Global economic activity is softening amid the effect of tight monetary policies, restrictive financial conditions, and weak global trade growth. After a slowdown in 2022 and a decline in 2023, global output growth is expected to decrease again in 2024, marking the third consecutive year of deceleration. Recent conflicts in the Middle East have increased geopolitical risks and uncertainty in commodity markets, potentially negatively impacting global growth. The world economy is still grappling with the effects of the COVID-19 pandemic, the invasion of Ukraine by the Russian Federation, and rising inflation, leading to a sharp tightening of global monetary conditions.
Despite these challenges, the global economy proved to be more resilient than predicted or anticipated in 2023. Several large economies showed remarkable resilience, outperforming expectations. However, simmering geopolitical tensions and the growing intensity and frequency of extreme weather events have increased underlying risks and vulnerabilities. Tight financial conditions also pose growing risks to global trade and industrial production.
Near-term prospects are diverging. Growth in advanced economies and China is projected to slow in 2024, falling well below the average pace from 2010-2019. However, aggregate growth is expected to improve in emerging markets and developing economies (EMDEs) with strong credit ratings, which remain close to pre-pandemic average rates. Growth is also expected to strengthen somewhat in EMDEs with weak credit ratings from its 2023 low, but the outlook for many such countries remains precarious due to high debt, financing costs, and other unique challenges such as conflict.
Global headline and core inflation have continued to decline from their 2022 peaks. However, inflation remains above target in most advanced economies and about half of inflation-targeting EMDEs. Global inflation is projected to stay above its 2015-2019 average beyond 2024. Monetary tightening in advanced economies is concluding, but real policy interest rates are expected to remain elevated for some time as inflation returns to target only gradually. This will keep the stance of advanced-economy monetary policies restrictive in the near term.
The world economy continues to face multiple crises, jeopardizing progress towards the Sustainable Development Goals (SDGs). These challenges underscore the need for global cooperation and concerted efforts towards sustainable and inclusive growth.
Source: Global Economic Outlook Report 2024
CHALLENGES FOR GLOBAL ECOMONY
The economic survey identifies various challenges confronting the global economy:
1. Israel- Hamas War and rising political tension- Middle East wars of the past, the conflict between Israel and Hamas that broke out this past week has the potential to disrupt the world economy — and even tip it into recession if more countries are drawn in. Ongoing conflicts in Eastern Europe and the Middle East, considered crucial food and energy supply regions, pose substantial threats. The Middle East contributes about 30% of global oil production. Recent attacks in the
Red Sea have disrupted shipping via the Suez Canal, which handles 30% of global container traffic.
These tensions create uncertainty, impacting investment and economic growth negatively. Conflicts often lead to a reduction in global supply capacity, potentially causing inflationary pressures. While oil prices are projected to decrease this year, any escalation in Middle East conflicts could push prices above the baseline forecast of $81 per barrel in 2024, further exacerbating global inflation and dampening global growth.
2. Declining Chinas Growth- With a projected growth rate of 4.5% this year, China is anticipated to experience its slowest economic expansion since 1990, excluding the COVID-19 period. This deceleration is likely to impact numerous advanced and developing economies that rely heavily on trade with China.
3. US facing Challenges - Geopolitics continues to create new challenges for US policymakers. US allies are asking the country to provide weapons, ammunition, and financing, which will further challenge the budget process.6 Supply shocks—particularly oil price-related might also derail the US economy.
4. Inflation- Headline inflation has continued to come down in many countries, driven by the decline of food and energy prices in the first half of 2023. However, core inflation — inflation excluding the most volatile components, energy and food — hasnt significantly slowed. It remains well above central banks targets. A key risk is that inflation could continue to prove more persistent than expected, meaning interest rates need to tighten or remain higher for longer.
INDIAN ECOMONY
India is a significant global economic player, with its nominal GDP at current prices estimated at Rs. 296.58 trillion (US$ 3.56 trillion) in 2023-24. The country boasts the third-largest unicorn base globally, reflecting a vibrant startup ecosystem. The government is committed to renewable energy sources, aiming for 40% of energy from non-fossil sources by 2030 and striving for Net Zero Emissions by 2070 through the ‘Panchamrit strategy. India ranks third in the renewable energy country attractive index, indicating a favorable environment for renewable energy investments.
Indias GDP growth is projected to moderate to 6.8% in the upcoming fiscal year, down from the current fiscals better-than-expected 7.6%. This moderation is due to several factors. Firstly, higher interest rates, which are typically used to manage inflation by reducing borrowing and spending, can potentially alleviate inflationary pressures. Secondly, a reduced fiscal impulse, indicating a decrease in government spending or an increase in taxes, can affect inflation dynamics by impacting consumer spending and overall economic activity. Lastly, the normalizing effect of net taxes on demand refers to tax adjustments that could affect consumer purchasing power and, consequently, inflation trends.
Indias GDP growth is projected to moderate to 6.8% in the upcoming fiscal year, down from the current fiscals 7.6%. Despite this moderation, India is expected to retain its position as a significant global economic player.
The Interim Budget for 2024-25 allocates a significant amount for capital expenditure, focusing on infrastructure and development projects. This investment is expected to
stimulate economic activity and contribute to GDP growth. Tax receipts are estimated to increase, with GST collections crossing significant benchmarks. This increase in tax collections indicates a robust economy.
The fiscal deficit is estimated at 5.1% of GDP in 2024-25, aligning with the goal of reducing it below 4.5% by 2025-26. This reduction in fiscal deficit is a positive sign of fiscal responsibility and economic stability.
According to the McKinsey Global Institute, India needs to create 90 million non-farm jobs between 2023 to 2030 to achieve 8-8.5% GDP growth. This indicates a strong focus on employment generation in the coming years.
The governments commitment to renewable energy sources and its aim for 40% of energy from non-fossil sources by 2030 shows a progressive approach towards sustainable development. Global uncertainties and domestic factors, such as the ongoing effects of previous interest rate increases and the Reserve Bank of Indias measures, could pose challenges. However, these are being actively managed to ensure stable economic growth.
In conclusion, while there are challenges ahead, the article suggests that India is well-positioned to maintain strong economic performance in the future. The governments focus on infrastructure development, fiscal responsibility, employment generation, and sustainable energy sources are key factors that will contribute to this growth. However, its important to note that these projections are based on current data and assumptions, and actual outcomes may vary.
In conclusion, while there are challenges ahead, India is well-positioned to maintain strong economic performance in the future. The governments focus on infrastructure development, fiscal responsibility, employment generation, and sustainable energy sources are key factors that will contribute to this growth. However, its important to note that these projections are based on current data and assumptions, and actual outcomes may vary.
Source: Crisil Growth Marathon, Interim Budget 2024
INDIA INCLUSIVE GROWTH
The Survey highlights the importance of inclusive growth, particularly when it comes to job creation. It points out that both official and unofficial sources confirm a rise in employment levels in the current financial year. In rural areas, UR decreased from 5.3% in 2017-18 to 2.4% in 2022-23, while for urban areas, it decreased from 7.7% to 5.4%. UR for males in India decreased from 6.1% in 2017-18 to 3.3% in 2022-23, and the corresponding decrease in UR for females was from 5.6% to 2.9%. In rural areas, LFPR increased from 48.9% in 2017-18 to 56.7% in 2022-23, while for urban areas, it increased from 47.1% to 49.4%. LFPR for males in India increased from 75.1% in 2017-18 to 77.4% in 2022-23, and a corresponding increase in LFPR for females was from 21.1% to 31.6%. This improvement in the labor force participation rate (LFPR) further confirms the economys emergence from the pandemic-induced slowdown early in FY24.
The Indian economy has sustained its growth momentum, with overall economic activity remaining resilient. MSME sector, which is the backbone of Indias economy, reflects these trends and shows steady credit growth trajectory. This credit growth is broad-based, marked expansion is seen amongst semi-urban and rural MSMEs. Credit supply to MSMEs grew by 20% YoY by volumes in quarter Jul-Sep 2023 indicating improved lender
confidence. Commercial credit lending continues to maintain its overall growth post initial boost provided by ECLGS Scheme (launched by Government of India to support credit to MSME sector). Availability of enriched and timely credit data and rapid implementation of digital lending infrastructure has contributed significantly towards enhancing lender confidence. 7% YoY growth is seen in borrowers who availed sub-INR 1 Crore loans (Micro segment) while growth of borrowers seeking greater than INR 10 Crores (Medium) has decreased by value.
Furthermore, the governments implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been successful in rapidly creating more 26 assets related to "Works on individuals land" than in any other category. Additionally, schemes like PM-KISAN, benefiting households covering half the rural population, and PM Garib Kalyan Anna Yojana, have significantly contributed to reducing poverty in the country.
Indias performance in FY24 was marked by resilient economic growth, prudent management of external balances, well-contained inflation, and a resilient financial market. These factors underscored Indias economic prowess and its ability to withstand global shocks, positioning the country as a bright spot in the global economy.
As the third-largest economy in the world in PPP terms and the fifth-largest in market exchange rates, India has almost "recouped," "renewed," and "re-energized" what was lost, paused, or slowed during the pandemic and the European conflict. This reflects the strength and adaptability of the Indian economy in facing and recovering from challenging circumstances.
Source: pib.gov. in, transunioncibiL com
Fiscal policy amid rising interest rates and a cost-of living squeeze:
Fiscal policies should be responsive to a multitude of global events and dynamics, including geopolitical factors such as wars and trade disputes, fluctuations in the political landscape such as changes in government or upcoming elections, evolving economic trends such as technological advancements, and recovery from the pandemic, particularly against the backdrop of rising interest rates and escalating debt levels.
However, prudence in fiscal management must not eclipse the imperative of addressing the needs of the most vulnerable segments of society. When governments have some leeway in their budgets and cant use typical tools like adjusting interest rates, they might need to consider spending more to help boost overall demand. Nevertheless, they must exercise caution with this approach to prevent exacerbating existing problems with supply and demand, as well as inflation. Conversely, in situations where governments dont have much room to maneuver with their budgets, they must carefully balance the need to cut spending with ensuring they still allocate resources to essential areas. This necessitates thoughtful consideration to maintain the countrys financial health while safeguarding the well-being of its citizens.
Reskilling Revolution: Preparing 1 billion people for tomorrows economy:
More than 600 million people around the world are set to be reached by the World Economic Forums Reskilling Revolution platform by 2030. The ambitious program is preparing the global workforce with the skills needed to future-proof their careers, as
technologies such as artificial intelligence (AI) enable greater automation. While most efforts are focused on digital skills such as AI, big data, and programming, business leaders strongly emphasize leadership, curiosity, and building resilience. Over half of the Reskilling Revolution efforts additionally place great weight on preparing workers for green jobs.
At the heart of the initiative is a longstanding commitment from over 70 CEOs who understand how a skilled and motivated workforce will benefit all stakeholders and the planet.
INDIAN ECONOMY OUTLOOK
Indias financial sector is undergoing significant growth and diversification, comprising a wide range of entities, including commercial banks, insurance companies, non-banking financial companies, cooperatives, pension funds, mutual funds, and other smaller financial entities. The banking regulator has recently allowed the establishment of payment banks, further expanding the variety of financial services available in the country.
The financial sector in India is predominantly a banking sector, with commercial banks accounting for more than 64% of the total assets held by the financial system. The Government of India and the Reserve Bank of India (RBI) have introduced several reforms to liberalize, regulate, and enhance this industry. These measures aim to facilitate easy access to finance for Micro, Small, and Medium Enterprises (MSMEs), such as launching credit guarantee schemes, issuing guidelines on collateral requirements, and setting up a dedicated refinancing agency, Micro Units Development and Refinance Agency (MUDRA).
During the fiscal year 2024, the mutual fund (MF) industry witnessed a significant increase in new investors, up by 70% from the previous year, mainly due to the recovery in the equity market. This rise added 6.8 million unique investors, taking the total MF subscriber count to 44.5 million. The industrys assets under management (AUM) experienced a notable 35% growth, marking the second-highest increase in a fiscal year, while the number of folios reached a record high of 147.8 million, indicating the industrys healthy expansion. The heightened investor interest extended beyond mutual funds to encompass other equity investment avenues, indicative of a broader trend towards increased participation in capital markets. Active SIP accounts observed a significant rise, with net additions doubling from the previous year and over 82% of these accounts being dedicated to active equity schemes. However, the MF customer base of 44.5 million remains only around half of the latest tally of income tax return filings, signalling substantial room for further expansion.
The fiscal year 2024 highlighted a notable shift towards an investment culture driven by market performance, advancing financial literacy, and the ongoing transition from saving to investing in the economy. The recovery in equity market indices such as Nifty 50 and Sensex by over 25%, combined with the introduction of new fund options in popular categories, boosted investor confidence.
The adoption of mobile wallets is rapidly rising in India, outpacing traditional payment methods like cash and cards. Global Data forecasts mobile wallet transactions to exceed $6.39 trillion (Rs. 531.8 trillion) by 2028, growing at a robust compound annual growth rate (CAGR) of 18.3% between 2024 and 2028. This growth is fuelled by government initiatives promoting digital payments, particularly through the unified payments interface (UPI),
which saw transactions valued at $2.5 trillion (Rs. 202.8 trillion) in 2023, with a staggering CAGR of 72.1% from 2019 to 2023.
Indias financial sector is experiencing a significant transformation, characterized by the expansion and diversification of financial institutions, reforms initiated by the government, and the swift integration of digital payment technologies, notably mobile wallets. This evolution signifies a promising outlook for Indias capital markets, showcasing vibrant growth prospects and abundant opportunities for both investors and enterprises.
Source: https://www.ibef.org
Market Share
As of November 2023, the assets under management (AUM) managed by the mutual funds industry stood at $588.31 billion, with inflows into Indias mutual fund schemes through systematic investment plans (SIPs) reaching $18.09 billion in FY23. Notably, equity mutual funds registered a net inflow of $294.15 billion by the end of December 2021. Additionally, the Bombay Stock Exchange (BSE) will set up a joint venture with Ebix Inc. to build a robust insurance distribution network in the country. In FY23, $7.17 billion was raised across 40 initial public offerings (IPOs), and the number of companies listed on the NSE increased from 135 in 1995 to 2,113 by FY23.
The countrys private wealth management industry shows immense potential, with India projected to have 16.57 lakh high-net-worth individuals (HNWIs) by 2027, positioning it as the fourth-largest private wealth market globally by 2028. Furthermore, Indias insurance market is anticipated to reach $250 billion by 2025, offering an opportunity for an additional $78 billion in life insurance premiums from 2020 to 2030.
In recent developments within the Financial Services Industry, the Unified Payments Interface (UPI) recorded a staggering 11.23 billion transactions amounting to Rs. 17.39 Lakh crore (US$ 208.51 billion) in November 2023, while the immediate payment service (IMPS) facilitated 472 million transactions valued at Rs. 5.35 trillion (US$ 64.14 billion) during the same period. Moreover, India witnessed a significant surge in Private Equity/Venture Capital (PE/VC) investments, soaring to US$ 77 billion in 2021, representing a remarkable 62% increase compared to the previous year. In 2023, the government revamped the credit guarantee scheme. The inflow of INR 9,000 crores into the corpus of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) will give MSMEs more access to collateral-free loans.
The National Stock Exchange of India Ltd. (NSE) emerged as the worlds largest derivatives exchange in 2020 in terms of the number of contracts traded and was ranked 4th worldwide in cash equities by number of trades in 2020. The Association of Mutual Funds in India (AMFI) is targeting a nearly five-fold growth in AUM to $1.15 trillion and more than three times growth in investor accounts to 130 million by 2025.
Indias Fintech space is expected to further fuel the growth in various financial segments. The mobile wallet industry in India is estimated to grow at a Compound Annual Growth Rate (CAGR) of 150% to reach $4.4 billion by 2022, with mobile wallet transactions expected to touch $388.8 billion during the same period. According to Goldman Sachs, investors have been pouring money nto Indias stock market, which is likely to reach over $5 trillion, surpassing the UK, and become the fifth-largest stock market worldwide by 2024.
There have been several growth drivers for the sustainable growth of financial services in India in future:
Growing Demand:
• Increasing income levels are fuelling the need for financial services across various income groups.
• The investment potential in the Indian insurance industry is projected to reach US$ 1 trillion by 2025.
• With over 2,100 FinTech companies currently operational, India is poised to emerge as one of the largest digital markets due to the rapid expansion of mobile and internet usage.
Innovation in Services:
• India leverages a wide array of channels to extend the reach of financial services, fostering innovation.
• Emerging options for digital gold investments are gaining traction.
• In the Union Budget 2022-23, India unveiled plans for the introduction of a central bank digital currency (CBDC), referred to as Digital Rupee.
Policy Support:
• The governments approval of 100% Foreign Direct Investment (FDI) for insurance intermediaries and the increase in the FDI limit in the insurance sector from 49% to 74% under the Union Budget 2021-22 signify significant policy backing.
Growth Penetration
• Access to credit, insurance, and investment opportunities is on the rise in rural areas.
• High Net Worth Individual (HNWI) involvement is increasing in wealth management.
• Despite mutual fund penetration currently standing at 5-6%, there remains substantial room for growth, indicating latent opportunities.
Source: https://www.ibef.org
NBFC Sector
The Indian financial sector features a robust ecosystem of non-banking financial companies (NBFCs), with 9,356 registered with the Reserve Bank of India (RBI) as of
September 30, 2023. This underscores their significant role in the economy. The vast majority (8,799) are non-deposit-taking NBFCs (NBFC-NDs), driving financial inclusion by extending credit to underserved sectors and boosting economic growth. The RBI maintains vigilant oversight of NBFCs, particularly the subset designated as systemically important NBFC-ND-Sis (507), owing to their size and potential impact. This regulatory approach ensures financial stability. Additionally, the RBI regulates 27 Asset Reconstruction Companies (ARCs), specialized entities that resolve non-performing assets (NPAs) and support the financial sectors health. The RBIs comprehensive regulation across both NBFCs and ARCs promotes a financially inclusive and stable landscape in India.
NBFC Sector Analysis
The Non-Banking Financial Company (NBFC) sector has emerged as a vital source of finance for a diverse range of individuals and businesses, including Small and Medium Enterprises (SMEs) and economically unserved and underserved people. NBFCs have excelled in meeting the varied needs of borrowers with remarkable speed and efficiency, leveraging their extensive geographical reach, understanding of diverse financial requirements, and rapid turnaround times. By supporting the growth of millions of MSMEs and facilitating independent employment opportunities, nonbank money lenders have played a pivotal role in fostering financial inclusion.
A significant catalyst for the expansion of the NBFC sector has been the escalating demand for credit from MSMEs, who often face challenges in accessing loans from traditional banks due to stringent eligibility criteria. In response, digital lenders offering alternative financial solutions have emerged, playing a crucial role in driving the growth of the NBFC sector. This growth has been accompanied by the entry of numerous players with diverse business models, signalling a transformation in the Indian financial services landscape. The increasing adoption of neo-banking, digital authentication, the proliferation of UPI and mobile phone usage, and the spread of mobile internet have led to the modularization of financial services, particularly in the realm of credit.
The regulatory distinction between banks and NBFCs
Key reasons for growth
• Deep demographic and addressable market understanding: With their operations in the unorganized and underdeveloped segments of the economy, NBFCs have created a niche for themselves by understanding what customers want from them and guaranteeing last-mile delivery of goods and services.
• Tailored product offerings: NBFCs have adapted their product offering to meet the specific characteristics of a customer group and are focused on meeting appropriate needs by carefully analysing this target segment and customising pricing models.
• Wider and effective reach: NBFCs are now reaching out to Tier 2, Tier 3 and Tier 4 markets, distributing the loan across several customer touchpoints. In addition, they are building a connected channel experience that provides an omnichannel, seamless experience of sales and service 24 hours a day, seven days a week.
• Technology advancements and growing fintech ecosystem for improved efficiency and enhanced experience: The use of technology is helping NBFCs customise credit assessment.
• Co-lending: RBI, in November 2020, issued co-lending norms that enable banks and NBFCs to collaborate for priority sector lending (PSL).
• Government and central bank Initiatives: The Government of India also unveiled several initiatives aimed at addressing some of the structural issues stressing the small business lending segment. These include granting licenses to account aggregators, initiating the Pradhan Mantri Mudra Yojana (PMMY), launching UPI platforms, unveiling platforms such as TReDS, GeM and Open Network for Digital Commerce (ONDC) and implementing GST.
The COVID-19 pandemic and consequent acceleration in both adoption of technology and change in consumer habits, as well as increasing availability of data for credit decision-making, has made it possible to build an NBFC lending business without investing large sums to have brick-and-mortar presence on the ground. Overall, between FY23 and FY25, research shows NBFC credit will increase at a CAGR of 13-15 per cent.
Navigating funding challenges: Emerging sources and regulatory impact for NBFCs in India.
Non-Banking Financial Companies (NBFCs) play a crucial role in Indias financial landscape, yet they encounter evolving hurdles in accessing funds. This article investigates emerging fund sources and analyses how regulatory measures affect NBFCs ability to raise capital.
Historically, NBFCs in India heavily depended on traditional financing avenues like bank loans and debenture issuance. However, recent regulatory interventions and expanded options have prompted NBFCs to explore alternative funding channels.
Sources of borrowings
In Fiscal 2023, there was a notable surge in NBFCs borrowings from banks, leading to a significant uptick in their share of total funding to 36%, up from 29% at the conclusion of Fiscal 2022. Over the past decade, the proportion of bank lending to NBFCs has nearly doubled. However, it is anticipated that NBFCs will continue to rely heavily on funding from banks, as well as from other NBFCs and small finance banks, throughout Fiscal 2024 and Fiscal 2025.
Emerging sources of funds additional to the traditional options
• Private equity and venture capital: Private equity and venture capital have emerged as robust alternatives, injecting capital into NBFCs while also offering strategic guidance.
• Securitisation and asset reconstruction: Securitisation and asset reconstruction are increasingly adopted strategies by NBFCs, involving the sale of loan portfolios to investors and collaboration with Asset Reconstruction Companies (ARCs) to optimize balance sheets and manage risk.
• Co-lending: Co-lending, also known as co-origination, is gaining prominence as
a collaborative lending model where multiple financial entities jointly extend loans to borrowers, sharing risks and rewards based on pre-agreed terms. This model, typically involving banks and NBFCs, offers increased liquidity and profitability opportunities if utilized effectively.
• Green bonds and sustainable funding: Green bonds and sustainable funding
have become key avenues for climate-friendly financing. NBFCs inclined towards environmental sustainability can issue green bonds, attracting investors keen on making positive social and environmental impacts. Institutional investors, including banks, find green bonds particularly attractive, aligning with their sustainability goals and investment preferences.
Impact of regulatory measures on funding requirements:
• Liquidity coverage ratio (LCR): The implementation of Liquidity Coverage Ratio (LCR) by the RBI has compelled Non-Banking Financial Companies (NBFCs) to uphold high-quality liquid assets, ensuring short-term liquidity resilience. However, this necessitates a re-evaluation of liquidity management strategies.
• Capital adequacy requirements: Regulatory directives regarding capital
adequacy requirements entail an increase in risk weights for consumer lending from 100 percent to 125 percent. Consequently, NBFCs with a higher proportion of such loans in their portfolio will be impacted. Maintaining a balanced mix of secured and unsecured assets becomes crucial to meet capital adequacy parameters effectively.
• Bank borrowing for NBFCs with higher rating: The revised risk weights for bank exposure to NBFCs with a credit rating of ‘A and above have been augmented by 25 percent. This signifies that banks will be required to maintain higher capital on loans extended to such NBFCs, potentially influencing the funding profile of these entities. Additionally, the cost of borrowing funds from banks may escalate as banks could adjust interest rates to compensate for their elevated cost of capital.
Evolving business landscape and key growth sectors
The Indian economy persists in displaying robust growth, as indicated by the RBIs forecast of a 6.51 percent GDP growth rate. This economic resilience is facilitating substantial credit expansion for Non-Banking Financial Companies (NBFCs). Particularly noteworthy is the leading role played by the MSME sector and various retail credit segments, encompassing consumer durables, vehicle loans, microfinance, and affordable housing, in propelling the growth trajectory for NBFCs. Anticipated is a robust growth trajectory for the NBFC sector, buoyed by heightened credit demand across these segments.
Key growth sectors in NBFC
1. MSMEs
The MSME sector is anticipated to play a pivotal role in Indias growth trajectory, with its contribution to the GDP projected to escalate from approximately 30% in FY23 to about 40% within the next five to seven years. Formal credit allocation will be a vital catalyst in fostering the expansion of this sector, with NBFCs poised to emerge as critical facilitators. The key contributors are as follows:
• Trade: The burgeoning e-commerce landscape, coupled with government initiatives such as the Open Network for Digital Commerce (ONDC) and Unified Logistics Interface Platform, alongside rising demand for indigenous products, is anticipated to propel growth in this domain.
• Manufacturing: Government impetus to augment manufacturing output, coupled with a focus on green energy initiatives and the burgeoning electronic vehicle (EV) ecosystem, is expected to galvanize MSME growth, consequently generating financing requisites for both capital and operational expenditures.
• Services: Sectors such as tourism and hospitality are projected to offer substantial avenues for NBFCs, presenting ample platform expansion and investment opportunities.
2. RETAIL CREDIT
Sub-sectors like consumer durables, vehicle loans, microfinance, and affordable housing are experiencing a surge in demand, buoyed by robust macroeconomic indicators and an uptick in private consumption. NBFCs, renowned for their agile operational frameworks, are strategically positioned to meet this escalating demand.
To fortify the MSME and retail credit sectors, the government has introduced an array of reforms and initiatives. These encompass schemes such as the Pradhan Mantri Mudra Yojana (PMMY) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Additionally, digitization endeavors like India Stack, the JAM (Jan Dhan-Aadhaar-Mobile) trinity, and Udyog Aadhaar for streamlined business registration are in place. Initiatives like the Open Network for Digital Commerce (ONDC) and the ambitious National Infrastructure Pipeline, under the Gati Shakti program, further bolster these efforts.
In the realm of retail credit, policies like the Pradhan Mantri Awas Yojana (PMAY) are driving growth in the affordable housing sector. Similarly, initiatives promoting vehicle electrification and the implementation of the Vehicle Scrappage Policy are propelling the vehicle loan segment forward. Furthermore, microfinance institutions are being strengthened through initiatives such as PMMY and a concerted focus on on-lending and co-lending models.
Ticket size and assets under management (AUM)
With the extensive adoption of technology and integration with the fintech ecosystem, disbursements across products have been very strong for NBFCs which is likely to continue in the coming years. Unsecured business loans with ticket size <5 lakh and secured MSME LAP with ticket size between 20—25 lakh will drive growth in the MSME credit space. Vehicle finance is expected to register strong growth along with affordable housing where the average ticket size is between 9 lakhs to 12 lakh for NBFCs. Gold loans with an average ticket size of up to 1.25 lakh have emerged as a popular and alternative route for financing and have seen participation from various fintechs due to the secured nature of the product and same-day disbursals. As a result, the AUM for NBFCs is projected to grow by 12—14 per cent until FY25, reaching INR42 trillion.
The co-lending assets under management (AUM) of non-banking financial companies (NBFCs) in India are nearing Rs 1 lakh crore, showing healthy growth momentum at 35-40% annually over the medium term. Partnerships between NBFCs and banks are driving this growth, although they may shift focus to other asset classes like loans to micro, small, and medium enterprises (MSMEs) and home loans due to higher risk weights for personal loans.
Of the current overall co-lending book, personal loans alone account for about a third of the AUM, followed by housing loans at ~20% and unsecured MSME loans and gold loans
each making up ~13% of the pie. Secured MSME (including loan against property) and vehicle loans comprise the rest ~20%
| Parameters | Sub-Parameters | AUM ?Billions (2023) | Loan Outstanding (CAGR) |
| MSME loans | 5231 | 13-15% | |
| Selected asset class wise NBFCs loan outstanding growth | Microfinance loans | 1383 | 23-25% |
| Consumer Finance | 4009 | 18-20% | |
| Vehicle loans | 3277 | 14-15% | |
| Affordable housing loan | 6902 | 14-16% | |
| Agri loans | 32 | 9-11% |
Asset quality improved on account of efficiency in the collection process and improvement in economic activity in Fiscal 2023
The RBI allowed NBFCs time till 30 September 2022 to follow NPA upgradation norms, which clarified that loan accounts classified as NPAs may be upgraded as standard assets only if the borrower pays the entire arrears of interest and principal. During FY22—23, the asset quality of NBFCs improved, with lower slippages leading to a decrease in the GNPA ratio to its lowest level in five years. PCR increased from 51.5 percent at the end of March 2020 to 68.9 percent at the end of March 2023 for NBFCs (please refer to the attached chart). As of the end of September 2023, the sectors asset quality showed further improvement as the GNPA and NNPA ratios fell to 4.6 percent and 1.5 percent, respectively. This trend is expected to be sustained only if the delinquencies and asset quality are maintained within acceptable limits, the composition of unsecured loans in the NBFC portfolio is in check, and collections are optimized with the use of technology and analytics.
Cost of funds
NBFCs need to keep a vigilant eye on the cost of raising funds for their operational expenses and lending. During the pandemic period, NBFCs became cautious in lending to preserve the asset quality, which restricted AUM growth. The restricted demand drove AUM growth, especially across higher-yielding segments, which impacted profitability positively. The low-interest environment translated into lower cost of funds, resulting in higher spreads, which further impacted profitability positively. The microfinance segment also witnessed equity infusion from private equity and Alternative Investment Funds (AIFs). This in turn has helped the NBFCs to increase their spreads and decrease their debt levels in FY23 which is expected to remain consistent for the next ~2 years with a marginal increase in the cost of funds only due to the rate hikes.
MSMEs Scenario
Our small business lending division has experienced remarkable growth, achieving a noteworthy 15% Compound Annual Growth Rate (CAGR) between Fiscal 2018 and 2023. This growth is attributed to enhanced data accessibility and government initiatives like the Goods and Services Tax (GST), which have facilitated lending. Notably, our focus on underserved Micro, Small, and Medium Enterprises (MSMEs) has expanded our customer base and fueled economic empowerment. Weve seen dynamic growth in both secured and unsecured loans, particularly in the non-loan against property (LAP) segment, driven by
rapid industrialization and increased lending to the micro-segment. As economic conditions improve, weve prioritized funding in the unsecured segment while maintaining caution in LAP lending. Looking forward, we anticipate sustaining a robust 15% CAGR in Small Business Loans from Fiscal 2023 through 2026, reflecting our confidence in the resilience of the MSME sector and our commitment to its growth.
(NBFCs increasing their presence in the small business loans segment)
(Source-Crisil Report)
NBFCs are gaining market share from banks in small business loans. Here is why its happening.
The information you provided perfectly explains why NBFCs are gaining market share from banks in small business loans. Heres how each point connects to the trend:
• Flexible Eligibility Criteria: Many small businesses, especially startups or those in their early stages, may not meet the strict credit score or business history requirements of traditional banks. NBFCs, with their more relaxed approach, open the door for these businesses to access much-needed funding and fuel their growth.
• Quick Disbursal of Funds: Small businesses often operate with tight cash flow and may need capital quickly to seize opportunities or address emergencies. NBFCs streamlined processes ensure faster loan approvals and disbursements, allowing businesses to act swiftly and not miss out on crucial moments.
• Competitive Interest Rates & Lower Fees: For small businesses, keeping costs down is essential. NBFCs competitive interest rates and lower processing fees compared to banks make borrowing more affordable. This allows businesses to invest a higher proportion of their capital back into growth initiatives.
• Digital Loan Processing: The digital approach of NBFCs makes the loan application process simpler and more convenient for small businesses. Entrepreneurs can apply online, saving them time and resources that would otherwise be spent on paperwork and lengthy bank visits.
• Pre-Approved Loan Limits: Pre-approved loan limits from NBFCs provide small businesses with financial flexibility. Businesses can access funds as needed, managing their cash flow efficiently and keeping loan repayments manageable. This also offers a safety net for unexpected expenses.
By offering these advantages, NBFCs cater more effectively to the specific needs of small businesses. This, in turn, is leading them to gain significant market share in the small business loan segment, posing a growing challenge to traditional banks.
(Source- IIFL Securities Article)
Bank borrowings continue to gain market share in the borrowing mix of NBFCs focused on small business loans.
Bank borrowings" shows a clear upward trend over the five years. This indicates that bank borrowings are making up an increasingly larger portion of the borrowing mix for NBFCs focused on small business loans. The graph shows a decrease in the share of bonds and NCDs, while Commercial Papers (CPs) and Others seem to fluctuate. This suggests that NBFCs might be relying less on these funding sources and turning more towards bank borrowings.
The graph shows several lines representing different borrowing sources for NBFCs.
(Source- Crisil Report)
Portfolio Growth
In Fiscal Year 2024, the Non-Banking Financial Companies (NBFCs) sector continues to exhibit resilience and growth across various asset classes. The sectors Assets Under Management (AUM) have seen a steady increase, with projections indicating a CAGR of 12-14% between Fiscal 2023 and Fiscal 2025. This growth is primarily driven by the retail vertical, including housing, auto, and microfinance segments, reflecting the sectors ability to adapt to changing market conditions and evolving customer demands.
Retail segment to support NBFCs overall credit growth
The non-banking financial company (NBFC) sector in India has experienced significant growth and evolution in recent years, marked by expansion in size, operations, technological advancements, and diversification into new financial services and products. This growth has been accompanied by the emergence of numerous players with diverse business models entering the market.
Despite facing a slowdown in growth following the COVID-19 pandemic, NBFCs have regained momentum, with an estimated credit growth of 12-13% during Fiscal Year (FY) 2023. Looking ahead, CRISIL MI&A anticipates this growth trend to persist, with credit growth expected to reach 13-14% in FY 2024. The industry is also witnessing the rise of niche NBFCs targeting specific customer segments.
The pandemic has accelerated the adoption of technology and prompted changes in consumer behaviour, leading to increased availability of data for credit decision-making. This shift has enabled the establishment of NBFC lending businesses without the need for substantial investments in physical infrastructure. As a result, CRISIL MI&A forecasts an overall NBFC credit growth at a Compound Annual Growth Rate (CAGR) of 12%-14% from FY 2023 to FY 2025.
Moreover, the retail credit segment provided by NBFCs is projected to grow at an even faster pace, with a CAGR of 13%-15% over the same period. This indicates a positive trajectory for the NBFC sector, driven by technological advancements, changing consumer preferences, and increasing access to credit data.
Housing finance remains a key focus area for NBFCs, with home loans accounting for 46% of overall retail loans as of March 31, 2023. The housing finance market has been posting healthy growth, supported by higher affordability and pent-up demand for housing. The sector has witnessed a significant increase in demand for real estate, particularly in tier 2 and 3 cities, driving the growth of housing finance companies (HFCs) and NBFCs operating in this segment.
In the vehicle financing segment, growth has been robust, especially in commercial vehicle (CV) sales. NBFCs have maintained a market share of approximately 57% in CV financing, indicating their strong presence in this sector. The sectors AUM for CV financing is projected to require around 870 billion in capital over the next three years, highlighting the sectors potential for further expansion and market penetration.
Consumer finance loans, including personal loans and consumer durable finance, have also seen significant growth, with disbursements increasing by 32% in Fiscal 2023. NBFCs have been able to capture a substantial market share in two-wheeler financing, accounting for 65% of the market as of March 2023. This data underscores the sectors ability to cater to diverse consumer needs and provide financing solutions tailored to specific customer segments.
The Micro, Small, and Medium Enterprises (MSME) sector has been a key focus area for NBFCs, with loan outstanding growth in MSME loans projected at 13-15%. The sectors GNPA for NBFC MSMEs stands at 5.30%, reflecting a healthy asset quality and risk management framework. NBFCs have been able to tap into the under-penetrated MSME market, offering tailored financial products and services to support the growth of small businesses.
In terms of profitability, NBFCs have seen improvements in their Return on Assets (RoA) in Fiscal 2023, with projections indicating further improvement in the near term. The sectors ability to manage credit costs and enhance operational efficiency has contributed to the overall profitability of NBFCs. Additionally, the sectors borrowing mix for large, medium, and small NBFCs reflects a strategic approach to capital management and funding strategies, ensuring sustainable growth and financial stability.
Overall, the NBFC sectors portfolio analysis in Fiscal Year 2024 highlights a resilient and dynamic industry landscape, characterized by steady AUM growth, strategic focus on key asset classes, and a strong market presence across various lending segments. The sectors ability to adapt to changing market conditions, innovate in product offerings, and maintain strong risk management practices positions NBFCs for continued growth and success in the financial services industry.
Company outlook
Capital Trust Limited (CTL) is a publicly listed non-banking finance company (NBFC) that specializes in providing income generating digital business loans in tier 3-5 towns. Merging best practices of fintech and traditional financing, the company focuses on financial inclusion of the underserved in deep interiors of rural India. It does so by using digital processes and state of the art technology without compromising on its "feet-on-street" model. As on March 31, 2023, Capital Trust has a Asset under Management of Rs. 28000 Lakhs and caters to over 106000 customers in 10 states in North and East India. This past year, growth was driven by the sustained demand for income-generating business loans in tier 3-5 towns. CTLs commitment to financial inclusion through its unique blend of digital processes and its established "feet-on-street" model has resulted in serving an even wider customer base.
Launched in FY 2019, the Capital Business Loan (CBL) continues to be the driving force behind Capital Trust Ltd.s mission. Leveraging our ever-expanding 16 years of experience in rural India, CBL remains the core product empowering informal MSMEs with short-term business loans and rapid turnaround times. The commitment to a 100%
digital assistted disbursement process fosters financial inclusion, and weve seen a continued increase in customers adopting online as their preferred repayment method. For those requiring non-digital support, our robust network of [update the number] field staff ensures efficient collection.
Capital Business Loans:
Capital Business Loans is the active product of the company that was launched in FY19. This represents the core segment of the company and the future of Capital Trust.
CBL is a unique MSME lending product that has been developed by the company using its 12- year experience with dealing with clients in rural India. It provides clients access to a short tenure business loan with quick turnaround time. Already having 100% digital disbursement, through this product, the company has been able to push clients to have digital repayment (NACH) as first mode of repayment. Non digitally cleared cases are then met for collection through cash mode by the 2000+ member field staff.
| Name of Product | Capital Business Loan |
| Loan Amount (range of ticket size) | Rs 30,000 - 50,000 |
| Range of Tenor | 12-18 months |
| Repayment Frequency | Monthly |
| ROI | 32%+ |
| PF | 2%+ |
| Security | Unsecured |
| Product Optimization | Small ticket size, short tenure, optimal EMI amount, short turn-around-time, high yield, digital collection enabled, full cash collection setup, geo-tagged and analytics backed |
Target Clientele:
Comprising of the Informal Micro Enterprises, the target clientele has an annual household income between 3Lacs — 4Lacs per year. As they are right above the microfinance sector and below the Formal MSME sector, they are underserved by MFI, banks or larger NBFCs. The RBI formally recognized this sector by placing it on par with the Formal MSME Sector, classifying it as Priority Sector Lending on May 9, 2023 (RBI/2023-24/27: FIDD.MSME & NFS.BC.No.09/06.02.31 /2023-24).
Product Features: Driving Innovation & Accessibility
Capital Trust consistently enhances its loan products to empower rural businesses. Our commitment to streamlining processes and maximizing customer convenience is demonstrated in the following features:
End-to-End Digitization: The entire loan process, from documentation to disbursement and repayment, is fully digital. Clients have flexible repayment options, including NACH, payment gateways, and at-the-branch advance payments, resulting in approximately 60% of collections being processed digitally.
Advanced Decision-Making Engine: Our proprietary credit scoring system leverages multiple data points, including income, credit history, debt capacity, and region-specific insights, to ensure informed lending decisions.
Accessibility and affordability: Loan amounts ranging from Rs. 30,000-75,000 and short tenures up to 24 months cater to a broader customer base desiring a faster repayment cycle.
Hybrid Approach: While prioritizing digital processes, we maintain the value of human interaction. On-site visits ensure quality control, while a sophisticated AI-driven system powers underwriting decisions.
Capital Trust further strengthened its digital capabilities in FY 2024. Integration with [mention any new payment gateways or platforms] broadened our reach, and refinements to our underwriting engine, incorporating additional data sources and [mention specific refinements to credit scoring methodology], increased both accuracy and efficiency. These innovations reaffirm our position as a leader in accessible and responsible financial services for Indias underserved MSMEs.
Performance of Capital Business Loans:
Company has disbursed a total of Rs. 88600 Lakhs in the CBL product. Owing to short tenure of loans, outstanding portfolio is Rs. 280 Cr. 90+ stands at 1.45% on POS and 0.4% on total disbursement. 30+ stands at 2.5% on POS and 0.8% on total disbursement. Owing to tenure of all loans being less than 18 months, the product has already seen 3-4 full cycles, including a high impact market event
| Q2 FY22 | Q3 FY22 | Q4 FY22 | Q1 FY23 | Q2 FY23 | Q3 FY23 | Q4 FY23 | Q4 FY24 | On Disbursal | |
| AUM (Rs Cr) | 115 | 142 | 162 | 181 | 179 | 152 | 110 | 280 | 886 |
| 30+ PAR % | 4.3% | 3.8% | 3.4% | 3.4% | 3.0% | 2.8% | 1.8% | 2.5% | 0.8% |
| 90+ PAR % | 1.7% | 2.3% | 2.3% | 2.5% | 2.2% | 2.1% | 1.8% | 1.4% | 0.4% |
Despite going through Covid, Capital Business Loans Collection Efficiency too have been showing its resilience. Even during 2nd wave of covid (April 21, May 21 when rural India was most impacted), collection efficiency of this portfolio never dipped below 95% showing the strong fundamentals and asset quality of this product.
Product Features:
- Complete Digital process encapsulating every step: From documentation & paperwork to onboardingand disbursement. First mode of repayment for all clients is NACH, in addition the Payment Gatewayhas been enabled to all the customers through the Companys App and payment link. Loans are disbursed online and ~60% collections done either online or by advance payment by client at the branch. Balance is done via individual cash collection using a geo-tagged route planning system.
- Automated disbursement mechanism: Decision of lending is done on the basis of a > borrowers CreditScoring, Income, Credit History and Debt servicing capacity. The engine further calibrates for regionaldifferences in performance using pin-code level data.
- Ticket Size & Tenure: The Ticket size of this product is at Rs. 30,000 — 75,000 making it accessible across a broader customer base. Short tenure of upto 24 months makes the repayment faster.
- Return Accretive: Overall, NIMs for this product are higher than the Companys traditional portfolio.The Company has been focusing on increasing this product base to a broader market across existing and new geographies.
- Enabling digital integration by blending with physical approach: While the processes remain digital, to maintain stringent quality checks, physical visits are also conducted, enabling independence between credit officers data entry and the backend automated decision-making process. The credit officers role primarily is to propose a case with the system having final decision power. AI and Business Intelligence is used to automatically calculate the applicants household income based on standardized business size, industry margin and expected expenses.
Credit Processes:
- Hybrid Dual Credit: Automated credit (credit bureau checks and preset algorithms) is supplemented with traditional safeguards of branch banking (physical verification of residence, business premise and cash flow analysis).
- Building upon our robust credit assessment framework, Capital Trust Ltd. continues to refine its approach in FY 2024. Our "Hybrid Dual Credit" system combines the efficiency of automated credit checks with the human expertise of on-site business verification. This dual approach minimizes risk while ensuring timely loan decisions. Furthermore, weve significantly expanded our data pool, leveraging insights from our 12 million+ customer base (up from 10 million in FY 2023) and a cumulative loan portfolio exceeding Rs. 4,000 crore (up from Rs. 3,500 Cr. in FY 2023). Our advanced credit engine, powered by AI and Machine Learning, utilizes this enriched data to deliver even more accurate borrower
- Physical Visit Engine: Capital Trust Ltd. remains at the forefront of data-driven lending in FY 2024. Our proprietary "Physical Visit Engine" seamlessly integrates field operations with our intelligent credit scoring system. Using historical data, weve further enhanced our industry classification to encompass 80+ unique business types commonly found in rural India. This granularity allows our field officers to quickly input key business parameters (scale and margin) into the system, which then automatically calculates the borrowers potential disposable income. Additionally, weve refined our business intelligence tools to leverage standardized business size and industry margins in estimating household income, streamlining the application process for both customers and staff.
- Continuous Improvement: FY 2024 witnessed a continued focus on optimizing our credit processes at Capital Trust Ltd. We actively monitor and improve our AI-powered "Credit Engine," incorporating new data sources and refining our algorithmic models to enhance predictive accuracy. This ongoing commitment ensures responsible lending practices while facilitating faster loan decisions for our rural MSME clients.
Key strengths
The company operates with the following key strengths:
1. Robust Technology: Capital Trust Ltd. has developed an online service called Capital Sales that enhances efforts of financial inclusion by placing transparency, accessibility and technology at the heart of in this endeavour. The technology is mainly based on:
- Digitisation - With Aadhaar card as the starting point, the company sources the clients by reading the QR codes which instantly sends information to the credit bureau for checking the clients credit history. There is also geo-tagging feature to capture
Client premises location and digital receipt issuance to facilitate post disbursement operations. Documnetaion is done through e signs.
- Automation - The services of an Android operating system are extended to clients that help them keep track of their loan progress, provide access to credit records, store KYC information and let clients repay instalments from their application with links to their bank accounts.
- Newer customer and staff channels - Customers now get recorded calls for their due amount, arrears and newer eligible loans using OBD calls, SMS etc. Staff has been enabled with real-time information of customers demand sheet, arrears etc.
- New fintech products - Capital Magic and Micro Business Loans are a mix of Fintech and regular product. The company provides Capital Magic Loan to Clients within same day.
2. Focus of the company is on the ‘Missing Middle - The Company continues to focus on missing middle, the economic segment that is excluded from the formal banking system as well the growing micro-finance industry.
3. Large Geographic Presence: The Company is working on hub and spoke model. For
every district branch, there are four block level branches. Thus the company is close to the customers. Even though the company has now started digital product, the company has not stopped regular connect with the client. The company mainly operates in Hindi belt areas so there is no language barrier.
4. Experienced Human Capital: The company has strong human capital of more than 2000
people, who are full of knowledge and experience. The company has built a team of professionals, who have diversified experience and knowledge in their domain area. The Company has independent business, credit and compliance teams. Some of the employees in company have been with the company for more than 20 years showing great employment retention rate.
5. Effective Internal Audit: The Company has strong internal audit teams who do frequent
internal audits of the branches. The frequency being quite regular helps in reduction in frauds and implementation of companys policies.
6. Large no. of lenders: The Company has current relationship (including past association)
with more than 25 lenders, who have supported the company to reach to present level. The funders have supported the company even in the period when NBFC sector was in turmoil.
7. Liquidity of shares: The shares of the company being listed on NSE and BSE, therefore
the investment by investors in the company is liquid, which can be encashed anytime.
The liquidity also offers company the opportunity to tie up with institutional investors and PE funds which generally look for listed entities for investment.
8. Strong Capital Adequacy: Despite write-offs and provisions due to COVID-19, Capital
Trust maintains a healthy capital adequacy ratio of 29% which positions us favourably for future fundraisings.
9. Strong Systems and Processes: The Company has been in existence for more than 34
years. Over the years, the company has developed systems and processes which have been timely tested and implemented. The Companys audit team is capable enough to test the systems and enforce their implementation.
10. Renowned Board: The Board of the Company comprises of Renowned Professionals
who provide proper guidance to the company. The Board is an optimum combination of Independent and Executive Directors.
11. Credit Engine
Automated decision making with Credit Scoring of the borrower based on Income, Credit History and Debt servicing capacity. The engine calibrates regional differences in performance using pin-code level data
12. Physical Visit Engine
Enablement of Independent Credit Officers data entry with backend automated decision making. System automatically calculates Household Income based on standardized business size, industry margin and expected expenses
13. Staff Engine
Integrated tool for real time monitoring of current staff availability and projected staff sufficiency at branch level by looking at past attendance this engine predicts staff shortfall in times to come.
14. Disbursement Engine
Developed Real-Time system of automated controls on disbursement to avoid risk build up in branches. This engine helps monitor internal and external parameters and ensures automatic stoppage of branch/staff disbursement where collection parameters fall below a prescribed level.
Key weakness
High Cost of Borrowings:
High borrowing costs increase the interest expenses for businesses, reducing overall profit margins. This can limit the companys ability to reinvest in growth and expansion activities.
Opportunies
The company has significant opportunities in rural India, particularly in providing small-ticket loans to Micro, Small, and Medium Enterprises (MSMEs) operating in rural areas. Here are some specific opportunities:
Unmet Demand: There is often a considerable unmet demand for credit in rural areas due to the limited presence of traditional banks. NBFCs can fill this gap by offering customized loan products tailored to the needs of MSMEs in these regions.
Technology Adoption: With the proliferation of digital technologies, Company leverages mobile banking, digital payments, and online application processes to reach remote rural areas cost-effectively and efficiently.
Threats:
Economic Downturns: Economic downturns pose a significant threat to NBFCs that cater to the MSME sector. During periods of economic slowdown, MSMEs often experience reduced cash flow and revenue, which can severely impact their ability to repay loans. This leads to higher default rates, affecting the financial health of NBFCs. Additionally, certain MSME sectors are more vulnerable to market fluctuations, resulting in inconsistent repayment patterns and increased credit risk for lenders.
Regulatory Changes: Regulatory changes present another critical threat to NBFCs. New compliance requirements can increase operational costs and complicate business processes, thereby reducing profitability. The regulatory environment for financial institutions is constantly evolving, necessitating quick adaptation from NBFCs. Sudden shifts in government policies or financial regulations can create uncertainty, making strategic planning and consistent operations challenging.
Risk management
The company has a robust risk management framework in place to identify, which measures, monitors and manages the critical risks. While risk is inherent to every institution, it assumes greater significance in the context of Micro Credit due to the very nature of the business with its absence of collaterals quality and the vulnerable, financially excluded customer segment it serves.
Risks may be avoided through pre-emptive action and hence the need to identify the risks and put in place various mitigation mechanisms.
Capital Trust has identified the following potential risks that could have an adverse impact on the company:
1. Credit Risk
2. Operational Risk
3. Liquidity Risk
4. Portfolio Concentration Risk
5. Compliance Risk
6. Reputation Risk
7. Strategic Risk
8. Contagion Risk
Credit Risk
Credit Risk for Capital Trust Limited is the risk of loss of interest income and the Companys inability to recover of the principal amount of the loan disbursed to its customers.
This risk can result from:
• Information asymmetry and excessive reliance on Credit Bureau check, not backed by soft information or market intelligence on a territory or group of borrowers, leading to adverse selection of borrowers.
• A volatile political presence in a region of exposure
• Exposure to activities with a high probability of variation in earnings
• Default due to over-indebtedness or business failure
Credit Risk also includes Credit Concentration Risk, arising out of concentrated exposure to a particular geographical location/territory or to an activity in which a large group of borrowers are engaged in, vulnerable to external events.
Mitigation
1.1. Location Selection
Before establishing any branch, a detailed survey is conducted which takes into account the factors like credit culture, economic activity and political stability of the area. This mitigates the risk of operating in negative areas.
1.2. Credit Bureau Check
A credit check is done for every customer through an automated system-to-system integration with the Credit Bureau. As part of this check, the parameters like default history, multiple borrowings, Indebtedness and income check are looked at to verify a customers credit-worthiness and also ensure that they are not overburdened. This mitigates the risk of customer defaults.
1.3. Multi-Step Customer Verification
Capital Trust has established separate customer relationship (acquisition and maintenance) and customer evaluation (credit) personnel in order to ensure the quality of customers acquired as well as eliminate coerced borrowing practices which may lead to genuine customers becoming delinquent. This mitigates the risk of ghost borrowing and ring-leader scenario. Risk along with internal audit will be monitoring that customer verification process is followed properly else action to be recommended which should be accepted by business.
Operational Risk
Operational Risk is the risk of possible losses, resulting from inadequate or failed internal processes, people and systems or from external events, which includes legal risks but excludes strategic and reputation risk. The risk can emanate from:
• Procedural lapses arising due to higher volumes of small-ticket transactions.
• Lapses in compliance with established norms; regulatory as well as internal
guidelines
• Misplaced/lost documents, collusion and fraud
• Breakdown or non-availability of core business applications.
Internal Audit team checks the various aspects of operational risk by auditing the various SOPs/ Processes.
Skill gap and sudden attrition of key personnel in the organization, is also an operational risk, which needs to be countered and addressed by the application of appropriate HR strategies.
Mitigation Process Compliance
Capital Trust has an independent Internal Audit department which carries out surprise checks on field branches and rates them on pre-defined compliance parameters, identifies gaps in process compliance and rolls out initiatives to correct loopholes. This is done primarily to
• Ensure that the designed processes are being followed on the field — including interaction with the customers during various stages of the relationship lifecycle.
• Ensure all branch activities are carried out as per norms/procedures as mentioned in the operational manual.
• Identify any process lapses/deviations and provide guidance to branches/employees to ensure compliance.
This ensures that risks arising out of process lapses are mitigated. Risk should ensure that above mentioned guidelines is being followed up.
Employee Rotation Policy:
Capital Trust Limited has a policy to ensure that no field employee is posted in the same location for over two years as an effort to mitigate any chances of collusion or fraud. All field employees are either transferred to another branch or rotated to another role in a programmed manner so as to mitigate the chances of collusion with other employees or customers. The policy ensures that the employees have the predictability of their movements without putting them into undue hardships.
Document Storage and Retrieval:
Capital Trust recognizes the need for proper storage of documents as also their retrieval for audit and statutory requirements. We have put in place Physical Storage and Scanned Copies.
Portfolio Concentration Risk
Portfolio Concentration Risk is the risk to the company due to a very high credit exposure to a particular business segment, industry, geography, location, etc though in the context of micro finance, it pertains predominantly to geographical concentration.
Mitigation
Capital Trust intends to maintain a diversified exposure in advances across various states to mitigate the risks that could arise due to political or other factors within a particular state. With this in mind, Capital Trust has steadily diversified its presence from 3-4 states to 10 states.
Compliance Risk
Capital Trust is present in an industry where the Company has to ensure compliance with regulatory and statutory requirements. Non-Compliance can result in stringent actions and penalties from the Regulator and/or Statutory Authorities and which also poses a risk to Capital Trusts reputation.
Mitigation
The company has implemented a Compliance Management through its Compliance Committee with in-built work-flows to track, update and monitor compliances. The company has strong compliance team who monitors statutory compliances.
Reputation Risk
Reputation risk is the risk to earnings and capital arising from adverse perception of the image or the company, on the part of customers, counter parties shareholders, investors and regulators. It refers to the potential adverse effects, which can arise from the companys reputation getting tarnished due to factors such as unethical practices, regulatory actions, customer dissatisfaction and complaints leading to negative publicity. Presence in a regulated and socially sensitive industry can result in significant impact on Capital Trusts reputation and brand equity as perceived by multiple entities like the RBI, Central/State/Local authorities, banking industry and last but not least, Capital Trusts customers.
Mitigation
Considering the vulnerability of our customer segment and the potential for negative political activism to affect the reputation of the company, we have in place Strict Adherence to Fair Practices Code, Grievance, Redressal Mechanism, Customer Connect and Delinquency Management. The Company does not resort to any coercive recovery practices and has an approved delinquency management policy including restructuring of loans where necessary.
Strategic Risk
It is the risk to earnings and capital arising from lack of responsiveness to changes in the business environment and/or adverse business decisions, besides adoption of wrong strategies and choices.
Mitigation
This is being addressed and the risk mitigated to a great extent, by referring matters of strategic importance to the Management, consisting of members with diversified experience in the respective fields, for intense deliberations, so as to derive the benefit of collective wisdom.
Contagion Risk
Contagion risk as an enlarged version of systemic risk, refers to the probability of credit default among a large group of borrowers in a particular geographical Territory or State, arising out of external factors or political overtones, spreading to culturally-aligned neighboring Territory or State, resulting in moral hazard, thereby escalating the risk of possible default. Further in the context of micro credit, it could result mostly from ghost-borrowing and ring-leader scenarios.
Mitigation
This is being addressed by customer connect program wherein we pro-actively reach out to each individual customer as well as customers in each center to validate that the customers have genuinely applied for the loan and there has been no incidence of commission, following a relationship based mode of engagement so the customer feels a sense of loyalty to the company and is therefore less likely to be part of a mass default by others and implementing an analytics solution to study the credit bureau data and look for warning signs of increased defaults — upto the pin-code level.
Cybersecurity Risk
Cybersecurity risk refers to the potential harm or damage that can occur due to vulnerabilities, threats, or attacks targeting an organizations digital assets, systems, and networks. These risks arise from various sources, including malicious actors such as hackers, cybercriminals, and state-sponsored entities.
Mitigation:
We regularly assess potential cybersecurity threats and vulnerabilities through thorough risk assessments, enabling us to identify and prioritize areas for improvement. Through continuous security awareness training, we ensure that our employees are well-informed about evolving cyber threats and adhere to best practices in cybersecurity.
At Capital Trust Ltd., we take proactive measures to mitigate cybersecurity risks and ensure the protection of our clients data. As part of our security protocols, we have implemented a policy of regularly changing passwords for our systems and accounts.
Every 15 days, we enforce a password rotation policy, requiring employees to update their passwords. This practice reduces the likelihood of unauthorized access due to compromised credentials and enhances the overall security posture of our organization.
By regularly refreshing passwords, we minimize the risk of data breaches and cyber threats, as it limits the window of opportunity for potential attackers to exploit weak or compromised passwords. This proactive approach aligns with our commitment to maintaining the confidentiality, integrity, and availability of our clients sensitive information.
Artificial Intelligence Risk
AI risk, also known as artificial intelligence risk, refers to the potential negative consequences or adverse impacts associated with the development, deployment, or use of artificial intelligence (AI) technologies. These risks can arise from various factors, including technical limitations, ethical concerns, societal implications, and unintended consequences. Some key categories of AI risk include:
Technical Risks:
- Algorithmic Bias: AI systems may perpetuate or amplify biases present in data, leading to discriminatory outcomes or unfair treatment of certain individuals or groups.
- Robustness and Reliability: AI systems may exhibit unexpected behaviors, vulnerabilities, or errors, particularly in complex or unanticipated situations, posing risks to reliability, safety, and security.
- Data Quality and Integrity: AI performance heavily depends on the quality, relevance, and integrity of data. Poor data quality or biased datasets can lead to inaccurate or unreliable AI predictions and decisions.
Security Risks:
- Cybersecurity Threats: AI systems may be vulnerable to cyberattacks, malicious manipulation, or adversarial attacks, compromising data confidentiality, system integrity, and operational resilience.
Mitigation:
- By Conducting regular audits and assessments to identify and mitigate biases, errors, or inconsistencies in training data that could affect AI model performance.
- By maintaining human oversight and intervention mechanisms to complement AI-driven decision-making processes, particularly in high-stakes or sensitive domains - By establishing ethical guidelines, principles, and codes of conduct governing the development, deployment, and use of AI technologies within the organization.
- By fostering a culture of ethical awareness, accountability, and responsible innovation among employees, stakeholders, and partners involved in AI initiatives.
- By empowering employees with the necessary training, expertise, and tools to interpret, validate, and challenge AI recommendations or decisions when necessary.
- Integrate AI risk assessment and management practices into existing risk management frameworks, governance structures, and compliance programs.
- Conduct comprehensive risk assessments to identify, prioritize, and mitigate AI-related risks, including technical, ethical, legal, and regulatory concerns.
Investment in Subsidiaries
As on 31st March, 2024, there are no subsidiray compnies of Capital Trust Limited.
INTERNAL CONTROL SYSTEM
The Company has well documented internal financial controls with risk control matrix for all the critical areas of business and processes. Internal Financial Controls ensure that business is conducted on the set principles efficiently and the company adhere to policies, safeguarding its assets, prevention of errors, accuracy and completeness of the accounting records and the timely preparation of reliable financial information. The internal financial controls of the company are adequate and commensurate with the size of the business.
The Internal Auditors monitor the efficiency and efficacy of the internal control systems in the company, compliance with operating systems/accounting procedures and policies framed by the company. The department is also responsible to review and monitor the risk framework within the company. The department also undertakes audit of its branches covering all aspects of branch operations and credit audit. The department also provides independent assurance on the effectiveness of implementation of risk management framework, including the overall adequacy of the internal control system and the risk control function and compliance with internal policies and procedures.
The Company has adequate systems and procedures to provide assurance of recording transactions in all material respects. During the year, the Internal Auditors reviewed the operating effectiveness of the internal financial controls by undertaking an effectiveness testing of controls covered under the Risk Control Matrices for major processes.
The Internal Audit Department of Capital Trust upholds its departmental Vision of fostering a control environment of the organization, adding value to the organization by continuously improving operational efficiency and safeguarding the interests of the organization. The function will do so by recruiting and retaining the best talent from both internal and external sources in order to raise the profile of the Internal Audit Department within the organization.
The Mission of the Internal Audit Department of Capital Trust is to enable the organization in:
- Focusing on key business activities through motivated, skilled and experienced staff who are responsive to the customers needs;
- Engaging with different entities to facilitate positive changes to existing processes, practices and systems;
- Adopting continuous improvement initiatives and implementing best practices in developing its plan, policies and methods;
- Creating a dynamic working environment which encourages innovation and maximizes the use of new technology;
- Ensuring that its performance is monitored, measured and reported in satisfying the expectations of the different stakeholders.
The internal audit adopts a risk based audit approach and conducts regular audits of all the branches/offices of the Company and evaluates on a continuous basis, the adequacy and effectiveness of the internal control mechanism, adherence to the policies and procedures of the Company as well as the regulatory and legal requirements. The company has well drafted policies and procedure in the form of manuals.
These policies and procedures are well established and followed meticulously. The company adheres to audit process which encompasses risk identification, risk assessment, risk address and reviewing & reporting risk. The Company has established risk management and audit framework to identify, assess, monitor and manage credit, market, liquidity and operational risks. This is extremely important as many of our borrowers do not have any assets and also do not have adequate literacy skills. The company has three levels of the audit which include surprise branch audit, Pre disbursement audit for client identification and checking of credit worthiness of the clients and post disbursal audit. Under the post disbursal audit, the loan utilization is checked. The internal audit department also tracks the attendance of client in the centre meeting.
The audit recommendations are actively followed up and implemented. As part of the effort to evaluate the effectiveness of the internal control systems, our Companys internal audit department reviews all the control measures on a periodic basis and recommends improvements, wherever appropriate. In addition to in-house internal audit department, the company has engaged independent internal auditor who submits its report to the audit committee.
INFORMATION TECHNOLOGY
The company has leveraged technology to effectively reach out to micro-borrowers to fulfil their requirements for income generating loans in a transparent manner. With Aadhaar card as the starting point, our software validates identity and credit history instantly. Zxing, an open-source, multi-format barcode image processing library, scans QRs codes on the Aadhaar Card which instantly sends information to the credit bureau for checking the clients credit history, determining whether the person is eligible for a loan. Through the mobile application, a soft approval for a loan can be given to a client within seconds.
The company uses the Technology to its maximum and helped the company in attaining:
- One of the first NBFCs to start cashless disbursement of all loans since 2015.
- Started process of cashless repayment for all loans (expect Microfinance) in 2019.
- Automated closing of company and all branch books at 6PM daily through collation of issued Digital Receipts (SMSs sent to client on collection of any repayment).
- Client application with access to all details regarding the loan to promote transparency and authenticity.
- Staff and client-facing smartphone applications with access to all details regarding the loan to promote transparency and authenticity
- All staff have access to Capital Sales, the company application, that provides real-time information in even the most remote locations.
- All new staff onboarding through paperless, digitalized processes with joining formalities done within hours - All warehousing of information on cloud.
- Smart credit enabling client on-boarding and in-principle approval from scanning of clients Aadhar card at his doorstep.
- 100% paperless processes. From onboarding to disbursement all processes are
digitalized and through the application with no scope of any manual input into system - No manual entry allowed for any clients
The issuance of digital receipts for the repayments made by the clients, has helped the company is transparency and authenticity in transaction with the clients and reduction of frauds.
SEGMENT - WISE OR PRODUCT - WISE PERFORMANCE
The company has only one segment of business i.e "financing" so there is no segment wise or product wise performance available.
HUMAN RESOURCES
Capital Trust Limited is operating in ten states within India and has more than 1700 employees. The company is market-driven, and technology-based, serving customers in ten states in northern, central and eastern part of India with financial products, and services. The company aims to be the first choice of customers, employees and shareholders.
Capital Trust policy offers equal employment opportunity for all persons, without bias or discrimination. It applies to all employment practices including (but not limited to) recruitment, promotion and training. Selection of business partners is also guided by like principles.
The business of the company is directly affected by the wellbeing of all sections of the society where we operate in. It is CTL,s policy to maintain a working environment free of harassment and intimidation. Any type of harassment (including sexual harassment, verbal or implicit), or intimidation, is a violation of CTL policy, and is dealt with in accordance with corrective action procedures. The company has in place the Sexual Harassment policy, where the company has zero tolerance for any offence.
The human capital is major component in the finance industry besides capital. So having the right people at right place is the major strength of Capital Trust. We believe that the employees working with Capital Trust are realizing their dreams and in return the company achieves it goal.
Capital Trust does not hesitate in recognizing the co-existence of the Company and its Human Capital. Some of the employees in the company have been for more than 30 years with us. The company believes in long term relations with employees and the company has good retention rate.
All the employees of the company are equipped with smart phones. The employees mark their attendance through their mobile, apply for leaves, tours and tour claims through
mobile app only. This has smoothened the processes and reduced the time to settle the claims. This is also environmental friendly as a lot of paper is being saved in printing.
The company has hired some senior people from reputed companies who are expert in their area of activity. With professionals at the top and fully motivated team at the field, the company is bound to grow in the future.
CAUTIONARY STATEMENT
The Management Discussion and Analysis report containing statements used for describing the Companys objectives, projections, estimates, expectation or predictions are ‘forward looking in nature. These statements are within the meaning of applicable securities laws and regulations. Though, Company has undertaken necessary assessment and analysis to make assumptions on the future expectations on business development it does not guarantee the fulfillment of same. Various risks and unknown factors could cause differences in the actual developments from our expectations. The key factors that can impact our assumptions include macro-economic developments in the country, state of capital markets, changes in the Governmental regulations, taxes, laws and other statues, and other incidental factors. The Company undertakes no obligation to publicly revise any forward looking statements to reflect future/likely events or circumstances.
Directors Report 2023-24
Your directors take pleasure in presenting the 38th Annual Report on the business and operations of your company, along with the standalone and consolidated audited financial statements for the year ended March 31, 2024.
1. FINANCIAL RESULTS
The Companys financial performance for year ended 31st March, 2024 is summarized below:
| Particulars | Financials | |
| 2023-24 | 2022-23 | |
| Total Income from operations | 7958.23 | 8691.42 |
| EBIDTA | 1352.50 | (3924.97) |
| Less: | ||
| Interest | 1022.10 | 2162.03 |
| Depreciation | 42.28 | 45.68 |
| Profit Before Tax | 288.12 | (6132.68) |
| Profit/(Loss) after tax | 73.50 | (1568.54) |
| Available for appropriation | 214.62 | (4564.14) |
| Transfer to Reserve fund u/s 45IC of RBI Act, 1934 | 43.23 | |
2. FINANCIAL PERFORMANCE
apital Trust remains committed to innovation in the financial services space. Our Capital Business Loans initiative, launched in 2020, has achieved impressive results. The company is on the growth track. The Asset under management has reached to Rs. 28000 Lakhs.
During the year 2023-24, the total income decreased from Rs. 8,691.42 Lakhs to Rs,. 7,958.32 Lakhs. This is because that in March 2023, the company has written off a significat portion of portfolio. The imcome has shown an increasing trend since Quarter 1 of Financial year 2023-24.
Interest expenses have decreased to Rs. 1,022.10 Lakhs from Rs. 2,162.03 Lakhs. This positive trend is a direct result of our ongoing focus on reducing high-cost debt and optimizing our funding mix.
The company is back to profitabilit with net profit of Rs. 218 Lakhs against theloss of Rs. 4564 Lakhs in 2023. Capital Trust enjoys a positive reputation with stakeholders and a proven history of timely repayments. Our credit rating stands at BB+ (SO) by Care Ratings as of 31st March, 2024.
Capital Trust is well-positioned to navigate the evolving NBFC landscape. We are actively exploring opportunities in South India - for example MSME lending, secured lending, etc. Our focus remains on delivering value to our customers through tailored financial solutions, technological advancements, and an unwavering commitment to responsible lending.
3. FUNDRAISING
In total, the company has raised Rs.11150 Lakhs during the year in the form of Term loans, PTCs, and Direct Assignments from Banks and NBFCs. Further, the company has disbursed Rs.37380 Lakhs during the year both under own funding and partnership model.
4. SHARE CAPITAL
During the year under review, there has not been any change in the Share capital of the company. The paid up capital of the company remains at 16,36,14,150 divided to 1,63,61,415 equity shares of Rs. 10/- each.
5. DIVIDEND
Your directors have not recommended any dividend. Your Company has formulated a dividend Policy in accordance with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR Regulations) to bring transparency in the matter of the declaration of dividends and to protect the interest of investors. The Dividend Distribution Policy forms part of this Report.
6. RESERVE FUNDS
During the year, the company has transferd Rs. 43.20 Lakhs to the reserve fund, in accordance with Section 45 IC of the RBI Act, 1934.
7. CREDIT RATING
As of March 31, 2024, the Companys credit rating stood at BB+ (SO)as assessed by Care Ratings.
8. CONSOLIDATED FINANCIAL STATEMENT
In accordance with Section 129(3) of the Companies Act, 2013 and Accounting Standards (AS) - 21, there is no requirement of Consolidated Financial Statements as on 31st March, 2024 as the company does not have any subisiary.
9. PARTICULARS OF SUBSIDIARY COMPANIES
The Companydoes not have any subsidiary company as on 31st March, 2024..
10. COMPLIANCE WITH RBI GUIDELINES:
Your Company is compliant with all the applicable RBI regulatory norms. The company is complying with all the provisions of the master directions in this regard.
11. CAPITAL ADEQUACY
As of March 31, 2024, the companys consolidated Capital Adequacy Ratio was reported at 29%, signifying robust capital reserves to facilitate future growth initiatives.
12. MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY
There have been no material changes and commitments affecting the financial position of the Company that have occurred between the end of the financial year of the Company to which the financial statements relate and the date of the report. However, the company is proposing to raise equity through prefrential allotment for which the board resolution was passed on 28th June, 2024 .
13. CHANGES IN NATURE OF BUSINESS
There has not been any change in the nature of Business and the company continues to do the business as a Non- Banking Finance Company.
14. CORPORATE SOCIAL RESPONSIBILITY
As per the provisions of Section 135(1) of the Companies Act, 2013, the company has a Corporate Social Responsibility Committee comprising of the below members:
| Name | Designation | Category |
| Mr. Pawan Dubey | Chairman | Independent Director |
| Mr. Yogen Khosla | Member | Managing Director |
| Mr. Vahin Khosla | Member | Executive Director |
| Mr. Sanjiv Syal* | Member | Independent Director |
* till 13th February, 2024
Section 135 of the Companies Act 2013 provides the threshold limit for applicability of the CSR to a Company:
1. net worth of the company to be Rs 500 crore or more; or
2. turnover of the company to be Rs 1000 crore or more; or
3. net profit of the company tobe Rs5 crore or more.
The company does not meet any of the criteria for the FY 2023-24 and therefore Section 135 does not apply to the company.
However the calculations of the CSR Amount (Rs in Lakhs) for the year 2023-24 Average Profit for preceding 3
years (A) (2892.02)
| Particular | FY 2022-23 | FY 2021-22 | FY 2020-21 |
| Net Profit as per Section 198 | (4564.13) | (1082.05) | (3029.89) |
| Minimum amount of CSR | 2% of (A) |
15. RISK MANAGEMENT FRAMEWORK
The companys risk management committee is pivotal in safeguarding our enterprise. This committee assists the Board in overseeing a comprehensive risk management framework that strategically addresses potential risks across a broad spectrum. This includes market, financial, credit, liquidity, interest rate, equity price, security, IT, legal, regulatory, and reputational risks. We actively identify, assess, monitor, and mitigate these risks to protect our business objectives and ensure long-term success.
Our approach extends beyond mere risk identification. We have implemented a robust risk management infrastructure that enables us to develop and implement effective mitigation strategies proactively. The Committee works with the Board and Audit Committee to ensure transparency and oversight. Major risks and corresponding mitigation measures are thoroughly evaluated for maximum effectiveness. This integrated approach, working in tandem with our management systems, organizational structures, processes, standards, and code of conduct, forms a strong defense against the risks inherent in our industry.
In 2024, we made significant enhancements to our Integrated Enterprise Risk Management, Internal Controls Management, and Assurance Frameworks. These improvements help maintain a holistic view of risks, optimize mitigation strategies, and streamline internal control and assurance activities. Our Risk Management Policy underscores this
unwavering commitment to mitigating all current and future material risks. This proactive approach drives business growth, ensures continuity, and bolsters financial stability.
We recognize that effective risk management is not a static process. Our team is dedicated to ongoing evaluation and improvement of our risk management strategies. This forward-thinking approach prepares us to address the evolving risk landscape, fostering a culture of risk awareness, facilitating innovation, and laying the groundwork for sustainable long-term growth.
16. CORPORATE GOVERNANCE
The Company is in compliance with the Corporate Governance requirement of Companies Act, 2013 also those set out by SEBI. The Company has also adhered to the Guidelines on Corporate Governance adopted in accordance with Chapter XI - Corporate Governance of RBI Master Directions. The Company has also implemented several best corporate governance practices as prevalent globally. The report on Corporate Governance as stipulated under Listing Regulations forms an integral part of this Report. The company has also adopted various Social and Environmental policies and the same is placed on the website of the company www.capitaltrust.in.
A certificate from statutory auditors M/s JKVS & Co., Chartered Accountants, confirming compliance with the condition of Corporate Governance as stipulated under the listing Regulation also form part of the Annual Report.
17. CONTRACTS AND ARRANGEMENTS WITH RELATED PARTIES
All contracts / arrangements / transactions entered by the Company during the financial year with related parties were in the ordinary course of business and on an arms length basis. During the year, the Company had not entered into any contract / arrangement / transaction with related parties which could be considered material in accordance with the policy of the Company on materiality of related party transactions.
All Related Party Transactions are placed before the Audit Committee and also the Board for approval. During the Financial Year under review, your Company had not entered into any arrangements, which constitutes Related Party Transactions covered within the purview of Section 188(1) of the Act. Accordingly, requirement of disclosure of Related Party Transactions in terms of Section 134(3)(h) of the Act is provided in Form AOC-2 is not applicable to the Company.
Further as required by RBI Master Directions, ‘Policy on transactions with Related Parties can be accessed on the website of the Company at www.capitaltrust.in
18. PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS
The provisions of Section 186(4) of the Companies Act, 2013 requiring disclosure in the financial statements of the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security is not applicable to us.
19. PUBLIC DEPOSITS
Being a Non Deposit taking Non-Banking Financial Company, your Company has not accepted any deposits from the public under section 73 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 during the year under review.
20. ANNUAL RETURN
The Annual Return in Form MGT-7, as per provisions of Section 92(3) and 134(3) (a) of Companies Act, 2013 and rules thereto, is available on website of the company at www.capitaltrust.in
21. NUMBER OF MEETINGS OF THE BOARD
The Board met 4 (Four) times during the financial year 2023-24 viz., on May 27, 2023, August 14, 2023, November 08, 2023 and February 13, 2024.
The maximum interval between any two meetings did not exceed 120 days.The details of these meetings are given in Corporate Governance Report, which forms part of Directors Report.
22. DIRECTORS RESPONSIBILITY STATEMENT
Pursuant to Section 134(5) of the Companies Act, 2013, Your Directors state that:
i. in the preparation of the annual accounts for the year ended March 31, 2024, the applicable accounting standards read with requirements set out under Schedule III to the Act, have been followed and there are no material departures from the same;
ii. the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2024 and of the profit of the Company for the year ended on that date;
iii. the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;
iv. the Directors have prepared the annual accounts on a going concern basis;
v. the Directors have laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and are operating effectively; and
vi. the Directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively.
23. DETAILS OF ADEQUACY OF INTERNAL FINANCIAL CONTROLS WITH REFERENCE TO THE FINANCIAL STATEMENTS
The Company has adequate internal controls and processes in place with respect to its operations, which provide reasonable assurance regarding the reliability of the preparation of financial statements and financial reporting as also functioning of other operations. These controls and processes are driven through various policies and procedures. During the year, such controls were tested and no reportable material weakness in the design or operations were observed.
24. DIRECTORS & KEY MANAGERIAL PERSONNEL
A) RETIRE BY ROTATION
During the year under review, Mr. Vahin Khosla (DIN-07656984), Director of the Company, retires by rotation. He being eligible offers himself for reappointment as Executive Director of the Company.
b) APPOINTMENT/ RESIGNATION
During the year, Mr. Sanjiv Syal has resigned from the directirshop of the company with effect from 13th February, 2024 due to pre occupancy.
BOARDS INDEPENDENCE
Based on the confirmation/disclosures received from the Directors and on evaluation of the relationships disclosed, the following Non-Executive Directors are Independent in terms of Section 149(6) of the Companies Act, 2013 and the requirements of Listing Regulations :-
1. Mr. Sanjiv Syal (DIN 00271256) (Till 13th February, 2024)
3. Ms. Suman Kukrety (DIN 08730773)
4. Mr. Pawan Dubey (DIN 01767875)
5. Mr. Govind Saboo (DIN 06724172)
Declaration by Independent Directors:
Independent Directors have submitted the declaration of Independence, as required pursuant to Section 149(7) of the Act, stating that they meet the criteria of Independence as provided in section 149(6) of the Companies Act, 2013 and are not disqualified from continuing as Independent Directors.
25. POLICY FOR SELECTION AND APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY
The appointment of the directors of the company is as per the Policy framed for the Selection and Appointment of Directors. The policy is in compliance with the provisions of the Companies Act, 2013 and SEBI Listing (Obligations and Disclosure Requirements) Regulations. The directors are appointed on the recommendation of the Nomination and Remuneration Committee. The Policy is available on the website of the Company at www.capitaltrust.in
26. NOMINATION AND REMUNERATION POLICY
The Company pursuant to the provisions of Section 178 of the Companies Act, 2013 has formulated and adopted a nomination and remuneration policy which is disclosed on our website.
27. ANNUAL EVALUATION OF BOARD MEMBERS
The Company has devised a Policy for performance evaluation of Independent Directors, Board, Committees and other individual Directors which include criteria for performance evaluation of the non-executive directors and executive directors.
Pursuant to the provisions of the Companies Act 2013 and the corporate governance requirements as prescribed by Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations 2015 ("SEBI Listing Regulations"), the Board is required to carry out an annual performance evaluation of its own performance, the directors individually as well as the evaluation of the Audit Committee, Nomination and Remuneration Committee.
The executive Directors are evaluated on the basis of
| Organizational goals | Persistence | Continuous improvement | Decency |
| Humility | Integrity | Setting a vision for companys work | Managing execution |
| External communication and relationship building | Enhancing potability | Understanding of and commitment to the company | Building strong organisation |
The Independent Directors are evaluated on the basis of:
• Structure of the Board - Competency, Experience and Qualifications of directors, Diversity in Board under various parameters, Appointment Process
• Meetings of the Board - Regularity of meetings and adequacy, discussions and recording of dissent, if any.
• Recording of minutes, dissemination of information
• Functions of the Board - Role and responsibilities of the Board
• Strategy and performance evaluation
• Management of Conflict of interest
• Stakeholder value and responsibility
• Corporate culture and values
• Facilitation of independent directors
• Evaluation of performance of the management and feedback
• Independence of the management from the Board
• Access of the management to the Board and Board access to the management
The company has also formulated familiarisation of Independent Directors. The details of programmes for familiarisation of Independent Directors with the Company, their roles, rights, responsibilities in the Company, nature of the industry in which the Company operates, business model of the Company and related matters are put up on the website of the Company www.capitaltrust.in.
A statement on formal evaluation of the Board is mentioned in the Corporate Governance Report which is provided separately in this Annual Report.
Information on Directors Appointment /Re-appointment
A brief resume of the Director proposed for the appointment/re-appointment at the ensuing Annual General Meeting, the nature of his/her experience in specific functional areas and name of Companies in which he hold Directorship and Membership of committees of the Board are provided in the Notice of the Annual General Meeting of the company.
28. COMMITTEES OF THE BOARD
In accordance with the Companies Act, 2013 and Listing Regulations, the Company has following Committees in place:
• Audit Committee
• Stakeholders Relationship Committee
• Corporate Social Responsibility Committee
• Nomination and Remuneration Committee
• Risk Management Committee
The company also has Asset Liability Committee.
Details of the said Committees along with their charters, composition and meetings held during the financial year, are provided in the "Report on Corporate Governance", as a part of this Annual Report.
29. EMPLOYEE STOCK OPTION SCHEME
Capital Employee Welfare Trust under Capital Trust Employee Stock Option Scheme, 2016 holds 143915 shares. The trust has not granted any shares to employees yet. There has not been any further allotment of shares to the Trust.
30. VIGIL MECHANISM
The company has adopted Vigil Mechanism policy with a view to provide a mechanism for directors and employees of the Company to report to the appropriate authorities concerns about unethical behaviour, actual or suspected, fraud or violation of the Companys code of conduct policy and provides safeguards against victimization of employees who avail the mechanism and also provide for direct access to the Chairman of the Audit Committee. The provisions of this policy are in line with the provisions of the Section 177(9) and (10) of the Companies Act, 2013 and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations 2015. The policy is available on the website of the company www.capitaltrust.in.
31. DISCLOSURE UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION AND REDRESSAL) ACT 2013 READ WITH RULES
The Company is in compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and has a prevention of sexual harassment policy in place. The Directors further state that during the year under review, there was no case filed pursuant to the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. The policy on Sexual Harassment of Women at Workplace is available on the website of the company www.capitaltrust.in.
32. AUDITORS AND AUDITORS REPORT
a) Statutory Auditors
The Statutory Auditors of the Company M/s JKVS & Co. Chartered Accountants (Firm Registration No. 302049E), were appointed as the statutory auditor of the from Extraordinary General Meeting held on 12th March, 2022 for the period of 5 years on such remunerations may be mutually agreed between the Board of Directors of the Company and the Auditors. The same is being ratified.
b) Secretarial Audit
Section 204 of the Companies Act, 2013 inter-alia requires every listed company to annex with its Boards report, a Secretarial Audit Report given by a Company Secretary in practice, in the prescribed form.
The Board has appointed M/s Shashank Sharma and Associates, firm of Practising Company Secretaries, to conduct Secretarial Audit for the financial year 2023-24. The Secretarial Audit Report for the financial year ended March 31, 2024 forms part of this Report. The Report does not contain any qualification, reservation or adverse remark.
c) Internal Auditor
The Company had appointed Mr. Vijay Malviya as Internal Auditor. The Internal Auditor has submited reports on quarterly basis which is placed before the audit committee of company.
33. EXPLANATIONS ON COMMENTS BY THE BOARD ON ANY QUALIFICATION, RESERVATION OR ADVERSE REMARK OR DISCLAIMER MADE
(i) Statutory Auditors report
There are no disqualifications, reservations, adverse remarks or disclaimers in the auditors report.
However, the auditors have observed that:
A. During the year, the Company has transferred Rs. 8.36 Lakhs to Investor Education and Protection Fund with delay of 18 days.
In response to it, we would like to inform you that there was technical issues with website where the forms could not be filed.
B. According to the records of the Company examined by us, the Company is generally regular in depositing undisputed statutory dues including Goods and Service Tax, Provident Fund, Employees State Insurance, Income-tax, Sales tax, Service tax, Duty of customs, Duty of excise, Value Added tax, Cess and other statutory dues as applicable, with the appropriate authorities. There were no undisputed outstanding statutory dues as at the year end for a period of more than six months from the date they became payable other than Provident Fund amounts to Rs. 4.27 Lakhs, Employees State Insurance amounts to Rs. 1.06 Lakhs and Professional Tax amounts to Rs. 1.34 Lakhs.
In response to that it is submitted that the there were some employees where there is mismatch between the name in their Adhar and PAN and therefore their UAN is either not generated or not linked. Therefore the amount can not be deposited. The company has separately parked this amount and will deposit once the issue is resolved by employees.
C. Based upon the audit procedures performed and considering the principles of materiality outlined in Standards on Auditing, for the purpose of reporting the true and fair view of the financial statements and according to the information and explanations given to us, we have neither come across any instance of fraud by the Company or on the Company noticed or reported during the year nor have we been informed of any such case by the management during the course of audit except frauds discovered by the Company aggregating Rs. 5.40 Lakhs committed by employees by embezzlement of cash against which the Company has recovered Rs. 2.14 Lakhs and balance Rs. 3.26 Lakhs has been provided for doubtful in the statement of profit and loss.
In response, it is submitted that the nature of the business involves some clients repaying their loan installments in cash at the branch office. In a few instances, employees did not deposit this cash in the bank and absconded with the money. The company has already recovered a portion of the lost funds and has initiated action against those employees.
(ii) Secretarial Auditors Report
The Secretarial Audit Report does not contain any qualification, reservation or adverse remark made by Secretarial Auditor.
(iii) Internal Auditors Report
The Internal Audit Reports does not contain any qualification, reservation or adverse remark made by Internal Auditor.
34. DETAILS OF FRAUDS REPORTED BY THE STATUTORY AUDITORS
Based upon the audit procedures performed and considering the principles of materiality outlined in Standards on Auditing, for the purpose of reporting the true and fair view of the financial statements and according to the information and explanations given to us, we have neither come across any instance of fraud by the Company or on the Company noticed or reported during the year nor have we been informed of any such case by the management during the course of audit except frauds discovered by the Company aggregating Rs. 5.40 Lakhs committed by employees by embezzlement of cash against which the Company has recovered Rs. 2.14 Lakhs and balance Rs. 3.26 Lakhs has been provided for in the statement of profit and loss.
In response to that it is submitted that the the nature of the business is such that cash is collected from customers and same is to be deposited in the bank account. In some cases the employees take away the cash. The company has zero tolerance towards the frauds and legal action is taken against the fraudulent employees .
35. TRANSFER OF AMOUNTS TO INVESTOR EDUCATION AND PROTECTION FUND
There are no amounts due and outstanding to be credited to Investor Education and Protection Fund as at 31st March, 2024.
36. CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING IN COMPANYS SECURITIES
Your Company has formulated Code of Conduct for Prevention of Insider Trading in Companys Securities (‘Code) in accordance with SEBI (Prohibition of Insider Trading) Regulations, 2015, as amended. The objective of this Code is to protect the interest of Shareholders at large, to prevent misuse of any price sensitive information and to prevent any insider trading activity by way of dealing in securities of the Company by its Designated Persons. Ms. Tanya Sethi, Company Secretary and Compliance Officer of the Company is authorized to act as Compliance Officer under the Code.
37. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO
Conservation of Energy/ Technology Absorption
As the Company is not engaged in the manufacturing activity, the prescribed information regarding compliance of rules relating to conservation of Energy and Technology absorption pursuant to Section 134 (3) (m) of the Companies Act, 2013, read with Rule — 8 (3) of the Companies (Accounts)Rules, 2014 is not provided.
Foreign Exchange Earnings and Outgo
The Foreign exchange earnings for the FY 2023-24 were Nil.
Foreign Exchange Inflow: Nil Foreign Exchange Outflow: Nil
38. EMPLOYEE REMUNERATION
A. The statement containing particulars of employees as required under Section 197 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, is given below:
| S. No. Details | Disclosure by the Company |
| 1. The ratio of the remuneration of each Whole time director to the median remuneration of the employees of the company for the financial year | Managing Director : 105:1 Executive Director : 40:1 |
| 2. The percentage increase in remuneration of each director, Chief Financial Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the financial year | Managing Director : Nil Executive Director : Nil Chief Financial Officer : 10% Company Secretary: 10% |
| 3. The percentage increase in the median remuneration of employees in the financial year; | Nil |
| 4. The number of permanent employees on the rolls of Company | 1834 |
| 5. Average percentile increase already made in the salaries of employees other than the managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration | There has been 10% increase in remuneration of employees during the year. |
| 6. Affirmation that the remuneration is as per the remuneration policy of the company | Yes |
b. In accordance with the provisions of Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the names and particulars of the top ten employees in terms of remuneration drawn are set out below:
a. if employed throughout the financial year, was in receipt of remuneration for that year which, in the aggregate, was not less than One Crore Two lakh rupees :
| S. No. Particulars | Details |
| 1. Name and Designation | Mr. Yogen Khosla,Managing Director |
| 2. Remuneration received | Rs. 179.467 Lakhs |
| 3. Nature of Employment | Permanent |
| 4. Qualifications | Mr. Yogen Khosla is a commerce and Experience graduate from Loyola College, Chennai. He introduced the company into retail lending of Micro loans in rural and semiurban areas in 2008. He has led the company to being adjudged as to one of the top 100 Small and Medium Enterprises in India by India SME Forum in 2017. |
| 5. Date of Commencement of Employment | 01-04-2003 |
| 6. Age | 60 |
| 7. Last Employment | Associated with the company since inception |
| 8. Percentage of Held | Equity Shares 36.91% |
b. if employed for a part of the financial year, was in receipt of remuneration for any part of that year, pro rata rate which, in the aggregate, was not less than Eight Lakhs Fifty thousand rupees per month; NIL
c. if employed throughout the financial year or part thereof, was in receipt of remuneration in that Year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two percent of the equity shares of the company. : NIL
39. GRIEVANCE REDRESSAL
Your Company has adopted a well-structured customer grievance redressal mechanism and provides customers a reliable and easily accessible interface for timely and fair resolution of enquires & complaints. The helpline Number is printed on each document shared with the customers and a person is dedicated to address the customer grievances. The helpline number is available in each branch with the contact person and the contact details of the Officials of the Reserve Bank of India for escalation of grievances if company is unable to redress the complaints. Grievance Redressal Mechanism is also available on the website of Capital Trust to facilitate easy access.
40. DETAILS OF SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATIONS OR COURTS OR TRIBUNALS IMPACTING THE GOING CONCERN STATUS AND COMPANYS OPERATION IN FUTURE
There have been no significant and material orders passed by the Regulators or Courts or Tribunals impacting the going concern status and companys operations in future.
41. ADDITIONAL DISCLOSURES UNDER COMPANIES (ACCOUNTS) RULES, 2014
a. The details of application made or any proceeding pending under the Insolvency and Bankruptcy Code, 2016 (31 of 2016) during the year along with their status as at the end of the Financial Year:
During the Financial Year under review, the Company has made neither any application nor any proceeding is pending under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), therefore, it is not applicable to the Company.
b. The details of difference between amount of the valuation done at the time of one-time settlement and the valuation done while taking loan from the Banks or Financial Institutions along with the reasons thereof.
During the Financial Year under review, it is not applicable to the Company.
42. DIVIDEND DISTRIBUTION POLICY
(i) Scope and Purpose
a. Capital Trust Limited ("the Company") equity shares are listed on the BSE Limited and the National Stock Exchange of India Limited.
b. This Dividend Distribution Policy ("the Policy") defines conditions to be considered by the Board for recommending / paying a dividend to the shareholders of the Company. The Board of Directors will recommend any interim / annual dividend based on this Policy, applicable laws, as well as any specific financial or market conditions prevailing at the time.
c. Subject to the factors mentioned in para 1.2 above, the Company has a consistent dividend policy for "distribution of dividend out of profits and the Board may recommend the rate".
d. The Policy set out the broad criteria to be considered for determining the proposed dividend to appropriately reward shareholders through dividends while supporting the future growth of the Company.
(ii) Dividend Policy
a. Dividend Distribution Philosophy
i. The Company believes in long term value creation for its shareholders while maintaining the desired liquidity and leverage ratios and protecting the interest of all the stakeholders. Accordingly, the focus will continue to be on sustainable returns in terms of dividend, in consonance with the dynamics of business environment.
b. The circumstances under which shareholders may not expect dividend
i. The Company shall comply with relevant statutory requirements that are applicable to the Company in declaring dividend or retained earnings. Generally, the Board shall determine dividend for a particular period after taking into consideration financial performance of the Company, advice of executive management and other parameters described in the Policy.
c. The financial parameters that shall be considered while declaring dividend
i. As in the past, subject to provisions of applicable law, the Companys dividend pay-out will be determined based on available financial resources, investment requirements and taking into account optimal shareholder return.
ii. Based on above and, subject to factors mentioned in para 2.4 below, the Company will endeavour to maintain steady level of dividend.
d. The internal / external factors that shall be considered for declaration of dividend
i. When recommending / determining the dividend, the company will consider, amongst other matters:
1. actual results for the year and the outlook for business operations
2. providing for anticipated capital expenditures or acquisitions to further enhance shareholder value or meet strategic objectives
3. setting aside cash to meet debt repayments
4. changes in cost and availability of external financing
5. level of dividends paid historically
6. retaining earnings to provide for contingencies or unforeseeable events
7. the overall economic environment including taxation
8. changes in government policy, industry rulings and regulatory provisions
e. Policy on utilization of retained earning
i. The utilization of retained earnings will include:
1. Inorganic / organic growth
2. Diversification opportunities / capital expenditure
3. Fund based requirement of company, its subsidiaries, joint ventures and/or other investee companies
4. General corporate purposes including contingencies
5. Investments in the new/existing business
6. Any other permitted use under the Companies Act, 2013 and applicable laws
f. Provisions with regard to various classes of shares
i. The provisions contained in this policy shall apply to all classes of shares of the Company. It may be noted that currently the Company has only one class of shares, namely, equity shares.
(iii) Review and Disclosure
a. This policy will be reviewed and amended, as and when, required by the Board and/or under applicable laws. Any revisions in the Policy will be communicated to shareholders in a timely manner.
(iv) Limitation
a. In the event of any conflict between the Act or the SEBI Regulations or other statutory enactments ("the Regulations") and the provisions of this policy, the Regulations shall prevail over this policy. Any subsequent amendment / modification in the Regulations, in this regard, shall automatically apply to this policy.
(v) Disclaimer
a. The Policy does not constitute a commitment regarding future dividends of the Company, but only represents a general guidance regarding payment ofdividend.
b. The statement of the policy does not in any way restrict right of the board to use its discretion in the recommendation of the dividend to be distributed considering various factors mentioned in the policy. Further, subject to the provisions of
applicable laws, the board reserves the right to depart from the policy as and when circumstances so warrant.
43. REGISTER E-MAIL ADDRESS
To contribute towards a greener environment, the Company again proposes to send documents like general meeting notices/other notices, annual report, audited financial statements, boards report, auditors report or any other document, to members in electronic form at the e-mail address provided by them and/or available to the Company by the Depositories. Members who have not yet registered their e-mail address (including those who wishes to change their already registered e-mail address) may get the same registered/updated either with his / her depository participants or by writing to the Company / RTA.
44. ACKNOWLEDGMENTS
The Board of Directors acknowledge and place on record their appreciation for the guidance, co-operation and encouragement extended to the Company by the Government of India, Ministry of Corporate Affairs, Reserve Bank of India, Securities and Exchange Board of India, National Stock Exchange of India Limited,Bombay Stock Exchange Limited and other concerned Government departments/agencies at the Central and State level as well as various domestic financial institutions/banks, agencies etc. Your Directors also convey their gratitude to the shareholders, various various Banks/Multilateral agencies/financial Institutions/ credit rating agencies for the continued trust and for the confidence reposed by them in CTL.
The Company is also thankful to the Statutory Auditors and Secretarial Auditor for their constructive suggestions and co-operation.We would also like to place on record our appreciation for the untiring efforts and contributions made by the employees towards the growth of the Company.
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+91 9892691696
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