the customers in the matters pertaining to insurance. Some major opportunities with regards to NBFCs are as under.

a) Co-Lending: - One of the key obstacles currently India faces is how to covert liquidity from risk-averse Public Sector Banks into credit to fund the consumption growth. One of the most prominent ways is to lend to NBFCs via co-lending. Co-lending is a very encouraging way of sharing risk, wherein the underlying loan remains in the books of both the Lenders in proportion to their respective share, and the banks also do not lend to the NBFC but to the borrowers directly. The government had ushered a slew of schemes such as co lending, partial guarantee, and onward lending last to last year. The main advantage to NBFCs is getting access to a new set of customers and cheaper funding sources. Co-lending is expected to create considerable amount of synergy for the sector. According to experts, as the economy recovers coupled with pent-up demand, these kinds of models will evolve and grow to fulfil the credit requirements of the priority sector segments. The Company has also entered in co-lending relationships with regional players, which not only spreads out the geographical risk but also provide leverage on the opportunity to enter newer markets and granular customer segment.

b) Collaboration with FinTechs: - NBFCs have better access to credit market due to its existing huge customer base. NBFCs also have own credit underwriting, risk management and collection process in place. FinTechs on the other hand with the use of their new-age technologies and digital tools such as AI, machine learning, and data analytics extend customised working capital solutions to the retail segment in India. FinTechs offer superior customer experience through new-age underwriting models, seamless partner integration and real-time loan decisions. This will lead to increased synergies between NBFCs and Fintechs. The Company utilizes Omni Fin for single platform operation support such as risk management, documentation, customer services etc. Perfios / Novel software as a part of AI for analysis of customer banking behaviour. Further, the Company has done collaboration with different FinTech companies for onward lending of unsecured loans to the salaried and self-employed segment and also for offering education loans.

c) Underserved / Unserved MSME segment: - MSME contribute significantly to Indias Gross Domestic Product, and this is a sector where there is huge potential for growth but limited access to funds from traditional banks and Financial Institutions. There is still a large unbanked population in India who doesnt have access to formal banking channels. NBFCs with wide coverage and deep penetration in rural India can play a pivotal role in serving these areas by partnering with various players. From the total number of MSMEs 80% of these companies are under-financed or financed through informal sources. Informal credit ends up being much more expensive than formal debt making it difficult for MSMEs to address accumulated debt burden. The Company offers a Loan Against Property (LAP), Equipment Finance and Vendor Finance to MSMEs to cater their business needs. Currently, the Company has presence in 9 locations which include 7 capital cities of states. Further, the Company, with a vision to cater to semi urban and rural area as well, had started with micro-LAP products in these markets through additional 21 branches across India to support MSME Segment.

Threats:

a. NBFCs are now regulated almost in line with the banks. RBI has, time and again, brought in stricter regulatory changes, which may affect the flexibility enjoyed by the NBFCs in terms of the business. The constant and stricter regulatory changes may cause the NBFCs to revise their business models to the considerable extent.

b. NBFCs are facing stiff competition from the new-age FinTechs which have been rapidly capturing a market share with their technology-heavy low-cost operating models and by setting new standards for customer experience. Such endeavour by the FinTechs may result in changing the customer behaviour and the expectations towards the traditional NBFCs.

c. Lock down restrictions on account of COVID 19, can result in a deeper economic slowdowns in near future posing threats for our lending institution and may impact disbursals and consequent growth in the portfolio. The economist fraternity have expected a sharp V-shaped recovery in the economy and have projected Indias GDP to grow in double digits which will result in increase in credit off take and consumer spending. With liquidity and strong distribution network, the Company is poised to capitalize on this opportunity and foresee an increase in market share across all segments by introducing new product (Emerging Market Micro LAP) and tapping deeper markets. Further, the Company has a robust risk management framework with a deep understanding of underwriting and credit controls which will help the Company to mitigate the risk of customer behaviour deterioration in asset quality.

Opportunities and Threats for Forex Business vertical of the Company:

Post Covid the market has opened as corporate houses and Individual travels are at Peak which is a huge opportunity. There are several Fintech companies in market i.e., online aggregators getting into market of large overseas remittance to get a share of the growing cross border remittance business out of India. Further, due to regulatory guidelines on reduction of Wholesale Business may have an impact on the wholesale to retail ratio.

3. Segment–wise or product-wise performance:

The Company is an India-focused, technology enabled SME finance platform. The Company caters small and medium businesses with customized finance solutions. The Company believes in the Indian growth story and that Indias growing economy requires tailormade financing opportunities to millions of small businesses, traders and self-employed, who may not have ready access to traditional financial channels. The financing that serves the latent yet burgeoning demand which is not met by the conventional lenders. The Company intend to be a partner credit institution that seek to provide bespoke financial solutions to Small and Medium Enterprises (SMEs) for their growth and working capital requirements.

The Company primarily focuses on Small and Medium Enterprises (SMEs) for its financing activities. The product portfolio of the Company primarily consists of SME Secured Loans, Equipment Finance and Supply Chain Finance.

The Companys product suite is as follows.

SME Secured Loans

The Company provides financial solutions to develop and grow businesses sustainably. The Company understands the credit needs, market dynamics, growth opportunities and business strategy of the customers and tailor its financing solutions to meet their objectives. Through the broad range of SME finance offerings, the Company provides the optimum financing solution for every commercial need. As facilitators of credit, the Company works with organizations to provide finance so that the finest businesses have an opportunity to prosper.

Equipment Finance

The Company provides an access to funds for purchase or/and upgrade of machinery and equipment for SMEs. These loans can be availed for purchase of new or refurbished machinery/equipment at competitive interest rates with fast turnaround time.

Loan Against Property

The Company provides an easy loan against property collateral for various corporate requirements, ranging from debt consolidation to take over of existing facilities. The LAP is a go to product for SMEs for meeting their business needs, which provide for an enhanced focus on collateral valuation and loan serviceability.

Supply Chain Finance / Vendor Finance

Supply Chain Finance product provides a capital to support the credit cycle of the entire value chain at favourable interest rates. These collateral-free loans ensure that the business growth objectives remain unhindered. Vendor Finance is a form of post-sale funding designed to finance genuine trade book debts for sale of goods / services with the comfort that the payment for the receivables financed will be received from the buyer of such goods / services at the end of the credit period. Vendor Financing involves provision of credit to a supplier of a large corporate / Original Equipment Manufacturer (Anchor) against an accepted bill / invoice. Under this arrangement, the Company finances the existing receivable of a supplier for supplies already made to a large corporate.

Education Loan

The Company provides for an easy and quick access to the loans to the students for pursuing domestic and international courses. This product features the quick sanctioning process, the flexible repayment terms and covers the entire cost for international courses.

Wholesale bank notes

Wholesale bank notes business is the largest Topline contributor to the overall turnover of the company, with student and travel remittances following up closely.

4. Outlook:

Experienced, highly motivated, and dedicated management team

The Company has an experienced, highly motivated and dedicated senior management team, with significant experience in the banking, financial services, consultancy, and infrastructure sectors.

Dr. Harsh Kumar Bhanwala, an Executive Chairman of the Company is Ex-Chairman NABARD and postgraduate in the management from IIM Ahmedabad and has immense experience of financial services sector.

Mr. Keshav Porwal, Managing Director of the Company, has more than two decades of experience in the financial services and real estate industry. He has worked across all aspects of real estate financing ranging from risk management to new product launches. Keshav has also been involved in the restructuring and re-engineering of medium-sized enterprises in the auto and hospitality sectors

Mr. Vineet Kumar Saxena, Chief Executive Officer of the Company, is a banking and financial services industry veteran and was previously associated with Barclays Bank PLC, ICICI Personal Financial Services Limited and ICICI Bank Limited, among others. Our new and dynamic senior management team has already implemented several changes in the Company for steady growth of the business. One of the changes was to diversify our lending focus to become SME focused lending institution.

Institutional philosophy of prudent risk management controls through streamlined procedures

The Company maintains a healthy and high-quality loan asset portfolio in synchronization with the institutional philosophy of lending against security and cash flows. The Company has instituted a prudent and comprehensive risk management controls, policies, and procedures that are critical for the long-term sustainable development of the Company. The risk management committee of the Company oversees and monitors the overall credit risk management framework. The credit risk governance framework of the Company comprises of primarily three-units, (i) the business teams, that generates lead; (ii) the credit risk unit, that independently manages the risk, provides the policy guidance, and performs credit analysis, risk reporting and credit monitoring. The credit risk unit of the Company comprises of various sub-units, such as credit underwriting, policy unit and portfolio monitoring unit, which are responsible for management of credit risks; and (iii) the internal audit unit, which independently assesses the design and operational effectiveness of the entire credit risk management framework. The credit risk governance framework of the Company incorporates the requirement of senior management and credit committee approval, with built-in escalation matrices at pre-defined credit thresholds, which enables the Company to ensure that the high-ticket advances are scrutinised and sanctioned by the senior management.

Our Strategies

Focus on SME segment: SMEs substantially contribute to the growth story of India. As part of portfolio diversification strategy, the Company intends to lend to this fast-growing segment which shall provide for a healthy and diversified portfolio in the books of the Company. The management of the Company has a decade long experience in financial services and understands this segment to lend judiciously.

Leverage on the relationship and experience of our senior management for business growth: As a part of the Companys strategy to keep the growth at steady pace, In the next financial year, the company will enhance its business by establishing more branches and stating the business of Micro LAP which will also cover the semi urban areas of India. The senior management of the Company has a diversified track record that can help the Company in sourcing and identification of suitable customers across industries. The Company believe that the senior managements acumen of the market trends, credit demands and industry developments, would enable the Company to quickly adapt and take advantage of market opportunities.

Outlook for Forex business:

With the markets opening, we see huge opportunity in terms of travel and student remittance businesses. With the revamp of our B2C platform we also want to promote our products online.

5. Risks and Concerns: Risk Management

Risk Management is an integral part of the Companys business strategy with focus on building risk management culture across the organisation. As an NBFC, the Company is exposed to various risks related to its lending business and operating environment. The objective is to evaluate and monitor various risks that may be faced by the Company, and to follow by stringent policies and procedures to address these risks. An effective risk management forms the core of the business objectives of the Company. The credit risk management process encompasses astute underwriting, structuring & regulatory checks, coupled with appropriate credit and approval delegation, and monitoring of the portfolio at regular interval. Risk team which consists of seasoned professionals continuously monitor risk and suggest early measures to control risk at minimum level. The Company has also established effective risk management systems, policies, and internal controls to address various risks viz, operational risk, liquidity risk, market risk, compliance risk and regulatory risk. The focus on developing sector expertise across the products segments helps the Company to constantly monitor the event risks. The Risk Management Committee of the Company assists the Board of Directors in addressing various risks, and also discharges duties relating to corporate accountability. The Risk Management Committee reviews the implementation and effectiveness of risk management systems in the Company. It provides for an independent and objective oversight on corporate accountability and risks, and also considers reports of the Audit Committee on all categories of identified risks.

Risks and Risk Response Strategy at Capital India:

Risks	Risk Response Strategy
Risks associated with frauds	Risks associated with frauds are mitigated through a Fraud Risk Management framework. A Fraud Risk Management Committee comprising representatives of the Senior Management, reviews matter relating to fraud risk, including corrective and remedial actions as regards people and processes.
Credit, Liquidity	The Company has Credit Committee inter alia consisting of Independent Director, MD and Chief Credit Officer
and Finance Risk	to consider medium and large credit proposals. Smaller proposals are decided at appropriate level as per the approval matrix approved by board.
	Also in place are product specific lending policies, credit approval committees and regular monitoring of exposures.
Technology Risk	Company has implemented tools for mitigating various security risks - restriction of tool access and secured internet access.
	Management periodically reviews various technology risks such as protecting sensitive customer data, identity theft, cybercrimes, data leakage, business continuity, access controls, etc.
Compliance Risk	The Company has implemented business-specific Compliance Manuals, limit monitoring systems and AML/ KYC policies.
	To ensure complete involvement in the compliance process, reporting processes have been instituted by heads of all businesses/ zones/area offices and departments, through submission of quarterly compliance reports.

6. Internal Control System and their adequacy:

The Companys internal control system is designed to ensure operational efficiency, protection and conservation of resources, and promptness in financial reporting and compliance with laws and regulations. The internal control system is supported by an internal audit process for reviewing the parameters, adequacy, and efficacy of the Companys internal controls, including its systems, front-end and back-end operations, and compliance with regulations and procedures. It lays emphasis to check on the process, the controls and the measures undertaken by the Company to monitor the risks and to check on leakages or frauds.

7. Financial Performance with respect to operational performance: a. During the year under review, the Company earned a Profit Before Tax (PBT) of INR 1,993.36 Lakhs in Financial Year 2022-23 as compared to profit before tax of INR 1,494.98 Lakhs in the previous year.

Key Financial Indicators

(In INR Lakhs)

Particulars	Year ended March 31, 2023	Year ended March 31, 2022
Total Income	16,343.06	12,276.29
Total Expenditure	14,349.70	10,781.31
PAT	1,505.03	1,166.01
Net worth	58,542.26	57,084.33
Debt to Equity Ratio	1.09	1.08
CRAR	35.92%	41.08%

b. Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, including:

(i) Debtors Turnover : Not applicable being an NBFC

(ii) Inventory Turnover : Not applicable being an NBFC

(iii) Interest Coverage Ratio: Not applicable being an NBFC

(iv) Current Ratio: Not applicable being an NBFC

(v) Debt Equity Ratio: 1.09

(vi) Operating Profit Margin (%): Not applicable

(vii) Net Profit Margin (%): 9.21

c. Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof: Increase in Net Worth is due to Increase in Profit for the Period ended March 31, 2023 of INR 1505.03 Lakhs.

8. Material developments in Human Resources / Industrial Relations front, including number of people employed

Your Company believes that the employees are our most valuable assets and our constant endeavour is to help them realise their full potential through various up-skilling and re-skilling exercises. The Human Resource function plays a pivotal role in supporting the organisation in meeting its constant need of hiring right talent, on-boarding new hires, training the work force, performance management, compensation & benefits, and over all organisational development. During the period under review, your Company has strengthened its Management team and Core Leadership team to steer the Companys business conscientiously and diligently. Efforts have been put in place to attract the best talent from the industry to build a strong foundation. The permanent employee (on-roll) strength as on March 31, 2023, was 513.