Mega Fin (India) Ltd Management Discussions

1. 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 worlds 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 fueled 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 attributed 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 banks Monetary Policy Committee 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.

2. Outlook

The Reserve Bank of India (RBI) projects Indias economic growth to moderate in FY24, settling 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 Rupees stability.

The governments continued focus on capital expenditure will gradually attract 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.

3. 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.

4. Trends driving the NBFC sector. i. 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.

- Securitization volumes zoomed to 1.8 trillion in FY23 on account of an increase in funding requirements to meet the demand.

ii. 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.

iii. Diversified service models

- Platform model: Partnerships with fintech to offer loan products on their platform.

- Enabler model: The fintech provides technology solutions to NBFCs.

5. Overview

Mega Fin (India) Limited (MFIL) is private sector financial services companies, MFIL the Shares of the Company are listed on Bombay Stock Exchange (BSE) The Company is a core investment Company & has interests in financing and advancing short term and long term loans and credits to individuals, companies or association of individuals, companies or association of individuals by whatever name called,; merchant banking; commercial financing; stock broking; other activities in financial services.

6. Risks and concerns

Mega Fin (India) Limited (MFIL) 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 capitalize 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 companys overall profitability and growth.

5. Execution risks associated with the Companys emerging business vertical, specifically

SME Retail & its newly launched unsecured loan product - Fabricator Loan.

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

7. Human resources

MFIL considers its people as the driving force behind the organization. Their well-being directly impacts productivity, efficiency and overall performance. Fostering a positive work culture that prioritizes the needs of people 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 program.

- 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 Corbett for the Head Office.

8. Information technology

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

9. Opportunities and Threat:

Your Company is committed to addressing the changes boosted by its strengths in market position, agile execution capabilities, robust early warning systems and extensive use of analytics for risk mitigation and resource allocation. It will ensure to take advantage of the tailwinds that may emerge during the year.

The stringent RBI and other regulatory norms governing the functioning of NBFC and certain government restrictions act as hindrance in smooth functioning of NBFC.

10. Internal control systems and their adequacy:

The Company has a well-defined organisational structure, documented policy guidelines, and a defined authority matrix that ensures efficiency of operations, compliance with internal policies and applicable laws and regulations, as well as protection of resources. The Company believes that a strong internal control system and processes play a critical role in the day-to-day operations of the Company.

To this end, the Company has put in place an effective internal control system to synchronize its business processes, operations, financial reporting, fraud control, and compliance with extant regulatory guidelines and compliance parameters. Strict internal control and systems are devised as a depiction of the principles of the highest standards of governance. The Company ensures that a standard and effective internal control framework operates throughout the organisation, providing assurance about safekeeping of the assets and execution of transactions as per the authorisation in compliance with the internal control policies of the Company.

11. Opportunities and Threat:

Your Company is committed to addressing the changes boosted by its strengths in market position, agile execution capabilities, robust early warning systems and extensive use of analytics for risk mitigation and resource allocation. It will ensure to take advantage of the tailwinds that may emerge during the course of the year.

12. Discussion on Financial Performance:

Details of the Companys financial performance on standalone basis for the last two years is as follows:

(Rs. in Lakh)

Particulars	Year ended 31st March, 2023	Year ended 31st March, 2022	Varia nce	Varianc e %
I. Revenue from Operations
Interest Income	25.14	24.18	0.96	104%
Other Income	1.54	-	1.54	NA
Total Income	26.68	24.18	2.50	110%
II. Expenses			-
Employee Benefit Expenses	4.58	11.56	6.98	40%
Finance costs	-	-	-	-
Depreciation and amortization expenses	-	-	-	-
Impairment of deemed investment in subsidiaries	-	-	-	-
Other Expenses	6.93	5.57	1.36	124%
Total Expenses	11.51	17.14	5.62	67%
III. Profit / (Loss) for the year before exceptional items and tax (I - II)	15.17	7.05	8.12	215%
Less : Exceptional Items	-	-	-	-
IV. Profit / (Loss) for the year before tax	15.17	7.05	8.12	215%
Tax Expenses
Current Tax	-	-	-	-
Deferred Tax	-	-	-	-
VIII. Profit/(Loss) for the year	15.17	7.05	8.12	215%

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

Following are the details of significant changes in the key financial ratios as compared to the immediately previous financial year:

Ratios	Current Reporting Period	Previous reporting period	% of Change
Debt Equity Ratio	4.63	4.91	-0.28
Debt Service coverage ratio	0.00	0.00	0.00
Return on Equity Ratio	1.65	0.77	0.89
Inventory Turnover Ratio	NA	NA	-
Trade Receivables turnover ratio	NA	NA	-
Trade payables turnover ratio	NA	NA	-
Net capital turnover ratio	NA	NA	-
Net profit ratio	NA	NA	-
Return on Capital employed	0.02	0.01	0.01
Return on investment	NA	NA	-

14. Disclosure of accounting treatment:

The Company has followed the Indian Accounting Standards notified under Section 133 of the Act read with Companies (Indian Accounting Standards (Ind AS) Rules, 2015 in preparation of its financial statements.

Cautionary Statement

This report contains forward-looking statements extracted from reports of Government Authorities/ Bodies, Industry Associations etc. available on the public domain which may involve risks and uncertainties including, but not limited to, economic conditions, government policies, dependence on certain businesses and other factors. Actual results, performance or achievements could 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 thereto. The Company does not undertake to update these statements.