Cholamandalam Investment & Finance Company Ltd Management Discussions

MACROECONOMIC OVERVIEW

The Indian economy had a strong GDP growth of 8.20% in real terms in FY 24, against an advance estimate of 7.6%. The growth was driven by capital formation and investment for the most part and to a lower extent by private and public consumption. The year was marked by sound fundamentals, with inflation trending towards RBIs target level of 4%, forex reserves at all time high levels and interest rates held at the same level with an accommodative stance to spur growth. The RBI deployed a range of monetary tools in order to manage liquidity and forex at desired levels and ensured that the daily call rate was aligned with the policy rate. While there was no change in stance of the monetary policy, the market reading of the monetary policy statements indicated that the interest rate had peaked. The impact of global geopolitical events on India was limited to slowing global demand, volatility in fuel prices and foreign exchange. The building blocks are largely in place for a growth of 7.2% in FY 25. Monsoons are as expected and this is likely to be a positive trigger for rural consumption. Government cash balances are bolstered with largesse from the RBI by way of higher than expected dividends. The fiscal deficit is likely to be within the target of 5.1% in FY 25 . Corporate balance sheets are largely de-leveraged & healthy and private investment is on track. The interest rate environment is likely to be benign with the bond market being robust. While central banks around the world have divergent views on the outlook for interest rates, the RBI maintains that the domestic conditions would set the path for interest rates in India. Consequently, the growth estimate for FY 25 has been revised upwards to 7.2%.

The challenges to the growth trajectory are geo-political risks, food inflation triggered by heatwaves and climate risks, rising non-fuel commodity input prices of corporates and job creation for a rising population.

INDUSTRY GROWTH PROSPECTS Automobile Industry

The Indian commercial vehicle (CV) industry reported a fiat growth in FY 24 after two years of strong growth. The Heavy Commercial Vehicle (HCV) and Light Commercial Vehicle (LCV) segments had a growth of 2% and 3% respectively for FY 24 while the Small Commercial Vehicle (SCV) segment had a 6% de-growth in FY 24. The growth in commercial vehicle segment is expected to continue at a single digit growth in FY 25. The Passenger Vehicle (Car & MUV) segment had a growth of 8% in FY 24 , driven by replacement demand and the launch of new models especially in the MUV segment. The Two-wheeler industry had a growth of 13% in FY 24 and this segment is expected to grow at a moderate pace in the coming year supported by a recovery in rural demand.

Construction Equipment Industry

The Construction Equipment industry had a growth of 23% in FY 24 driven by an accelerated government spend on infrastructure. There might be a moderation in demand in the near future after two years of double-digit growth.

Tractor Industry

The Tractor industry had a de-growth of 6% in FY 24 due to the high base effect of the previous year. This segment is expected to grow at a modest pace with expectations of normal monsoon and an uptick in rural demand.

Loan Against Property

The industry size of the Loan Against Property segment stands at around Rs. 10 lakh crore. Out of this, NBFCs & HFCs have a market share of 46%. The NBFC LAP portfolio is expected to grow by 21-23% in FY 25 driven by a favourable economic environment and increase in business activities.

Housing Finance (Home loans)

The size of the Affordable Housing Finance segment (AHFC) with an industry size of Rs. 1 lakh crore continues to deliver a robust growth of 26%. The growth is spurred by government initiatives aimed at achieving "housing for all." AHFCs constitutes 13% of the housing finance industry. This is expected to maintain a healthy growth rate of 12-14% per annum on the back of a revival in demand for affordable housing.

Personal and Professional Loan Segment

The personal and professional loans sector stands out as one of the fastest-growing segments in the Indian financial services industry. This sector experienced a surge in activity following the pandemic and is expected to further grow. Despite this rapid expansion, there remains a significant portion of individuals in India who lack access to formal sources of credit.

In addition, the demand for credit within the Micro Small and Medium Enterprises (MSME) sector is consistently increasing year on year with the credit deficit in this sector estimated to be about

Rs. 42 lakh crore with over 60 percent of MSMEs not having access to institutional credit. Recognizing the need for greater financial inclusion in both the consumer and small enterprises sector,

Chola entered this space in November 2021. Considering the increasing size and scope of digital lending in India and the growth in the consumer durable lending space, the CSEL division added the direct-to-consumer journey and consumer durable lending business to its portfolio. The CSEL division offers collateral-free personal and professional loans to both salaried and self-employed professionals, as well as business loans tailored for small enterprises in the manufacturing, trading, and services sectors. It also offers consumer durable loans for mobile phones through a tie up with Samsung. The division engages with potential customers through a mix of traditional, direct-to-customer, and digital partnership channels.

Small and Medium Enterprises (SME)

The MSME sector is a major contributor to the socio-economic development of the country. In India, the sector has gained significant importance due to its contribution to Gross Domestic Product (GDP) of the country and exports. The sector also offers opportunities for entrepreneurship development especially in semi-urban and rural areas of India. With rising demand, improved credit performance and promising economic growth prospects, it is an opportune time for lenders to expand their MSME credit portfolios. The number of MSMEs in the country is expected to grow from 6.3 crore, (of which only 2.5 crore have ever availed credit from formal sources) to approximately 7.5 crore in the coming times, growing at a projected CAGR of 2.5%. While traditional banks have focused on MSME lending through models such as co-lending, Non-Banking Financial Companies (NBFCs) have emerged as lenders on the back of bank credit for onlending policies introduced by RBI and have grown their MSME loans over three times faster. NBFCs offer custom-fit financing solutions, a major advantage for MSMEs with unique needs.

BUSINESS ANALYSIS VEHICLE FINANCE (VF)

The vehicle finance disbursements during the year were at an all-time high of Rs. 48,348 crores as against Rs. 39,699 crores in the previous year with a growth of 22%. The VF division was able to grow in the new passenger vehicle segment over last year by 31% in line with industry growth. Disbursements in Two-Wheeler grew by 38% over last year. The used vehicle disbursements also grew by 33% over the previous year. Assets Under Management (AUM) for the business grew by 26% to Rs. 84,498 crores in FY 24 compared to

Rs. 66,938 crores in FY 23. The PBT during the year was Rs. 2,532 crores as against Rs. 2,272 crores in the previous year with a growth of 11%. The VF division restricted gross stage 3 assets to 3.02% in FY 24 as against 3.20% in FY 23 through its intense focus on collections. The VF business will endeavour to maintain higher marginal yields across its segments considering the increase in borrowing rates and focus on driving higher disbursals in the high yield segments which will help in improving Net Income Margin (NIM).

The VF business will focus on increasing its reach in Tier 4 & Tier 5 markets thereby de-risking business concentration and enabling better spread of field force for new acquisition of customers, collection coverage and efficiency. Retaining its existing customers through innovative technology and mobile applications with limited intervention of field force will be a key focus. Analytics based credit underwriting with pre-approved offers for both new and existing customers will help in faster loan delivery. The in-house Gaadi Bazaar platform helps in improving customer experience for all service-related queries, cross-selling and vehicle discovery needs. AI based collection monitoring and digital modes of collection in early buckets will help to curtail flows and reduce costs. Collection infrastructure at the field level will be aligned at a product and stage wise bucket level to further improve efficiencies.

LOAN AGAINST PROPERTY (LAP)

LAP business has achieved Rs. 13,554 crores of disbursements in FY 24, which is 46% higher than FY 23 disbursements. The AUM for the business grew by 38% to Rs. 29,859 crores in FY 24 compared to Rs. 21,588 crores in FY 23. Pan-Indian presence and geographical penetration into new markets, introduction of localized credit policy in line with market developments, increased contribution from rural branches have led to this growth. LAP is one of the major sources of funding for the MSME community in India. LAP business is an active contributor to MSME growth by way of lending to them for business expansion and working capital requirements. 97% of LAP disbursements in FY 24 is towards Self Employed Non-Professionals (SENP) community. As of FY 24, LAP business has 615 branches in rural locations, which is 78% of total LAP branches across India. In FY 24, LAP business has disbursed Rs. 5,165 crores in rural locations, amounting to 38% of total disbursements. The business continues to focus on a systematic approach to build a healthy portfolio mix, with more than 78% of the portfolio being residential properties and an average loan ticket size of less than Rs. 50 lakhs. Average Loan-to-Value (LTV) ratio at origination is consciously maintained at 50% levels which provides adequate security cover to the business. The asset quality of this business has shown steady improvement with the net credit losses and Stage 3 assets coming down significantly with consistent improvement in collection efficiency. Stage 3 assets of LAP business stand at 2.4% as of March 2024 compared to 4.02% as of March 2023.

HOME LOANS (HL)

As of March 31, 2024, the HL business had 1.10 lac live accounts (58% growth Y-o-Y) with an AUM of Rs. 13,404 crores (59% growth Y-o-Y). 97% of the portfolio is from Tier II, III, IV cities and towns. The disbursements grew by 66% Y-o-Y from Rs. 3830 crores in FY 23 to

Rs. 6362 crores in FY 24. The target group remains the lower middle income group customer. The average ticket size is Rs. 13 lakhs with an average LTV of 50%. 83% of the portfolio comprises business owners with semi-formal income and significant business vintage and 24% of customers are first time borrowers. The HL business leverages Cholas strength in reaching out and underwriting lower and middle-income borrowers across the country, penetrating to the smallest villages and towns. Chola offers loans for self-construction, purchase of resale fiats, purchase of new fiats uses, balance transfer from other financiers, mortgage of existing house for business use and shop loans. Chola enjoys a significant presence in Tier II, III, IV towns and cities. Apart from expanding its reach in states where HL already has established presence, HL established Pan Indian presence by expanding its branch network to states such as Uttar Pradesh, Bihar, West Bengal, Orissa, Assam and Jharkhand. Home loans are serviced through 701 touchpoints across 20 states. The business has been strengthening the channel partner network in order to reach out to more customers. Chola continues to build a strong ecosystem of channel partners, coupled with its digital offerings for customer service and on-boarding making it a trustworthy choice for customers pan India.

CONSUMER & SMALL ENTERPRISE LOAN (CSEL)

As of 31 March, 2024, the CSEL business has been serving close to 12 lakh customers with an AUM of _ 11,280 crores. The business has expanded across the country covering 25 states and 4 union territories with over 205 area offices. The division has active strategic partnerships with eight prominent Fintech firms, in order to enhance financial inclusion, particularly among economically active individuals who lack sufficient access to formal credit. In FY 23, the division launched Direct to Customer (D2C) digital lending journey through the Chola One application and in FY 24 it launched consumer durables lending vertical through a tie up with a leading mobile phone manufacturer for mobile phones.

The divisions primary strengths encompass a transparent end-to-end digital process, an exceptional customer experience journey, robust data-driven underwriting, and risk management capabilities. These factors coupled with the trust instilled by the Chola brand, position the division favourably to emerge as a leading player in this segment.

SMALL AND MEDIUM ENTERPRISES LOAN (SME)

As of 31 March 2024, the SME business has around 20,000 MSME customers with an AUM of Rs. 5,000 crores. The business has expanded across the country covering 20 states with over 70 branches. The division has entered into strategic partnerships with more than 16 OEMs and 10 leading Fintech companies to drive greater financial inclusion in the market.

With growing Small and Medium Enterprises ecosystem, Cholas SME loans business division provides a bouquet of products to meet the requirements of working capital and capex of SMEs.

Product & Customer Segment: The SME division focuses on the following product segments:

• Secured Term loan: Secured Term Loans are offered to formal SME Segments with loan amounts ranging from Rs. 50 Lacs to

Rs. 15 crs, which are backed by land & building as primary collateral. End use of loan is usually for capacity expansion, branch expansion and Long-term working capital requirements. Assessment is done basis audited financial statements, GST returns, banking behaviour and positive cash flow from operations with average LTV ranges from 60% to 70% of the estimated market value of the property.

• Equipment funding: These are term loans provided to MSME clients against hypothecation of machinery. The targeted market segment under this division are machine tools, plastic and packaging, textiles, medical equipment and printing industries. Chola collaborates with a select group of top OEMs in the industry to offer the equipment funding facility. Assessment is done basis audited financial statements, viability of the machine, GST returns, banking conduct etc. LTV offered ranges from 65% to 75% depending on the machine categorization, OEM Tie-ups and marketability of the asset.

• Vendor Invoice discounting and Channel finance: Major growth drivers for the supply chain finance market in the country, has been the increasing demand for working capital financing with growing adoption of digital technologies. These are short term revolving credit of upto 90 days tenure with sanctions valid for one year backed by invoice to vendors or dealers. This is mainly based on Anchor tie up with Mid and large Corporates by way of MOU. Chola intends to boost MSMEs access to working capital funds through these alliances and direct channels.

• Loan Against Securities: Loan against securities offers loans to Retail and HNI investors and promoters against the pledge of securities and Mutual funds units. Instead of selling their securities and incurring capital gains taxes or disrupting long-term investment strategies, investors can utilize the value of their investment portfolio to secure a loan.

SECURED BUSINESS AND PERSONAL LOAN (SBPL)

The Indian lending landscape faces a unique challenge: a segment that remains largely untapped despite possessing collateral and repayment capacity. This segment, distinct from regular Loan Against Property (LAP) borrowers, encounters barriers due to financial, geographical, and profile-related norms set by prime LAP lending institutions.

An added challenge to this scenario is that many Indian households live in rural areas where banking services are scarce and inadequate. This creates an unmet demand for financial services and an opportunity for the sector to tap into. India faces high levels of financial exclusion due to factors such as low income, lack of financial literacy, high costs, and poor infrastructure. As a result, many people still rely on informal sources of credit, such as relatives, money lenders, and landlords.

SBPL offers collateral backed business and personal loans on the basis of the credit assessment and cashflow projections of these businesses. Depending on eligibility and type of property, customers may avail loans with ticket sizes between Rs. 2 lakhs to

Rs. 8 lakhs at a loan-to-value (LTV) of up to 50%. The loan will be given for a tenure of up to 10 years.

As of March 31, 2024, the SBPL business had crossed 34,000 live accounts with an AUM of Rs. 1,404 crores. The average ticket size is around Rs. 4.30 lakhs with average tenure of 6 years. SBPL vertical is currently operating across over 260 branches spanning 11 states and plans to expand its reach to over 360 branches spanning 12 states by end of FY 25, with the primary focus on Tier 3 to Tier 6 cities. This business has digitised the entire customer loan journey for a hassle-free loan.

Key Di_erentiators include personalized doorstep service to customers, unique assessed income programme for business owners, transparent end-to-end digital process and customized product focusing on new to credit customers.

ASSET LIABILITY MANAGEMENT (ALM)

The year FY 24 started off with the expectation of interest rate cuts, globally and in India. Infiation was in focus and there was a steady guidance by RBI to steer it to the targeted rate. The RBI maintained its policy stance through the year, managing liquidity and supporting growth of the economy. Geopolitical factors, erratic monsoon and deficit in liquidity in Q3, impacted the interest rate environment adversely. The interest rates in the economy were relatively soft in the first half of FY 24 with the 10 year G-Sec trending down from 7.40% to as low as 7.10%; however there was an upward shift in the yield curve in the second half of FY 24 and the 10 year G-Sec touched a high of 7.50% mid-October. The regulatory intervention by RBI in Q3 on bank credit to NBFCs, resulted in a dip in availability of credit to NBFCs and a spurt in the spreads and cost of funds. The company ensured that the liquidity risk and interest rate risk were mitigated by ensuring a pipeline of fund availability through broad-basing of sources of funds, bringing in new investors and lenders. ALM was managed by borrowing an appropriate mix of long term and short-term borrowings. The first public issue of NCDs, for which a shelf prospectus for

Rs. 5,000 cr. was filed in March 2023, was fully raised in four tranches. All the tranches received sound response from investors and were subscribed fully. The success of the issue resulted in inclusion of retail investors in the companys funding base.

Securitisation, as an avenue of borrowing increased from 10% to 17.7%. Years of strong relationship with lenders, investors and intermediaries enabled the company to manage the cost of funds in spite of the difficult liquidity and interest rate conditions in the economy in H2. The company had a revision in the rating outlook by ICRA in December ‘23. The outlook for the rating was changed from "Stable" to "Positive".

RESOURCES & TREASURY

During the year, the company raised funds from banks/ Financial Institutions and from money markets to support the growth of its businesses at competitive interest rates without compromising the right mix of long and short-term borrowings, thereby maintaining a healthy asset liability position. The borrowing profile as on 31 March, 2024, is given below:

BANK BORROWING

In FY 24, the company mobilised Rs. 40,882 crores (net) of medium- term loans & ECB and Rs. 900 crores (net) as working capital / cash credit / short term loan facilities from banks. The company continued getting support for its money market issuances from banks through subscription of Commercial Papers (CPs) and Non-convertible Debentures (NCDs), and for Securitisation through investment in PTCs. The company continued to enjoy strong relationship with all lending banks helped manage the borrowing plan for FY 24.

MARKET BORROWING

During FY 24, the company raised CP of Rs. 17,330 crores of which

Rs. 13,930 crores were repaid by March ‘24. CP outstanding as at the end of the year was Rs. 3,400 crores. Medium and long-term secured NCDs to the tune of Rs. 2,691 crores by private placement and

Rs. 4,772 crores by public placement were mobilised at competitive rates. At the end of FY 24, outstanding NCD stood at Rs. 18,622 crores. Company issued maiden Compulsory Convertible Debenture – (CCD) of Rs. 2,000 crores in the FY 24. The Tier II borrowings raised during the year was Rs. 250 crores of Perpetual debt and Rs. 905 crores of Sub Debt. As at the end of FY 24, Tier II borrowings stood at

Rs. 4974 crores.

MOVEMENT IN INTEREST COST

The company managed to cap the increase in interest cost by optimising on the mix of marginal borrowings. As a percentage of average borrowings, interest cost stood at 7.9% in FY 24 as compared to 7.0% in FY 23. Cost of funds spurted in FY 24, due to stringent monetary policy and restricted access to funds.

CAPITAL ADEQUACY RATIO (CAR)

As at the end of FY 24, the capital adequacy ratio stood at 18.57% (Tier I: 15.10% and Tier II: 3.47%). The company raised Rs. 4,000 cr. in a QIP placement. The issue had an equity component of Rs. 2,000 cr. and a Compulsory Convertible Debenture of Rs. 2,000 cr. The CCDs are scheduled to be converted over 4 quarters commencing Sep 26. The issue received resounding response and was oversubscribed.

INVESTMENTS

The companys investments of Rs. 4,100 crores include investments in G-sec of Rs. 1,539 crores, investments in treasury bill of Rs. 1,440 crores, investments in GSTRIPS Rs. 599 crores, investments in subsidiaries, joint ventures, and associates of Rs. 522 crores.

FINANCIAL REVIEW

The companys aggregate disbursements grew by 33% from

Rs. 66,532 crores in FY 23 to Rs. 88,725 crores in FY 24. The AUM for the company grew by 36% (YoY) and the growth of on-balance sheet assets was 37%. The business AUM (including on book and assigned net of provisions) in FY 24 grew by 37% and stood at

Rs. 1,45,572 crores as against Rs. 1,06,498 crores in FY 23.

HUMAN RESOURCES (HR)

Human Resources as a function in Chola, has been evolving over the years from business partnering to strategic partnering. In the last financial year, HR as a function played a pivotal role in altering the business outlook in the Industry. Creation of Centres of Excellence, marked a significant transition in the way HR organization was positioned in Chola. While the larger focus remained in Talent sourcing, development and retaining, the launch of collaborative spaces, creating visibility through rewards, connecting every single employee through a common theme, employee partnering initiatives for mental wellbeing were phenomenal investments in creating future leaders for the organization.

I believe – Our way of being:

A campaign launched in the month of November 2023 covering Pan – India, with a purpose.

• Our Purpose Statement: At Chola, we believe in channelling our energy into building an unparalleled financial institution that will last generations.

• The Idea – A brief: The campaign focused on spreading the message that would alter the way we see ourselves, our environment, and our world. "Believe" – a powerful purpose statement that united Cholaites, carving our future and making a profound impact in our lives. This campaign was aimed to ingrain the Believe statement in each one of us and make it the way of living. 19 different torches travelled across branches spreading the believe messages. 674 torch bearers travelled across branches in 125 days.

Talent Management:

Talent management stands at the cusp of a valuable treasure trove of data and technology solutions. HR is poised to grow more strategically and contribute significantly to enable HR leaders to drive strategic change. This requires companies to look at talent management as a multi-faceted, deeply diverse and holistic process. Our journey in the year FY 23-24 was a full-_edged metamorphosis of a part of HR team from transitional role to strategic business partnering role. Talent managers were provided training on product, process, financials, understanding employee pulse and to understand business nitty-gritties and facilitate strategic solutions. Based on employee feedback the initiatives highlighted below were rolled-out.

The team focussed on talent management by offering the following:

• Aspiration fulfilment

• Automatic Career Progression

• High potential team identification and nurturing

• Talent resourcing for new businesses

• Employee wellness

TECHNOLOGY INITIATIVES

Digital has shifted from being in the periphery to the core of the business itself. The technology stacks built and made available by the government, regulators and the ecosystem over the last decade has facilitated this transition. In tune with these changes, Chola has been transforming to a digitally driven business from being an organization that conducts business digitally.

In line with this vision of a digitally driven business, our integrated super app – Chola One was launched last year. It has progressively scaled to become a single point solution for the customers to be able to access any of the loan origination and servicing requirements across the various businesses of Chola.

As part of our continued focus on vehicle ecosystem, the company continues to enhance the ease of experience for our dealers, through its Gaadi Bazaar offering. Gaadi Bazaar offers services to buy, sell new, and used cars, auction repossessed vehicles, and serve vehicle brokers gain better visibility of their products. To manage risks related to external technology partners, Chola has progressively moved towards being self-reliant for solution development. In this mission, Chola has put in place a team of in-house developers to promote and enable faster turnaround to its business. Self-reliance in development team also helps in greater velocity to change and improve internal processes. The objective of this exercise is to transition to a cost-e_ective and time-bound approach for solution delivery. This is being executed without any compromise to select features made available by cloud partners, enabling the company to have best of both the worlds.

The increasing reality of being digital brings with it the challenges around cyber security. Chola has been building and investing in the people, processes, and tools necessary to be able to identify and mitigate the risks around cyber security to protect the increasing volume of data and digital assets built in multiple layers of increasing complexity.

Cutting edge areas of Gen AI & ML are being looked at for development of analytical tools necessary to gain insights from the digital trails of each customer with the objective of being able to understand and service them better.

Upholding regulatory compliance remains paramount. We are committed to staying abreast of evolving regulations, ensuring that our technology initiatives adhere to regulatory standards and mitigate compliance risks effectively. Additionally, we are actively adopting data privacy practices in every point of storage and use of customer data in alignment with recent government regulations on data privacy.

Looking ahead, we remain committed to fostering a culture of innovation and harnessing technology to drive sustained growth through talent development, strategic partnerships and solution delivery aligned with business.

RISK MANAGEMENT

The risk management process of the Company, is driven by a strong organisational culture and sound operating procedures involving corporate values, attitudes, competencies, internal control culture, effective internal reporting and contingency planning.

The risk management process broadly comprises of the following steps:

• Risk Identification

• Risk measurement

• Risk monitoring

• Risk reporting

• Risk control/ Mitigation

The respective risk related policies viz. credit policy, market risk policy etc. shall define the steps to be followed for risk identification, tools / techniques/ indicators to be used .Risk parameters are applied on capital adequacy ratios, NPA ratios, liquidity ratios, profitability ratios, etc. for measuring risks and tolerance limits fixed for various risks against which the risk levels are monitored. Control / mitigation measures are tracked for different risks.

The Material Risk Identification aims to provide the senior management with appropriate information pertaining to the risk profile of the Company in a comprehensive and timely manner. The performance indicators are risk metrics and/or statistics that provide insight into the companys risk exposure. Key Performance Indicators (KPIs) provide insight into the status of operational processes to evaluate operational weaknesses, failures, and potential loss. Escalation triggers provide alerts when risk levels approach or exceed thresholds or limits and prompt mitigation plans.

Risk Identification is a dynamic and a continuous process. Risk Management Division works with the product process owners to identify the risks and controls and records them in the risk register. The Internal Audit reports / Loss events data, if any, are also be considered to identify any new risks. Business process mappings identify the key steps in business processes, activities and functions. The key risk points in the overall business process are documented. Process maps reveal individual risks, risk interdependencies, and areas of control. The Risk Management Team co-ordinates these activities and provide support in identifying risks and controls. Once the risk universe is identified, the materiality of risks is assessed and all material risks are covered in the ICAAP framework. The categorization of each identified risk to the various materiality levels requires identifying the criteria and assessing size, complexity etc. The Company periodically revisits the risk universe and update appropriately. In case of product changes and additions the respective teams appraise the Risk Management Team of the new risks faced.

CREDIT RISK

The Companys credit risk management builds on the principles of –

1) appr opriate risk diversification within the scope of the mission; 2) thorough risk assessment at the credit appraisal stage; 3) risk-based pricing and risk mitigation; 4) continuous risk monitoring at the individual counterparty level as well as portfolio level; 5) avoidance of undesirable risks to the extent possible.

Credit risk is defined as the potential loss arising from a borrower or counterparty failing to meet its obligations in accordance with the agreed terms. The Company is exposed to credit risk in both its lending and treasury activities, as borrowers and treasury counterparties could default on their contractual obligations.

Credit risk may also materialise in the form of rating downgrades, cross-default on payment obligations or during the transaction settlement process. Overall, credit risk is a function of the amount of credit exposure and the credit quality of the borrower or transaction.

The key parameters to access the credit risk are the Expected Credit Loss (ECL) and the Net Non-Performing Assets which are regulatory parameters

OPERATIONAL RISK

The Companys operational risk management focuses on proactive measures in order to ensure business continuity, the accuracy of information used internally and reported externally, a competent and well-informed staff and its adherence to established rules and procedures as well as on security arrangements to protect the physical and IT infrastructure of the Company.

The Company focuses on the following core procedures to manage the operational risk faced by the Company:

• Development of manuals, standard operating procedures and providing appropriate training on procedures to staff to create the risk culture through-out the organisation

• Emphasis on process design that has a maker- checker mechanism and sound internal audit system

• Ensure appropriate complaints handling mechanism and emphasis on the whistle blower policy

• Internal Audit of branches, frequency and coverage based on grading determined by key factors.

• Process of fraud investigation and action on employees

• Independent Disciplinary Committee to take decisions on fraud related matters.

COMPLIANCE RISK

Compliance risk is composed of integrity risk and operational compliance risk. In the day-to-day operations the three lines of defence model defines the roles and responsibilities for compliance and integrity risk in the Company. The first line of defence lies with the respective departments and units, which are responsible for ensuring that compliance risks are identified, understood and reported to the decision-making bodies of the Company. The second line of defence lies with Risk Management Team, which assesses and monitors the compliance and integrity risks and coordinates its control activities with the Risk Management functions, as necessary. Internal Audit is the third line of defence. In managing compliance and integrity risks, the Company places particular emphasis on preventing fraud and corruption.

RISK GOVERNANCE AND REPORTING

The Company has strong governance arrangements consistent with other principles and guidance embedded in the risk data aggregation capabilities and risk-reporting practices.

The Company has a robust Management Information Reporting (MIS) to provide the Board and senior management in a clear and concise manner with timely and relevant information concerning the risk profile. Senior management is informed of the assumptions behind and limitations inherent in specific risk measures.

These measures are developed to improve the senior managements ability to evaluate the impact of various types of economic and financial shocks that could probably affect the Company. They are flexible, adaptable and responsive to changes in the Companys underlying risk assumptions and incorporate multiple perspectives of risk exposure to account for uncertainties in risk measurement. It helps in ensuring that appropriate actions are initiated before the risk in providing threshold based limit trading.

RISK APPETITE AND STRATEGY

The Board approved Risk Appetite Statement at the Company addresses the following key elements:

• The articulation in written form of the aggregate level and types of risk that the Company is willing to accept in the pursuit of its strategic objectives and business

• Quanti_cation of risk limits in terms of earnings (earnings perspective)

• The level of risk that the Company is willing to take for each material risk.

• The limits and thresholds for monitoring the risk appetite of the organization

• The quantitative measures that can be translated into thresholds for risk limits applicable to the entire company

• The qualitative statements for non-quanti_able risks.

The Company has defined its risk appetite and tolerance limits within its Risk Management Policy Framework for specific organizational objectives.

RESULT OF OPERATIONS

The companys balance sheet size has steadily grown, compared to the previous year. A summarized version of the same is given below:

STATEMENT OF PROFIT & LOSS

Particulars	Mar-23	Mar-24	Growth %
Disbursements	66,532	88,725	33%
Income	12,978	19,216	48%
Cost of Funds	-5,749	-9,231	61%
Net Margin	7,229	9,986	38%
Operating Expenses	-2,779	-4082	47%
Provisions and Losses	-850	-1322	56%
Profit Before Tax (PBT)	3,600	4,582	27%
Current and Deferred Tax	-934	-1159	24%
Profit After Tax (PAT)	2,666	3,423	28%

BALANCE SHEET

Particulars	Mar-23	Mar-24	Growth %
Assets
Business Assets	1,04,748	1,44,424	38%
Cash & Bank Balances	2,961	4,320	46%
Other Liquid Assets	3,077	3,578	16%
Other Assets	2,729	4,129	51%
TOTAL	1,13,515	1,56,451	38%
Liabilities
Net worth	14,296	19,556	37%
Borrowings	87,373	1,10,692	27%
Securitisation	9,983	23,782	138%
Other Liabilities	1,863	2,421	30%
TOTAL	1,13,515	1,56,451	38%

KEY OPERATING MEASURES

CONSOLIDATED RESULTS

The consolidated profit after tax for the year under review was

Rs. 3,420.05 crores, as against Rs. 2,664.85 crores in FY 23.

	On behalf of the board
Place : Chennai	Vellayan Subbiah
Date : April 30, 2024	Chairman