Mega Corporation Ltd Management Discussions

Global Economic Review

The global economy is exhibiting resilience and fortitude. There are, however, multiple challenges emanating from still elevated inflation, tight monetary and financial conditions, escalating geopolitical tensions, rising geo economic fragmentation, disruptions in key global shipping routes, high public debt burdens and financial stability risks. Amidst heightened uncertainty, global growth is likely to weaken below its historical average in 2024, with divergent and uneven pathways across geographies and sectors.

The global economy in FY24 grappled with slowdown in economic growth due to persistence of high interest rates, increasing geo-political conflicts, sluggish international trade, and climate related issues. Notwithstanding the uncertain global economic backdrop, the Indian economy continued on its strong growth trajectory in FY24 on the back of some of its key inherent strengths, viz. macrofinancial stability (characterised by a steadfast inflation targeting regime, adherence to fiscal consolidation roadmap, manageable current account deficit and stable exchange rate along with an adequate buffer of forex reserves), strong twin balance sheets of banks and corporates, and frontloading of public capex in key sectors.

According to the International Monetary Fund (IMF), global growth decelerated to 3.2 per cent during 2023 from 3.5 per cent during 2022. The pace of economic activity was dragged down, inter alia, by restrictive monetary policy stances to tame inflation, protracted geopolitical tensions and sluggish recovery in China. The potential impact of climate change became increasingly evident, with economic losses due to extreme weather events. Global inflation fell to 6.8 per cent in 2023 from 8.7 per cent in 2022 on the back of easing commodity prices, favourable supply conditions and monetary tightening across major economies, but still remained at its highest level in over two decades. Inflation in respect of core items and services remained elevated, exhibiting persistence in major economies amidst tight labour market conditions.

Global financial conditions tightened amidst heightened volatility in response to synchronised monetary policy tightening as well as aggravating geopolitical conflicts. Sovereign bond yields hardened to multi-year highs in the first half of 2023-24, driven up by monetary tightening and exhibited large two way fluctuations in the subsequent period over growing haziness surrounding monetary policy trajectories of major central banks. The US dollar remained strong, with large swings in response to changing monetary policy expectations. This exerted downward pressures on a number of EME currencies. Global equity markets inched up higher on prospects of soft landing, with sharp gains registered in technology and artificial intelligence (Al) related stocks.

Indian economic Review

Against the backdrop of subdued global economic activity and multiple headwinds, the Indian economy expanded at a robust pace in 2023-24, with real GDP growth accelerating to 7.6 per cent from 7.0 per cent in the previous year - the third successive year of 7 per cent or above growth. With gross fixed capital formation (GFCF) accelerating to 10.2 per cent in 2023-24 from 6.6 per cent in 2022-23, investment was the major driver of domestic demand, buoyed by government spending on infrastructure. Growth in private consumption demand, on the other hand, stood at 3.0 per cent as against 6.8 per cent a year ago. Government consumption demand was also subdued tracking fiscal consolidation. Net exports dragged down growth due to the moderation in exports as a result of contraction in global trade volumes. Import demand was relatively buoyant on robust domestic demand.

Domestic financial markets remained stable during 2023-24, with orderly movements in the bond and foreign exchange markets and exuberant equity markets. The Indian Rupee (INR) displayed stability on the back of improving external sector and macroeconomic fundamentals, including a significant moderation in the CAD and resurgent capital inflows, that offset persistent headwinds from volatile global financial markets, the strong US dollar and persisting geopolitical tensions. The INR depreciated by 1.4 per cent during 2023-24 (7.8 per cent in the previous year) and was amongst the best performing major EME currencies during the year.

Industry Review

Post-COVID, credit offtake towards the consumer segment has been quite substantial combined with proliferating dependency of NBFCs on bank borrowings leading to regulatory concerns. This warranted a prudential intervention, notwithstanding a comfortable asset quality position at broader portfolio level. Accordingly, to pre-empt the build-up of any potential risks, regulatory measures were announced on November 16, 2023.

Capital adequacy of non-banking financial companies (NBFCs) was comfortable and asset quality improved as at end-September 2023. On the profitability front, RoA and net interest margin (NIM) stood strong and the cost-to income ratio improved. Robust credit growth was sustained, supported by demand for retail credit. Urban cooperative banks (UCBs) witnessed an improvement in their capital adequacy, with their capital to risk-weighted assets ratio (CRAR) surpassing the minimum requirement across all tiers in September 2023.

The impact of new asset classification norms on the gross non-performing assets (GNPAs) reported by NBFCs12 was analysed. GNPAs of the NBFC sector decreased from 6.3 per cent of gross advances as on March 31, 2022 to 5.9 per cent as on September 30, 2022, which was the cut-off date for implementation of the new norms. GNPAs decreased to 5.0 per cent of gross advances as on March 31,2023, and further to 4.6 per cent as on September 30, 2023. Since the system of marking of days past due on a daily basis was already implemented by the larger NBFCs, the new norms did not have a major impact on the reported asset quality. The increase in gross advances of the NBFC sector by 15.9 per cent during 2022-23 also had a mitigating impact on the GNPA level.

The resilience of the NBFC sector has increased over the years driven by substantial capital buffers, improving asset quality and robust earnings. Upper Layer NBFCs recorded a healthy growth in H1 FY24 and their GNPA ratio gradually improved while capital position remained robust. During H1 FY24, NBFC loan growth (Y-o-Y) was highest for housing (58.9%) followed by MSME (57.4%), agriculture (52.0%) and micro loans (50.7%). This reflects the NBFC sectors thrust on ‘financial inclusion. According to the RBI, the increase in risk weights (on Personal Loans and loans given to NBFCs by banks) in November 2023 is pre-emptive in nature and in the interest of macrofinancial sustainability.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The financial statements have been prepared in accordance with the requirement of the Companies Act, 2013 and applicable Accounting Standards issued by the Institute of Chartered Accountant of India.

(a) Diversification:- Regulatory restrictions NBFCs offer a wide range of financial products and services including personal loans, commercial vehicle finance, housing loans, infrastructure finance, gold loans, microfinance, money transfer, insurance, education funding, and many more customized finance solutions. The diversity of products and services offered enables them to focus on under-served populations of the economy, and create a niche market for themselves.

(b) Technology Adoption:- The recent few years have seen the emergence of integration of the NBFCs business operations with technology, to bring in productivity and efficiency. This enables companies operating in this space to offer simple, efficient, and cost-effective services such as credit score calculation, customer onboarding, loan disbursement, and collection among others.

ii) Weaknesses

(a) The informal nature of the NBFC sector increases its regulatory risk. One of the ways this increased regulatory risk can be observed is the frequency of regulatory changes brought in by the RBI. For example, on April 19 2022, RBI issued guidelines for loans and advances by NBFCs and the disclosures they are

required to make under a scale-based regulatory framework. A consequence offrequent regulatory changes are compliance costs that are borne by individual NBFCs, which reduces their ability to be competitive and protect their margins.

iii) Opportunity

The industry offers varied opportunities for the company to maintain growth. The Company continues to take efforts to identify opportunities in various types of products, technological initiatives, and competitive advantage and deploys efforts and resources that may be required.

• Increased penetration in the MSME segment with better integration of technology into business models.

• Synergistic alliance with FinTech to increase market penetration.

• Development of more sophisticated financial products and services to serve the needs of the customer.

• Tapping into the fast-growing e-commerce segment

• Diversify assets by targeting new profitable segments and developing the capabilities required to serve the segments.

• A new wave of entrepreneurship creating a new demand for capital and financial services from NBFCs

iv) Threats

The company constantly monitors the threats from competition, industry and takes steps to maintain/ enhance existing competence.

• Fligh cost of funds

• Inferior credit profile of borrowers

• Restrictions on deposit-taking NBFCs

RISK MANAGEMENT

Risk management denotes assessing all existing and potential risks and mitigating and/or pre-empting them to the best possible extent. It is a qualitative and quantitative approach involving risk identification, risk assessment/ quantification, instituting/ reviewing controls and risk mitigation.

Broad categories of risk faced by the company are Credit Risk, Market Risk, Operational Risk, Fraud Risk and Compliance risk. The risk management policies are well defined for various risk categories supplemented by periodic monitoring through the sub committees of the Board.

Credit Risk: The credit aspects in the Company are primarily covered by the Credit Policy and Delegation of Authority approved by the Board of Directors. Credit risk constitutes the most significant concern for your Companys business. It therefore, needs to have a well thought and calibrated mechanism in place to manage the credit risk. The Company measures, monitors and manages credit risks at individual borrower and portfolio level.

Market Risk: Adoption of a prudent approach helps in protecting your Company from market and liquidity risks. Market Risk management is guided by clearly laid down policies, guidelines, processes and systems for the identification, measurement, monitoring and reporting of exposures against various risk limits.

Operational Risk: Operational risk is the risk arising from system failure, human error, fraud or external events which may cause financial loss or disrupt business activities. The Company has put in place a comprehensive system of internal controls, systems and procedures for documenting, assessing and periodic monitoring of various risks and controls linked to various processes across all business lines. The Board on periodic basis identify and mitigate operational risks to minimize the risk and its impact.

Fraud Risk: The Company has adopted a robust Fraud Risk Management framework. It has an effective and very strong fraud risk governance mechanism that encompasses controls covering below objectives:

1. Prevent (reduce the risk of fraud from occurring)

2. Detect (discover fraud when it occurs) and

3. Respond (take corrective action and remedy from the harm caused by fraud).

Compliance Risk: The Company has a robust compliance risk management framework in place guided by a Board which lays down the roles and responsibilities of employees towards ensuring compliance with the applicable laws and regulations as also the role of the Compliance Department in monitoring compliance.

Your Company, in pursuit of its business objectives, is exposed to certain risks such as credit risk, market risk, liquidity risk and operational risk. These risks have the potential of impacting the financial strength, operations and reputation of your Company. Keeping this in mind, your Company has a Board-approved Risk Management Framework in place. The effectiveness of this framework is supervised periodically by the Management. The hallmark of your Companys Risk Management function can be attributed to its independence from the business with the convergence only at the MD & CEO level, to provide guidance during challenges, underscore oversight and balance the risk/ reward decisions.

Your Companys risk appetite sets out the desired forward looking risk profile and provides an objective base to guide strategic decision-making. This helps ensure that planned business activities provide an optimised balance of return for the risk assumed, while remaining within acceptable risk level. The Management reviews your Companys risk appetite on a quarterly basis to make sure it remains fit for purpose..

INTERNAL CONTROL

Internal Audit for the financial year 2023-24 was conducted by M/s Vikash Gupta & Co. a Company Secretaries, New Delhi. The idea behind conducting Internal Audit is to examine that the Company is carrying out its operations effectively and performing the processes, procedures and functions as per the prescribed norms. The Internal Auditor reviewed the adequacy and efficiency of the key internal controls guided by the Audit Committee.

The Company has well-defined internal control systems commensurate with the size and industry in which it operates. The internal control framework is aimed at ensuring reliable and timely financial reporting and management information, safeguarding of assets and efficient conduct of business. These internal controls endorse ethical behaviour, sound corporate governance and effective risk management.

The Company hasalso adopted an Internal Financial Control framework in line with section 134(5)(e)ofthe Companies Act, 2013 for ensuring the orderly conduct of its business, including adherence to the Companys policies, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of financial information.

AS HEALTH SAFETYAND PANDEMIC RISK

In addition to serious implications for peoples health and the healthcare services, coronavirus (COVID-19) is having a significant impact on the world-wide economy including India in terms of business growth and business models. The disruption has pushed the financial sector to adopt digital model for sustenance and growth. The company has been proactive enough to switch over to fully digital mode since the Covid-19 ensuring employees the best health safety measures and uninterrupted service to the stakeholders. However, the performance of the company be impacted in future because of the lasting effect of this disruption on the economy.

COMPLIANCE

Mega Corporation Limited observes compliance practices of the highest standard. The Compliance team closely monitors RBI and other notifications on NBFCs with special attention to those relevant to the Company. The Company follows all prudential norms laid down for NBFCs and submits all mandatory returns and statements in time. The Company has put in place a robust framework of internal controls that include precise delegation of authority and Standard Operating Processes which are available in all business segments and functions. The Company follows a practice of monitoring various internal control functions in-house as well as through external auditors whenever required or mandated. The Company also reviews risk management processes on a regular basis and documents the results.

HUMAN RESOURCES

At Mega Corporation Limited, our relentless focus is on attracting, retaining and nurturing the best of talents to lead the organization towards achieving its strategic goals. We ensure a work culture free of discrimination and bias and provide equal opportunity to all.

In the organizational context, human resource development may be described as a continuous and planned process by which employees of an organization are helped to:

(a) Acquire or sharpen capabilities required to perform various functions associated with their present or expected future roles.

(b) Develop their general capabilities as individuals and discover and exploit their own inner potential for their own and/or organizational development purpose.

(c) Develop an organizational culture in which superior-subordinate relationships, teamwork and collaboration among sub-units are strong and contribute to the professional well-being, motivation and pride of employees.

Mega Corporation Limited, prides itself in having a work culture that is transparent, solution-centric and growth oriented. The global pandemic had tested our resilience, bringing with it a lot of ‘firsts and we swiftly adapted to the ‘new normals. Given our high focus on digital transformation, our transition to remote working was seamless during times of the lockdown and disruptions. We moved many processes to the digital platform that not only engages employees more effectively but also helps our businesses to move up the curve fester.

The Company firmly believes that Human Capital is its most important asset. A series of engagement interventions across identified key themes were undertaken to increase employee morale and the initiatives focused on key aspects such as physical and mental wellness, celebrations, leadership engagement sessions, fitness and sports, and family engagement activities.

At Mega Corporation we believe that our people are our biggest assets. The workforce at our Company has a right blend of youth & experience and the success of our organisation is based on the capability, passion & integrity of our people. There is a high premium placed on internal growth which has enabled us to have a stable mid and senior management team over the last many years. Your Company conducts an array of online engagement activities (given the Covid background), encourage our employees to acquire newer skills and create platforms to interact with peers across the country that enables growth by sharing of best practices and learnings. Your Company continues to attract and retain talent that focuses on sustained superior performance, provide them opportunities to learn, realise their true potential and contribute positively to the success of the Company. Our Senior Leadership Team, from time to time, shares the strategy and vision for the company through virtual town-halls that ensures that our employees are always cognizant of what is happening in the Company, thereby encouraging an interactive and engagement driven work culture.

CAUTIONARY STATEMENT

This report contains several forward-looking statements that involve risks and uncertainties, including, but not limited to, risks inherent in Mega Corporation Limited growth strategy, acquisition plans, dependence on certain businesses, dependence on availability of qualified and trained manpower, economic conditions, government policies and other factors. The companys actual results, performances or achievements could thus differ materially from those expressed or implied in such forward-looking statements. This report should be read in conjunction with the financial statements included herein and the notes annexed thereto.