CSL Finance Ltd Management Discussions

<dhhead>MANAGEMENT DISCUSSION AND ANALYSIS</dhhead>

Indian economy

During FY23, the Indian economy faced challenges due to the transmission of global shocks through commodities prices and exchange rates, leading to elevated and persistent inflation. However, the economy displayed remarkable resilience, emerging as one of the world’s fastest-growing major economies. This growth was driven by robust domestic consumption and a relatively lower reliance on international trade.

According to a recent report from the National Statistics Office (NSO), the Indian GDP surpassed market expectations, recording a substantial growth rate of 7.2%. This impressive performance was bolstered by increased activity in the manufacturing and agricultural sectors.

Notably, the industrial sector experienced a significant upswing during the first half of FY23. Gross Value Added (GVA) witnessed a remarkable increase of 3.7%, outpacing the average growth rate of 2.8% recorded during the preceding decade, as revealed by the Economic Survey 2022-23. Several factors contributed to this growth surge, including robust private final consumption expenditure, export incentives, heightened investment demand due to public CAPEX, and improved bank and corporate balance sheets, which collectively fuelled industrial expansion. This growth was evident in key indicators such as the PMI manufacturing index, which remained in the expansion zone since July 2021, and the healthy pace of growth in the Index of Industrial Production.

An intriguing development observed during FY23 was the disparity between high bank credit growth and relatively subdued deposit accretion. Bank credit witnessed a significant surge, growing at 15.4% YoY, driven primarily by loans to the retail and services sectors. This robust credit uptake extended across all segments, comprising a mix of both term loans and working capital. On the other hand, deposit growth remained more muted at 9.6% growth rate YoY. This slower growth in deposits was largely a ributed to the gradual drainage of the surplus system liquidity that had been injected by the Reserve Bank of India during the pandemic period. The combination of high credit demand and comparatively restrained deposit growth presented a unique challenge for the banking sector during the fiscal year.

Despite its economic strength, India remained susceptible to external shocks that could impact significant macroeconomic variables. However, efforts to manage inflation by implementing an inflation-targeting framework led to a positive development. Retail inflation decreased to a 16-month low of 5.66% in March 2023, slightly below the upper tolerability level of 6% set by the Reserve Bank of India. The central bank’s Monetary Policy Commi ee responded by raising the repo rates to 6.25% during FY23, with a total increase of 250 basis points, aiming to maintain inflation at manageable levels.

 

Outlook

The Reserve Bank of India (RBI) projects India’s economic growth to moderate in FY24, se ling at 6.5%. This adjustment comes as the International Monetary Fund (IMF) slightly lowers its growth forecast for 2023, and global trade in goods and services is expected to further decelerate, driven by efforts to cool inflation through higher interest rates. Despite these challenges, the G-10 central banks nearing the peaks of their respective rate hike cycles will have a positive impact on the Rupee’s stability.

While merchandise growth is likely to slow, evident from the Q4 2023 contraction in exports, services exports have remained robust.

Supported by substantial remi ance inflows, this has resulted in a manageable Current Account Deficit, expected to be around 2.4% of GDP in FY23, and anticipated to further decrease in FY24. As a result, a surplus in the net Balance of Payments is expected, aiding the stability of the Rupee and enabling the RBI to replenish its foreign exchange reserves. Moreover, inflation is projected to gradually moderate, with RBI anticipating CPI inflation to average 5.1%, down from 6.6% in FY23. India’s macroeconomic fundamentals remain strong, positioning it as a bright spot amidst the uncertainties of the global environment. Although risks to the growth-inflation balance persist, the ongoing structural reforms and economic resilience will serve as a bu_er against potential shocks.

The government’s continued focus on capital expenditure will gradually a ract private sector investment. However, in line with the broader economic slowdown, bank credit growth is expected to moderate in the coming year, leading to a reduction in the divergence between credit and deposit growth. Nonetheless, deposit growth is likely to improve slightly, encouraged by higher interest rates as an incentive, and an anticipated enhancement in system liquidity conditions during the second half of the year.

(Sources: The RBI, IMF, NSO)

 

NBFC sector

In the previous fiscal year, the non-banking financial company (NBFC) sector experienced a significant surge in credit demand, primarily driven by pent-up consumer demand and an improved operating environment for borrowers. This growth was especially notable in the unsecured segments, where the adoption of digitalization in borrower onboarding and underwriting processes, access to comprehensive borrower data, and leveraging of established borrower franchises contributed to the strong performance. Consequently, the NBFC sector witnessed an impressive overall growth rate of 25%, surpassing expectations, and the assets under management (AUM) exceeded R14 trillion as of March 2023.

Within the retail exposure growth of NBFCs in FY23, the unsecured segments (excluding microfinance) played a pivotal role, representing personal/consumer loans and unsecured business loans, with an estimated growth rate of about 45% during the last fiscal year. On the other hand, the secured segment, comprising vehicle loans, gold loans, mortgage-backed loans, and similar products, experienced a relatively moderate growth pace of about 17-18% during the same period. Consequently, the share of the unsecured segment in the NBFCs’ retail AUM rose to approximately 23%, up from 17% in March 2021. Microfinance, another unsecured segment, accounted for an estimated 11% of the retail AUM of NBFCs as of March 2023.

Over the last 10 years, the share of banks lending to NBFCs has approximately doubled. However, a 250 basis points increase in the Repo Rate within twelve months resulted in higher borrowing costs for NBFCs through market instruments. Consequently, banks’ term loans emerged as the preferred source of borrowing for the NBFCs due to this development.

 

Trends driving the NBFC sector

1. Resource diversification

• Diversification from heavy dependence on bank borrowings

• Issuance of NCDs by NBFCs almost doubled in FY23 and surpassed the FY20 levels

• Within NBFCs, retail-focused NBFCs and infrastructure financiers saw healthy growth in NCD issuances

• Securitisation volumes zoomed to

1.8 trillion in FY23 on account of an increase in funding requirements to meet the demand

2. Product diversification

• Several NBFCs and HFCs are diversifying their product portfolio or adding new products that could drive growth

• NBFCs are focusing on under-penetrated segments such as affordable housing, small business loans and used vehicles

3. Diversified service models

• Platform model: Partnerships with fintechs to offer loan products on their platform

• Enabler model: The fintech provides technology solutions to NBFCs

 

Outlook

The retail AUM of NBFCs is expected to grow 12-14% in FY24. Nevertheless, there is expected to be a moderation in the Return on Managed Assets (RoMA) during the same period, likely se ling at around 2.4-2.6%. This moderation is a consequence of the full impact of increased borrowing costs, which will have an effect on margins. However, NBFCs’ ability to transfer the higher costs to their incremental lending and adjust their product offerings, along with an improvement in asset quality, will help mitigate the impact of margin compression to some extent.

 

Real estate in NCR

A_er the pandemic, the Indian real estate industry underwent a remarkable revival. Among various major cities, the National Capital Region (NCR) experienced a notable surge in demand for home buying. This upswing can be a ributed to the temporary halt in the repo rate hike cycle in 2023, providing much-needed relief to prospective homebuyers. Additionally, the introduction of new properties to the market has been met with a positive response from interested buyers.

Developers continued to introduce new projects to cater to the latent demand from homebuyers. At the same time, many developers intensified their efforts to acquire new land for future projects in their pipeline. Notably, the peripheral areas of the NCR have seen an increase in new property launches. These launches consist of amenities-rich group housing, independent floors and gated plo ed developments that cater to the preferences of modern homebuyers. This strategy allows developers to meet the evolving demands of the new-age homebuyer while ensuring a steady supply of projects for the market’s future needs.

Real estate developers in NCR are acquiring land and partnering with landowners to meet the surging demand from homebuyers. The demand has surpassed pre-pandemic levels and is growing manifold. Upcoming infrastructure upgrades, such as the Dwarka Expressway, Delhi-Mumbai Expressway, and Gurgaon Metro extension, are expected to further boost the real estate sector in NCR and drive demand in the coming years.

CSL Finance Limited is a registered Non-banking Finance Company (NBFC) under the oversight of the Reserve Bank of India. It is listed on both the NSE and BSE stock exchanges. As a comprehensive platform, the Company caters to the financing requirements of Small and Medium-Sized Enterprises (SMEs) and various real estate and non-real estate corporates by offering an array of secured loan products. With a team comprising experienced and dynamic professionals, CSL Finance is commi ed to realising the dreams of entrepreneurs by bridging the financial gap and empowering them to grow their businesses.

 

Business overview

Wholesale lending

CSL Finance’s Wholesale Lending business offers distinctively tailored loan products to real estate developers in the NCR-region, specifically for group housing and single-plo ed projects. These loans are secured against the projects they have already developed or intend to develop in the future. The Company has developed different categories of loan products, each catering to specific project types, such as Affordable Group Housing, Mid-Income Group Housing, and Small Builder Floors (G+4 buildings).

The Company emphasises funding projects where developers contribute a substantial capital investment. This approach aims to minimise project execution risks, ensuring a more secure financing environment for all stakeholders involved.

 

SME retail lending

CSL Finance’s SME Retail division focuses on addressing the financial needs of under-served and unbanked SME & MSME customers through secured and collateralized loans. Instead of relying on traditional banking and lending scorecards, this vertical adopts a unique approach that leverages alternative data. Multiple factors, such as the business’s operations, cash flows, and business vintage, are considered for the loan underwriting process.

A_er conducting thorough due diligence, this division promptly disburses small and flexible ticket-size loans to cater to the specific requirements of SMEs and entrepreneurs. The loans are typically extended to SMEs operating in diverse industries, including education, medicine, agriculture and FMCG trading. Additionally, this financing option is also made available to salaried professionals who have limited access to core banking services.

 

FY23 performance overview

CSL Finance recorded strong performance during the year on the back of its strengthened infrastructure, efficient processes and workflow and a stronger team.

The Company’s loan book grew from 520 Crore in FY22 to 736 Crore in FY23, marking a 42% growth. Parallelly, disbursements grew from

491 Crore to 759 Crore in FY23. Total income increased by 57% to stand at 118 Crore while net interest income grew by 43% to 88 Crore. The Company’s PAT stood at 46 Crore during the year, recording a growth of 36%.

The Company significantly ramped up the SME Retail vertical during the year, leading to rationalisation in the AUM-mix in favour of the vertical. Focus on extensive training and migration programmes continued during the year. Seven new lenders were onboarded during the last financial year. With new lenders onboarded, the Company has increased its leverage ratio to 1.13x as of FY23, compared to 0.65x in FY22.

 

Outlook

CSL Finance holds a promising outlook for the upcoming financial years, with abundant opportunities present in both of its business verticals. It firmly believes that there is substantial potential for growth in both areas, provided it can secure debt at favourable interest rates. The Company anticipates a credit rating upgrade to A status in the coming financial year, which will improve access to capital.

The Company will be launching 6-10 branches in FY24, while consolidating some of its underperforming branches. Rajasthan and Gujarat continue to be the be er-performing markets for the Company in the SME Retail vertical.

Furthermore, the Company has set its sights on accelerating the expansion of its SME Retail vertical while strategically optimising the overall mix of assets under management (AUM) in favour of this segment. This approach is expected to lead to an improved Cost-to-Income ratio and enhance profitability metrics, aligning with the Company’s long-term growth objectives. The Company has also launched a new product category within the SME Retail vertical - SME Fabricator Loan, which has a good outlook for the year to come. With such prudent strategies in place, the Company is well-positioned to capitalise on the available opportunities and achieve sustained success in the coming years.

 

Risks and concerns

CSL Finance maintains constant vigilance over both external environments and internal risks, ensuring it remains well-prepared with effective risk mitigation measures to address potential threats. This proactive approach allows the Company to capitalise on opportunities arising from various events and effectively navigate challenges posed by potential threats. Some of the identified risks and concerns include:

1. A slowdown in the global and Indian economy, potentially triggered by escalating geopolitical tensions

2. The persistent rise in interest rates as central banks respond to current inflationary pressures in the economy

3. A potential slowdown in the real estate sector, which could impact collections and loan book growth within the Wholesale lending vertical

4. The possibility of facing challenges in raising funds at competitive borrowing costs, which may have an impact on the company’s overall profitability and growth

5. Execution risks associated with the Company’s emerging business vertical, specifically SME Retail & its newly launched unsecured loan product - Fabricator Loan

By closely monitoring these factors, CSL Finance endeavours to proactively address and mitigate potential risks while seizing opportunities for sustainable growth and maintaining a robust financial position.

 

Human resources

CSL Finance considers its people as the driving force behind the organisation. Their well-being directly impacts productivity, efficiency and overall performance. Fostering a positive work culture that prioritises the needs of employees creates a sense of belonging and instils a strong sense of commitment. The Company undertakes a variety of initiatives to empower and motivate its people:

• Bespoke incentives structure and rewards programme

• Engagement activities such as team lunches and celebrations of birthdays, anniversaries and festivals

• Training and development on a variety of topics

• Annual Fest hosted at Jim Corbe for the Head Office

• Sports meet on Independence Day for the NCR employees

As on March 31, 2023, CSL Finance had 257 skilled and commi ed employees on the team.

 

Information technology

In the rapidly evolving landscape of technology, harnessing its vast potential to enhance organisational efficiency has become an imperative for every company. At CSL Finance, we recognize this imperative and have directed our efforts towards leveraging technology’s immense benefits across various operational facets. Our focus lies in optimising disbursement turnaround times, elevating credit underwriting processes, expediting customer onboarding, and elevating the post-disbursement service experience.

 

RECENT ACHIEVEMENTS:

• SMS & WhatsApp Integration for EMIs & deliverables

• Legal & technical vendor integrations in LOS

• E-NACH & Aadhar Based NACH LIVE for all sanctioned cases • Banking statement analyser integrated in LOS

• Pre-printed loan agreement

• Multiple third party API integrations to eliminate frauds in LOS pertaining to KYC, GST, Vehicle RC, among others • Mobile Collect for collections module • Extensive reporting tool • Extensive credit enhancements • Launch of new Unsecured Loan products in LOS

• Multiple Bureau Checks & Analysis through various credit bureaus

 

ROADMAP FOR THE COMING YEAR:

• Business Rule Engine

• Airtel Payments Bank Integration for cash deposit point

• Data Analytics

• BI Dashboards

• Lead Management System

• Treasury Management System

• Virtual Accounts with HDFC BANK

• Legal status tracking & crime check Integrations

• Communication Engine in LMS

• Document Management System

• Customer Facing App • CKYC

 

Cautionary statement

Statements in the Management Discussion and Analysis describing our objectives, projections, estimates and expectations may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to our Company operations include, among others, economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which we operate, changes in government regulations, tax laws and other statutes and incidental factors.