Muthoot Finance Ltd Management Discussions

1. Economic review

1.1 Global economic Review

After the challenging 2020, the global economy started with a note of optimism as vaccination drive started rolling out across the globe and resumption of economic activities. However, the onset of newer variants and the related challenges like disruptions in global supply chain kept the economy in tenterhooks. According to the April 2022 WEO report by IMF, the global economy achieved a growth of 6.1% compared to de-growth of 3.5% in CY 2020. The strength of the recovery was observed to vary significantly across countries, depending on access to medical interventions, the effectiveness of policy support, exposure to cross-country spillovers, and structural characteristics of the economy. For example, Advanced economies grew at an annual rate of 5.8% which was slower than Emerging and Developing economies, which grew at 6.8% in CY 2021. Among the important economic hubs of the world, India and China experienced the strongest recovery growing at an annual rate of 8.9% and 8.1% respectively. Another notable development during the year in the global economy was the rebound of international trade. According to the April WEO report by IMF, global trade volume recovery was sharper than output growth and it grew at an annual rate of 10.1% in CY 2021. inflationary pressures on key commodities such as oil, natural gas, and wheat among others, which will hit vulnerable populations in low-income countries the hardest. According to a new study done by the National Institute of Economic and Social Research, the war has led to a 30% increase in oil prices, a 90% increase in European gas prices, and a 17% increase in food prices. On the other hand, policy rate hikes by key central banks across the world to tame inflation is expected to lower the economic growth. Global growth is projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023.

1.2 Indian economic Review

The Indian economy started FY2021-22 with a sombre note owing to the spread of the delta variant which had a much sharper impact on the health of the population.

The resultant restrictions, albeit localised, lowered the recovery pace during the first quarter of the financial year under review. After a de-growth of 6.6% in FY2020-21, the Indian economy reported a growth of 8.7%. The easing of COVID-related restrictions, accelerated vaccination campaign, and a strong policy response from the Government of India and the reserve bank were critical in ensuring this recovery. The RBI continued to maintain an accommodative stance throughout the year, aiding the recovery process. However, the growth stunted towards the second half of the year, largely driven by the global supply chain disruptions and an inflationary environment, driven by the steep increase in crude and other commodity prices.

Outlook

As per the latest estimates by CRISIL, Indias Gross Domestic Product (‘GDP’) is expected to report a growth of 7.3% in FY 2022-23, in line with the RBI’s expectation of 7.2% Real Growth. This growth is despite private consumption and investment being impacted by higher oil and commodity prices, elevated freight prices, and drag on exports with lower global growth projections. The growth projections face downsides risks emanating from the increased duration of the war as well as growing inflation.

2. Industry review

2.1 Financial services industry

India has a diversified financial sector consisting of commercial banks, insurance companies, non-banking financial companies, housing finance companies, cooperatives, pension funds, mutual funds, and other smaller financial entities. The financial services industry plays an important role in ensuring the efficiency of capital allocation and driving high-return investments. In addition, the industry plays an important role in enabling more people to have access to capital. Financial inclusion driven by RBI has expanded the target market to semiurban and rural areas. NBFCs especially those catering to the urban and rural poor namely NBFC-MFIs and Asset Finance Companies have a complementary role in the financial inclusion agenda of the country. The financial services sector is expected to rapidly grow this decade driven by rising incomes and heightened government focus on financial inclusion and digital adoption - Indias digital payments could pass $1 trillion by 2030.

Growth Drivers:

• Shift to better financial asset class by investors

Important drivers of growth in the financial sector can be attributed to the rise in the personal wealth of the average Indian. According to new world wealth, the total private wealth of India stood at 8,893 billion and there were 357,000 HNIs in 2022¹. Given India’s status as the fastest growing major economy in the world, the creation of new wealth is expected to rise the demand for more and better financial services.

• Rise of technology

The integration of technology with the operations of finance has been an important driver in increasing the reach of financial services. In addition, the Indian governments policy initiatives such as Jan Dhan Yojna and the integration of PAN and Aadhar are expected to further increase the share of savings in financial assets.

2.2 NBFC Sector

Non-banking financial companies (NBFCs) are a crucial component of the Indian finance industry and serve the financial needs of less-banked population such as the unorganised section such as the micro, small and medium enterprises (MSMEs). NBFCs enjoy a competitive edge in their superior understanding of regional dynamics, well-developed collection systems, and personalised services in the drive to expand financial inclusion in India. Lower transaction costs, quick decision-making, customer orientation, and prompt provision of services have typically differentiated NBFCs from banks. As a result, over the last decade, the NBFCs have become an increasingly important part of the Indian financial services sector. According to the RBI, NBFCs have slowly, but steadily increased their credit to GDP ratio from 8.6% in 2013 to reach 13.7% in 2021.

The NBFCs are tightly regulated by the RBI, with regulatory guidelines mandating that operating NBFCs have minimum net owned funds of 2 crore. In terms of ownership, the dominant form of NBFCs in terms of liability structure was NBFCs-ND in comparison to other forms of ownership. Out of a total 9733 NBFCs in 2021, 9.7% had an asset size of ~100 crore .

Source: RBI. NBFCs-ND stands for non-deposit taking NBFCs and NBFCs-D stands for deposit taking NBFCs.

The industrial sector is the largest recipient of credit extended by the NBFC sector, followed by retail loans and services. Within the industrial sector, large enterprises constitute the largest category where NBFCs have distributed credit, followed by micro and small enterprises and medium enterprises. Vehicle loans constitute the dominant form of retail loans given by NBFCs and commercial loans constitute the dominant form of credit given to services.

Distribution of NBFC Credit, September 2021

During the year, profitability indicators such as return on equity (RoE) and Net interest margin (NIM) reflect challenges in the NBFC sector. RoE and NIM, both, declined to 5.3% and 5.7%, respectively, during 2020-21 because of pandemic-induced slowdown, which impacted the informal economy more than the formal economy. However, the NBFC sector registered an improvement in asset quality during the year. This shows the resilience of the sector to headwinds in the operating environment. Based on the duration for which an asset remains nonperforming, NPAs can be categorised into sub-standard, doubtful, and loss assets.

SWOT analysis of NBFC sector

Strength	Weaknesses
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 customised 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.	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 of frequent regulatory changes are compliance costs that are borne by individual NBFCs, which reduces their ability to be competitive and protect their margins.
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.
Opportunity	Threats
• Increased penetration in the MSME segment with better integration of technology into business models	• High cost of funds
	• Inferior credit profile of borrowers
• Synergistic alliance with FinTech to increase market penetration.	• Restrictions on deposit-taking NBFCs
• 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

2.3 Gold market

According to the World Gold Council, Indian households have US$1.5tn of gold, of which only 10% is used for financing. During the year, the gold market saw significant volatility in spot prices of gold, because of the persistent business shocks in the global economy, which made investors deal with an uncertain business environment. While the start of the year was relatively stable after COVID-related business risks had been sufficiently dealt with by Governments across the world with a global push for vaccination. The second half of the year saw one of the highest rallies of the year, with fresh concerns about inflation, rising interest rates, and geopolitical conflicts. The onset of the Ukraine-Russia conflict set off new waves of uncertainty and fears of a global economic slowdown, which triggered a bull run on the spot prices of gold.

• Gold historically rallies in periods of high inflation, and outperforms broad-based commodities

Culture significance of Gold in India

Gold has a unique place in the social fabric of India. It is regarded as an item of value with a life of its own. Beyond being a symbol of wealth and status, gold is part of worship and culture -a tradition that goes back thousands of years.

Religious connotations: Gold is an integral part of religious ceremonies in India, regardless of religion and is considered a prominent asset across all major religions in the country.

Family heirloom: Gold jewellery and ornaments are passed on from generation to generation, in a bid to keep family legacy alive. It is common for most households to pass on jewellery from a mother to a bride in weddings, irrespective of facts like change in design trends or value.

Gold is an extremely sentimental part of certain traditions and continues to remain a cherished heirloom. Passing gold from one generation to another also helps people save money on gold.

Golden gifts: Gifting gold is considered auspicious in India, with gold gifts forming an integral part of all ceremonies. It is common to gift gold during weddings. In addition, gifts of gold are common for birthdays and child births even in smaller towns.

Status symbol: Ownership of gold is considered a status symbol, because of its historical importance across all strata’s of Indian society

2.3.1 Indias gold jewellery market

According to ICRA, Indias gold jewellery demand reported strong growth of 25% during FY2022, despite a steep increase in gold prices. Gold consumption in FY2022 was spurred by pent-up demand in the second quarter and robust demand reported during the festive and wedding seasons. Further, the demand for gold jewellery in the fourth quarter also remained buoyant driven by limited impact of the third wave on store operations.

The report further expects a steady 11% growth in gold jewellery demand on FY2023 despite a higher base, driven by a robust wedding season, and festive purchases, given Indian consumers strong cultural affinity towards gold.

Annual jewellery consumption

	CY2021	CY2020	Growth
World	2123.6	1401.1	52%
India	610.9	315.9	93%

(Source: Gold Org)

2.2.1 Organised gold loan market

The Indian gold loan market is divided into two segments - organised and unorganised. The organised gold loan market includes banks, NBFCs, and Nidhi companies, while the unorganised gold loan segment comprises individuals who provide secured loans to borrowers by keeping gold as collateral.

According to the national household survey of gold consumption by India Gold Policy Centre (IGPC), more than 75% of Indian households own gold in one form or another. In addition, the majority of the gold consumption is concentrated among middle-income households, with 56% of total market demand²

Prominent features of gold loans³

• Secured: Loans are borrowed against the gold deposited by the applicant.

• Low disbursal times: NBFCs and the unorganised sector disburse loans at a much faster pace as compared with other sources which may take more time.

• Loan-to-value (LTV) ratios: According to RBI guidelines, loans against gold ornaments have a maximum LTV ratio of 75%.

• Tenure: There is no minimum period for the loan and, if need be, one can return the loan amount the very next day. The average tenure of the loan is about 90 to 100 days. The tenure would normally do not exceed 1 year

• Varied interest rates: The interest rate depends on the tenure and amount of loan. It varies from 12% to 18% in the case of banks, while for NBFCs, it could reach 24%. The interest rates charged in the unorganised sector are much higher and can range from 30% to 50%. Reasonable rates of interest are especially applied if the loan to value (LTV) does not exceed 50-60%.

• Multiple repayment options: Repayment can be structured with the interest amount and principal being repaid at the end of the period in one lump sum. Repayment through EMI, covering interest as well as principal, is also another frequently used option.

The gold loan industry is increasingly becoming significant in India, with a steady rise in AUM of gold loan NBFCs⁴. The flexibility of NBFCs coupled with the average Indians preferences for gold is an important driver in the gold loan market. According to the RBI, the value of outstanding gold loans by banks jumped 33% between January 2021 and January 2022 to 69,521 crore⁵. The jump in gold loans is being seen across specialised NBFCs as well as banks. The competitive advantages of NBFCs, inflationary pressures, and consumer preferences are some of the factors which are expected to be drivers of growth for specialised NBFCs operating in the gold loan market in FY23 and FY24, and as a result, the gold loan market is expected to become even more important in the future.

AUM of gold-loan NBFCs (E Lakh Crore)

• Enhanced capabilities across faster loan processing, accurate gold valuation, safekeeping, and auctioning

• Relatively small ticket size, secure nature of business, and wide variety of products, leading to minimal credit cost and stable growth

• As a trusted pan-India brand in the gold loan space, Muthoot Finance is revolutionising India’s gold banking sector and empowering people across the social pyramid. Inspired by a rich legacy that goes back several generations and strategised by our committed team

• Deeper penetration into semi-urban and rural areas, bringing more of the underserved into the formal banking fold of 26,000+ employees to serve 200,000+ customers every day, through 4,600+ branches.

• Flexible repayment options that suit different borrower requirements

• Proactive marketing, branding, and geographic expansion that help capture new-to- market customers

Technology disrupting the Indian gold loan sector

Digitisation and innovative technologies are leading to unprecedented disruption in the entire banking and finance sector including the gold loan sector. The gold loan business in the country has undergone a massive transformation with enhanced use of technology for faster loan processing, accurate gold valuation, safekeeping, auctions, and cost-cutting. Customers are required to visit only to deposit the physical gold.

3. Company review

Muthoot Finance Limited (MFL) is the flagship company of the Kerala-based business house, The Muthoot Group, which has diversified operations in financial services, healthcare, education, and hospitality. MFL was incorporated in 1997 and is Indias largest gold loan focussed NBFC with total loan assets (standalone) of 580,532 million and 4,617 branches as on 31^st March 2022.

Muthoot Finance is revolutionising Indias gold banking sector and empowering people across the social pyramid. Inspired by a rich legacy that goes back several generations, our team of 26,000+ employees serve 200,000+ customers every day.

SCOT analysis

Strengths

• Strong Core Loan Portfolio: Our gold loan portfolio is optimised by having a varied borrowed profile.

The diversification of our gold loan portfolio allows the possibility of loss in the event of a loan default by customers, the gold collateral can be liquidated with relative ease and minimum loss. This allows us to consistently generate strong cash flows which strengthens our balance sheet.

• Long-standing leadership: Our position as an industry leader in the retail financial services business owing to our large geographic footprint, committed workforce, and customer-centricity.

• Smart financial management: Our prudent financial management teams allow us to have a competitive advantage over our competitors, which allows us flexibility in offering different services on attractive terms.

• Smart solution: Our commitment to offering a seamless and better customer experience allows us to maintain long-term relationships with them.

• Excellent product mix: Our unmatched combination of products based on customer needs to help us to maintain our leadership position. We offer attractive rates which allow us to attract new customers and retain our existing customers.

• Brand legacy: Our distinctive product offerings and the strategic market has allowed us to build a strong brand with high recall value among customers.

Challenges

• Storage: Gold must be always handled with caution during the loans life cycle due to its low quantity vs high value. Employees must be trained on how to recognise the possibility of theft and other fraudulent behaviours, as well as the procedures to be complied with to prevent them.

• Operating expenses: Providing secure storage hubs at each branch costs and reduces operating revenues at the branch level. There are also costs associated with strong electronic monitoring and cybersecurity protocols to protect client data.

Opportunity

• Digital services: The shift in consumer preferences to a more experience-based mode of consumption opens up the possibility of value creation for our customers through creating a seamless experience

• Technology adoption: The emergence of the possibility of integration of technology into our business operations to provide innovative solutions.

Threats

• Increased competition and alternative products:

Our competition lies with other gold loan lenders as well as with other financial services providers in unsecured loans segment- providing the customers the option of availing funds without providing any collateral.

4. Operational review

Please see Page 50 of the Annual report for details on operational highlights.

5. Financial review

Gross Loans under management

We achieved a gross loan assets under management of 580,532 million in FY22 at a y-o-y rate of 10% compared to 526,223 million in the previous year.

Gold Loan Assets under management

We achieved a gold loan assets under management of 575 billions at a y-o-y rate of 11% in FY22 compared to 519 billion in the previous year.

Revenue

Our total income grew by 5% y-o-y to reach 110,984 million in FY22 compared to 105,744 million in the previous year.

Profit before tax

We achieved PBT of 53,094 million in FY22 compared to 50,065 million in the previous year at a y-o-y rate of 6%.

Profit after tax

We achieved PAT of 39,543 million in FY22 compared to 37,222 million in the previous year at a y-o-y rate of 6%.

Capital Adequacy Ratio (CAR)

We were able to maintain our capital adequacy ratio well above the statutory requirement and achieved a CRAR of 29.97% in FY22 compared to 27.39% in the previous year. Our CRAR for tier I assets stood at 29.10% in FY22 compared to 26.31% in the previous year. Our CRAR for tier II assets fell from 1.08% to 0.87% in FY22.

Earnings per Share(EPS)

We recorded an increase in our EPS at a y-o-y rate of 6.21% and it stood at 98.55 in FY22 compared to 92.79 in the previous year.

6. Risk management

We are committed to identification of risks to our business, and place in robust risk management mechanisms that enable us to achieve our companys mission and vision

Risk	Definition	Mitigation Measures
Operational	The possibility of direct or indirect loss as a result of system, personnel, or process failures, or as a result of external occurrences.	To mitigate various operational risks, we have robust systems and stringent processes in place. We protect our branches with centralised monitoring and surveillance cameras. Employees are trained on how to spot a fraud, such as unauthentic gold, on a regular basis. We have a centralised system with dedicated audit personnel for overall risk management.
Collateral	Downward fluctuation in gold prices could lead to loss of profits	To address this risk, we have a policy of retaining at least 25% of the gold price of j ewellery when calculating the loan amount, excluding design and production charges. Even if the collateral’s value falls below the repayment amount, the sentimental value of gold jewellery drives repayment and redemption.
Credit	Failure of counter-party to abide by the terms and conditions of any financial contract with us	We have a strict loan approval and collateral evaluation process in place, as well as an effective non-performing asset monitoring and collection approach. The risk is mitigated to some extent by the collateral’s liquidity, as there is a remote chance of recovering less than the amount due on account of adequate security margin.
Market	Fluctuations in interest rate	Interest rate hikes can be passed on to borrowers; fixed rates of interest for the bulk of borrowings, as well as all loans and advances, reduce interest rate risk.
Liquidity	The inability to raise cash from the market at the best possible price to meet operational and debt servicing needs.	We interact with the Asset and Liabilities Management Committee (Committee of Board Of Directors) and ALCO Committee (Committee of Executives) on a regular basis to examine the liquidity position based on future cash flows. Due to the nature of business of the company, which employs funds from a variety of sources, including debentures, external commercial borrowings, and bank loans with longer maturities than the loans given, there is less liquidity risk in operations.
Business cycle	Associated with the seasonal or cyclical nature of an industry	Our extensive presence across India enables us to alleviate cyclical pressures on various regions’ economic growth.

7. Human Resources

Please see Page 52 of the Annual report for details on people practices.

8. Internal Controls and Adequacy

The Company has an adequate internal control system in place to safeguard assets and protect against losses from any unauthorised use or disposition. The system authorises, records and reports transactions and ensures that recorded data are reliable to prepare financial information and to maintain accountability of assets. The Company’s internal controls are supplemented by an extensive programme of internal audits, reviews by the management, and documented policies, guidelines and procedures.

9. Cautionary Statement

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable laws and regulations. Important developments that could affect the Companys operations include a downtrend in the financial services industry, global or domestic or both, significant changes in the political and economic environment in India or key markets abroad, tax laws, litigation, labour relations, exchange rate fluctuations, interest and other factors. Actual results might differ substantially or materially from those expressed or implied. This report should be read in conjunction with the financial statements included herein and the notes thereto.

KSR/CBE/M154/590/2022-23

The Members,

Muthoot Finance Limited

Muthoot Chambers, Opposite Saritha Theatre Complex,

2^nd Floor, Banerji Road,

Kochi - 682 018

Our Secretarial Audit Report of even date is to be read along with this letter.

1. Maintenance of secretarial records is the responsibility of the management of the company. Our responsibility is to express an opinion on these secretarial records based on our audit.

2. Due threat of infection arising out of COVID-19 pandemic, we had to conduct our audit by examining various records and documents including minutes, registers, certificates and other records received through electronic mode as enabled

by the company. We state that we have not done a physical verification of all the original documents and records. The management has confirmed that the records provided to us for audit through electronic mode are final, true and correct.

3. Further, our audit report is limited to the verification and reporting on the statutory compliances on laws / regulations / guidelines listed in our report and the same pertain to the financial year ended on 31^st March, 2022. Our reporting does not include any statutory compliances whose dates are extended by Ministry of Corporate Affairs / SEBI /

RBI, as the case may be, from time to time and accordingly such extended time limits remain beyond the date of our audit report.

4. We have followed the audit practices and processes as were appropriate to obtain reasonable assurance about the correctness of the contents of the Secretarial records. The verification was done on test basis to ensure that correct facts are reflected in secretarial records. We believe that the processes and practices, we followed provide a reasonable basis for our opinion.

5. Where ever required, we have obtained the Management representation about the compliance of laws, rules and regulations and happening of events or transactions.

6. We have not verified the correctness and appropriateness of financial records and Books of Accounts of the company.

7. The compliance of the provisions of Corporate and other applicable laws, rules, regulations, standards is the responsibility of management. Our examination was limited to the verification of procedures on test basis. Further, compliance of the Act, Regulations, Directions listed under Para (vi) of the report is limited to issue of securities, corporate governance aspects and filing of forms and returns there under.

8. The Secretarial Audit report is neither an assurance as to the future viability of the company nor of the efficacy or effectiveness with which the management has conducted the affairs of the company.

	For KSR & Co Company Secretaries LLP
	Dr. K. S. Ravichandran
	Managing Partner
Place: Coimbatore	(FCS: 11684; CP: 11367)
Date: August 02, 2022	UDIN: F003675D000728586