Shriram Finance Ltd Management Discussions

<dhhead>MANAGEMENT DISCUSSION & ANALYSIS</dhhead>

ECONOMY OVERVIEW Global Economic Scenario

e global economy has shown remarkable resilience despite enduring repeated and overlapping shocks, coupled with unprecedented monetary tightening measures. Growth in the US and several key emerging market economies (EMEs) has outperformed expectations. While, manufacturing activity has remained subdued, services have exhibited strength. e global economy grew by 3.1% and is anticipated to slowdown to 2.9% in 2024. Although, headline inflation has decreased across countries, the decline in core and service inflation has been gradual, given the persistent tightness in labour markets. Major central banks in advanced economies (AEs) have kept policy rates on hold to ensure alignment of inflation with targets. Global crude oil prices have remained highly volatile, with Brent crude falling from a high of USD 95 in early October 2023 to below USD 75 by mid-December, before rebounding and settling above USD 80 in the first quarter of 2024. An escalation in the conflict in West Asia and logistical impediments on key trade routes may cause serious disruptions in the oil market. Assuming the crude oil price to be 10% above the baseline, domestic inflation could be higher by 30 bps and growth weaker by around 15 bps, respectively. Conversely, the de-escalation of geopolitical tensions along with a further weakening of global demand may pull down crude oil prices. Following a two-year surge, global inflation exhibited signs of easing in 2023, although it remained elevated compared to the 2010-2019 average. After peaking at 8.1% in 2022, the highest in nearly three decades, global headline inflation declined to an estimated 5.7% in 2023. Projections indicate a further decrease to 3.9% in 2024, driven by the continued moderation in international commodity prices and reduced demand amid monetary tightening measures. While developed economies witnessed a notable slowdown in inflation, core inflation rates remain relatively high, influenced by increasing service sector prices and tight labour markets. Furthermore, inflation in most developing countries peaked in 2023 and is expected to continue moderating in 2024.

Outlook

Looking ahead, the global economy is anticipated to grow at a steady pace, with diminishing effects of positive shocks. Alongside, it is set to witness increasing yields and tighter credit conditions. ere are likely to be persistent supply disruptions, along with a shi_ in inflation sentiment, which may restrain the fall in inflation. Notably, the business sector is likely to experience increased pressure, with shrinking profit margins, leading to a slowdown in hiring and expenditure. e potential resurgence of consumer price inflation is a primary concern for the global economy. e economic rebound in 2025 largely hinges on central banks alleviating economic constraints, as inflation indicators approach their respective targets. e US and the Euro Area are particularly susceptible, with real policy rates currently at their highest levels since January 2008. Prolonged periods of high rates could substantially dampen economic activity, worsening mild recessions into more severe downturns.

Indian Economic Scenario

India has solidi_ed its position as the world’s third-largest fintech economy, ranking behind only USA and the UK. Furthermore, it has surged ahead of Hong Kong to claim the fourth spot in global stock markets. is accomplishment stems from both domestic and international investor confidence, strengthened by sustained IPO activity. Initiatives like the Skill India Mission, Start-Up India, and Stand-Up India have played a pivotal role in fostering greater women’s participation in human capital development. Despite global economic uncertainties, India’s GDP grew by 8.2% in FY 2023-24, driven by increased public sector investments, a resilient financial sector, and significant growth in non-food credit.

Indian Economy GDP Growth Rate (in %)

Year	FY 2019_ 20	FY 2020_ 21	FY 2021_ 22	FY 2022_ 23	FY 2023_ 24
GDP
Growth	4.2	(6.6)	8.7	7.0	8.2
Rate (%)

India has demonstrated resilience and progress in the face of globaleconomicuncertaintieswithtimelypolicyinterventions targeting macro stability and the revitalisation of both financial and non-financial sectors. Substantial investments in robust physical and digital public infrastructure, have allowed the country to navigate challenges, both domestic and international, ensuring sustained economic progress. With ongoing and forthcoming government policy reforms, optimism and confidence in India’s economic growth story is notably high. Embracing its ‘Amrit Kaal’ with assurance, the nation views growth challenges as opportunities for inclusive development rather than hindrances.

Outlook

Going forward, the country is likely to remain the world’s fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rate regime and robust foreign exchange reserves. e economy is poised to achieve nearly 7% growth in FY 2024-25. e catalysts for this projected growth are likely to be robust domestic demand, private consumption and investment, and Government reforms and initiatives implemented over the past decade. e Government’s investments in both physical and digital infrastructure, coupled with measures to increase manufacturing have strengthened the supply side. Together, these developments are likely to provide an impetus to the country’s economic activity.

India is making significant strides to achieve its futuristic growth targets. e Indian economy is projected to cross the USD 4 Trillion mark during FY 2024-25, further escalating to USD 5 trillion by FY 2026-27. Additionally, the Government has set an ambitious goal of transforming into a developed country by 2047. India will sustain its upward growth track, propelled by stable and robust domestic demand, expanding private consumption and investments, and ongoing structural reforms.

INDIAN FINANCIAL SERVICES SECTOR SCENARIO

India’s financial services sector is experiencing rapid expansion, characterised by robust growth among existing firms and the in_ux of new entrants. is diverse landscape encompasses insurance companies, commercial banks, cooperatives, non-banking financial companies, mutual funds, pension funds and various smaller entities. Despite this diversification, banking remains the dominant force, accounting for 70% of total assets within the financial system. e Government of India has implemented several reforms to liberalise, regulate, and strengthen the industry. Initiatives like the Credit Guarantee Fund Scheme for Micro, Small, and Medium Enterprises (MSMEs), guidelines on collateral requirements for banks, and the establishment of the Micro Units Development and Refinance Agency (MUDRA) have facilitated improved access to finance for MSMEs. is concerted effort by the Government and private sector has propelled India into one of the world’s most dynamic capital markets. A primary catalyst fueling sectoral growth is the heightened focus on financial inclusion, aimed at enhancing access to finance for marginalised and underprivileged segments of society. is shi_ has spurred the rise of digital banking, microfinance initiatives and collaborative ventures with fintech companies, reshaping conventional banking paradigms.

India’s financial services sector is undergoing a profound transformation, driven by the widespread adoption of digital technologies, shi_ing consumer preferences and heightened competition. is dynamic landscape is reshaping the sector’s growth direction. Additionally, the integration of rapid technology has revolutionised the way Indians access and pay for services, with even street vendors embracing QR code payments. Consequently, the Boston Consulting Group anticipates a remarkable surge in India’s digital payments market, projecting a threefold increase from USD 3 trillion to USD 10 trillion by 2026.

(Source: https://timesofindia.indiatimes.com/blogs/voices/the-future-of-financial-services-in-india/)

Industry Scenario and Financing

Financial institutions play a crucial role in fostering stability and implementing regulatory measures to reinforce households and businesses, particularly during periods of economic uncertainty. Currently, geopolitical conflicts have hindered post-Covid-19 pandemic recoveries in various countries, leading to an expedited normalisation of monetary and fiscal policies.

In India, Non-Banking Financial Companies (NBFCs) have emerged as critical pillars of financial support for a significant segment of the population, including Small and Medium Enterprises (SMEs) and those historically underserved by traditional banking institutions. Displaying impressive agility and efficiency, NBFCs have adeptly catered to the diverse financial needs of borrowers, leveraging their widespread geographical presence, deep understanding of various financial requirements and prompt processing times. By playing a pivotal role in advancing financial inclusion, non-bank lenders have facilitated the growth of numerous MSMEs and fostered opportunities for self-employment. Moreover, the sector has witnessed remarkable expansion with the entry of various players boasting varied business models. In recent years, India’s financial services landscape has undergone a transformative shi_, characterised by the growing influence of neo-banking, digital authentication, widespread adoption of the Uni_ed Payments Interface (UPI) and mobile banking and the escalating penetration of mobile internet.

Furthermore, NBFCs are increasingly adopting digitisation to enhance operational efficiency, elevate customer experiences, drive cost savings and ensure compliance with regulatory standards. Despite facing sti_ competition from public and private sector banks and Microfinance Institutions (MFIs) across market share, customer acquisition, asset quality and technological innovation, NBFCs have spearheaded innovative digital initiatives. rough frugal innovation, they leverage cutting-edge technologies like cloud computing, low-code/no-code platforms, data lakes and artificial intelligence (AI). ese technologies propel multiple concepts like application modernisation, super apps, data transparency and robust information security.

is digital transformation enables NBFCs to compete effectively with larger institutions for customer engagement, while delivering seamless experiences for both customers and employees. In recent times, NBFCs have surpassed banks in terms of new credit disbursals, leveraging technology to reach underserved sectors and capitalising on banks’ limitations in swi_ly expanding operations and adapting inflexible policies. e retail and MSME sectors have emerged as crucial drivers of growth for NBFCs. Furthermore, the Indian MSME sector, comprising 64 Million MSMEs, contributes 30% to India’s GDP. With a total credit demand of Rs. 69.3 trillion, registering a CAGR of 11.5%, less than 15% of this demand is currently met by formal sources. Despite supportive government initiatives, there remains a credit gap of Rs. 25 Trillion, which NBFCs can address through collaborations with fintech firms and advancements in digital technologies. Additionally, NBFCs have significantly impacted these sectors. ey offer a wide array of products, including equipment financing, hire purchase and leasing, housing finance and gold loans. Moreover, they have expanded into new segments, such as consumer durable finance.

e Government of India has introduced several initiatives to address structural issues in the small business lending segment. ese include licensing account aggregators, launching schemes, such as the Pradhan Mantri Mudra Yojana (PMMY), introducing UPI platforms and unveiling platforms like TReDS, GeM and the Open Network for Digital Commerce (ONDC). With the Reserve Bank of India (RBI) intensifying scrutiny on corporate lending and the reporting of Non-Performing Assets (NPA) by banks, NBFCs have a unique opportunity to expand their lending portfolio into a sector traditionally dominated by commercial banks.

(Source: https://www.livemint.com/industry/banking/banks-nbfcs-meet-less-than-15-of-msme-credit-demand-11671035294728.html, https:// timesofindia.indiatimes.com/readersblog/virtual-cfo/nbfcs-empowering-msmes-and-entrepreneurs-in-indias-small-towns-and-cities-54806/)

Commercial Vehicle (CV)

e commercial vehicle sector has experienced a moderate growth of 0.56% in volume by the end of FY 2023-24. However, projections from the rating agency ICRA suggest a potential decline of 4-7% in commercial vehicle volume growth for the following FY 2024-25. Despite this projection, sales of commercial vehicles, offen considered a gauge of economic vitality have reached record highs in FY 2023-24. is is supported by robust revenues in leading companies like Tata Motors, Ashok Leyland, and VE commercial vehicles.

e surge in demand stems mainly from heightened interest in expensive heavy-duty vehicles, fueled by substantial government investments in infrastructure and increased freight movement. Sales figures for FY 2023-24 have exceeded the previous peak recorded in FY 2018-19, with anticipated revenue soaring by approximately 30% compared to that period. Sales of heavy-duty trucks capable of transporting larger freight loads have experienced a growth of 4% during FY 2023-24. is increase in load-carrying capacity is credited to the shi_ towards larger trucks. Moreover, demand for buses has spiked by over 38% during this period, boosted by improved highways stimulating road travel demand amid congested railway networks.

Despite an anticipated slowdown in commercial vehicle demand in FY 2024-25, particularly for medium and heavy commercial vehicles (MHCVs) and light commercial vehicles (LCVs), owing to elevated dealer inventories, the long-term outlook remains promising. is optimism is supported by a robust macroeconomic landscape, robust replacement demand (especially in the passenger vehicle segment), ongoing infrastructure projects (further rejuvenated by increased allocations in the recent interim budget) and burgeoning freight demand. Looking ahead, sustained economic growth is expected to provide a significant boost to commercial vehicle sales. With India’s manufacturing sector forecasted to reach USD 4.5 Trillion by 2047, accounting for 22% of the GDP (compared to a base projection of USD 2.5 Trillion with a 17% GDP share), the commercial vehicle market is poised for unprecedented growth. Additionally, increased investment in the manufacturing sector, spurred by heightened government capital expenditure to reduce import reliance and enhance capacity utilisation is expected to drive demand. Moreover, initiatives, such as the vehicle scrappage policy and electrification are anticipated to further stimulate sales within the commercial vehicle industry.

(Source: https://www.business-standard.com/industry/auto/commercial-vehicle-sales-likely-to-enter-into-a-downcycle-in-2024-25-124021301441_1. html, https://auto.economictimes.indiatimes.com/news/commercial-vehicle/ h1-fy24-cv-sector-analysis-high-base-drives-marginal-yoy-growth-outlook-stays-positive/104649925)

Passenger Vehicle (PV)

e Indian passenger vehicle market is witnessing a surge in demand for utility vehicles, including SUVs and MPVs. Moreover, the launch of new car models is significantly driving nationwide growth. roughout 2023, numerous automakers have unveiled a plethora of new passenger vehicles, catering to both mass-market and luxury segments. ese launches span both traditional internal combustion engine and advanced electric vehicle segments. e passenger vehicle segment constitutes about 18% of the total domestic sales in India. Driven by robust demand for sports utility vehicles, passenger vehicle sales in India soared to a record high in FY 2023-24, with over 42 Lakhs units dispatched. Manufacturers witnessed a substantial increase in overall passenger vehicle dispatches to dealers last fiscal, reaching 42.2 Lakhs units, a 9% rise from 38.9 Lakhs units in FY2022-23. is surge was led by record sales from Maruti Suzuki India, Hyundai Motor India and Toyota Kirloskar Motor. Furthermore, the share of sports utility vehicles in overall passenger vehicle dispatches rose to 50.4% in the last fiscal year, compared to 43% in FY 2022-23. is is the first time when passenger vehicle sales have crossed the 40-Lakhs sales mark in the country, with much of the growth attributed to the SUV segment. Electric cars currently contribute around 6% of total EV sales nationwide, experiencing substantial sales volume growth in recent years. e upcoming launch of utility vehicles and new models is expected to propel further growth in the Indian passenger vehicle market. Furthermore, with more OEMs planning to introduce new electric vehicles tailored for the domestic market, there is potential for an increased EV adoption rate, and overall growth.

(Source: https://economictimes.indiatimes.com/industry/auto/auto-news/ passenger-vehicle-sales-in-local-market-reach-new-heights-in-2023/ articleshow/106761676.cms?from=mdr, https://www.theweek.in/wire-updates/business/2024/04/01/del131-biz-ld-auto-sales.html)

Two-Wheeler (2W)

e Indian two-wheeler market is witnessing a remarkable surge and is projected to register a CAGR of 10.29% by 2029. is segment continued the recovery path with a handsome growth of over 13% in domestic sales to reach 18 million units. Rising economic prosperity and increasing disposable incomes across the Indian subcontinent are fueling a significant shi_ towards personal mobility solutions among a substantial portion of the population. Moreover, demographic changes highlight a sizeable young population with a preference for stylish, efficient and budget-friendly transportation options. is further contributes to the market’s growth. Additionally, the availability of diverse financing alternatives with consumer-friendly schemes is accelerating vehicle ownership among potential buyers.

e trend of urbanisation and resulting tra_c congestion is prompting two-wheelers to emerge as a preferred mode of travel within bustling city landscapes. Government initiatives are pivotal, with stricter emission and safety regulations driving technological advancements, favouring eco-friendly and safer two-wheelers. Furthermore, cultural dynamics have elevated two-wheelers beyond mere transportation, embedding them as symbols of familial connections and dynamics.

In FY 2023-24, sales of electric two-wheelers (e2W) saw a remarkable surge of 33.3% compared to the previous year, as per offcial records. According to data from the Vahan portal, 910,930 units of electric two-wheelers were sold in FY 2023-24, marking a substantial increase from 682,937 units sold in FY 2022-23. Notably, there has been a considerable reduction in manufacturing costs, attributed to economies of scale and a decline in the prices of critical components, such as batteries. Currently, batteries account for only a third of the two-wheeler production costs, down from half in previous years. Additionally, the subsidy amount has been progressively reduced, initially set at 45% of the vehicle cost, or Rs. 30,000 per kWh, then decreased to Rs. 15,000 per kWh, and now further minimised to Rs. 5000 per kWh.

(Source: https://www.globenewswire.com/en/news-relea se/2024/03/26/2852640/28124/en/India-Two-Wheeler-Market-2023-2029-A-16-63-Billion-Market-Opportunity-Vehicle-Type-Propulsion-Type-and-Granular-Region-Wise-Analysis.html)

Tractor and Farm Equipment

India’s tractor market, offen regarded as a key indicator of the nation’s rural economic vitality, surpasses that of China by nearly 2.5 times and that of the United States by 3.5 times. According to ICRA, despite concerns arising from the potential impact of a sub-par and erratic monsoon on rural cash flows, the volumes of the tractor and farm equipment market are expected to remain stable. Projections suggest the total market for tractors and farm equipment witnessed sales of around 900,000 units, slightly lower than the 945,000 units sold in FY 2022-23. Moreover, the uneven temporal and spatial distribution of precipitation is believed to have affected kharif yields, while low reservoir levels further dampen prospects for rabi sowing.

Sentiments in the farming sector have dampened due to weak government spending on agriculture and rural development in Q3 FY 2023-24, exacerbated by erratic rainfall patterns negatively impacting kharif output. Additionally, sluggish progress in rabi sowing, and weak Mandi arrivals from the kharif season signal widespread declines in farm output. Despite these challenges, the Indian agricultural equipment market, valued at Rs. 1,129.6 Billion in 2023, is projected by IMARC Group to soar to Rs. 2,527.4 Billion by 2032, reflecting a robust CAGR of 9.1% during 2024-2032.

In recent years, there has been notable progress in agricultural mechanisation. A significant proportion of farmers have transitioned from traditional methods to mechanical equipment for various farming activities, such as tillage, sowing, irrigation, plant protection and threshing. is shi_ has been propelled by factors like easier access to credit, government incentives, heightened agricultural productivity, the rise of contract farming and increasing rural incomes. As a result, the agricultural equipment market has experienced substantial growth, driven by these favourable trends. Additionally, the agricultural and rural sectors have witnessed the emergence of various agricultural technologies. ese technologies are aimed at aiding lenders in comprehending crop patterns and local geography for precise credit evaluation. Furthermore, these technologies can be leveraged for comprehensive tractor and agriculture based financing solutions. As a result, rural financing has expanded its scope beyond asset financing, including a plethora of agriculture technology enabled financing options.

(Source: https://www.giiresearch.com/report/imarc1451113-indian-agricultural-equipment-market-report-by.html)

Construction Equipment

e construction equipment industry is pivotal in stimulating economic development and contributes significantly to the GDP by enabling infrastructure development. Government backing through various initiatives like the National Infrastructure Pipeline (NIP) and the PM Gati Shakti Master Plan has unlocked a myriad of opportunities within the construction sector. Furthermore, the increased emphasis on improving domestic manufacturing capabilities under the ‘Make in India’ initiative augurs favourably for the construction equipment industry.

e Indian construction equipment market size is estimated at USD 7.30 Billion in 2024, and is expected to reach USD 10.90 Billion by 2029, registering a CAGR of 8.30% during the forecast period (2024-2029). Improvement in road construction infrastructure, an increasing urbanisation rate and higher investment to boost infrastructure activities serve as the major determinants for the growth of construction equipment in India. With better road transportation infrastructure and a rise in urban population, there exists a greater demand for convenience in personal mobility, healthcare, sanitation and water supply, among others. is, in turn, contributes to the boosting demand for construction equipment, attributed to the growth in the construction sector across India.

(Source: https://www.mordorintelligence.com/industry-reports/india-construction-equipment-market)

Micro, Small and Medium Enterprises (MSMEs)

The MSME sector in India holds a crucial position in both employment generation and the country’s GDP. In fact, 96% of the industrial units in the Indian economy belong to small companies. ese small companies contribute 40% to the nation’s overall industrial production and account for 42% of all Indian exports. Moreover, small companies provide various opportunities in both rural and urban areas of the country. Given the prevailing unemployment challenges in the Indian economy, small firms have played a significant role in increasing employment opportunities for people. In India, 7.56 Lakhs jobs were created, with the nation housing 75,000 recognised start-ups. Among these, 12% cater to Information Technology services, 9% to healthcare and life sciences, 7% to education, 5% to commercial and professional services and 5% to agriculture. Over the last six years, there has been a remarkable 110% yearly increase in job creation. is gap presents a promising opportunity for NBFCs to offer tailored products and digital solutions to support the sector’s growth.

As a cornerstone of the Government’s Make in India campaign, various supportive measures have been implemented to create a favourable environment for MSMEs, driving a positive growth outlook. e focal point remains indomitable: continue to ensure easy and secure funding for MSMEs, addressing credit shortages and mitigating credit fraud risks. Government initiatives encompass a spectrum of strategies, including tax exemptions, enhanced access to funding and the expansion of financing, marketing and technology support. Additionally, key policies supporting this outlook include the Pradhan Mantri MUDRA Yojana (PMMY), the Special Credit Linked Capital Subsidy Scheme (SCLCSS), SAMBHAV and the National MSME Policy. NBFCs have played a significant role in augmenting credit flow to MSMEs, particularly in underbanked regions. ese entities have adopted innovative tools, unconventional risk assessment methods and personalised offerings to meet the unique needs of small businesses. Harnessing technology for advanced data analytics, NBFCs have streamlined processes, ensuring expedited credit disbursal. In contrast to traditional banks, NBFCs have showcased agility by introducing tailor-made products for different segments within the MSME sector. Additionally, they have forged strategic alliances with fintech firms, banks and alternative lenders to broaden credit availability and offer extensive bundled products to businesses.

(Source: https://www.forbes.com/advisor/in/business/msme-statistics/)

Gold Loan

Amid global market and currency volatility, gold maintains its supremacy as a consistent financial instrument. India, renowned for its cultural reverence for gold, stands out as one of the largest consumers globally. e country possesses a significant 27,000 metric tonnes, as per the Reserve Bank of India, accounting for 14% of the world’s total gold reserves. e Indian gold loan market, valued at USD 55.52 Billion in 2022, is poised for substantial growth, with a projected CAGR of 12.22%, estimated to reach USD 124.45 Billion by 2029.

e increasing demand for gold loans extends across individuals and MSMEs. Individuals opt for gold loans to fulfil immediate diverse needs, such as education expenses, wedding costs, and medical bills. Similarly, small businesses find gold loans appealing for securing working capital. Despite facing fierce competition from banks, NBFCs specialising in gold loans have maintained resilient market shares. Additionally, reports by CRISIL Ratings indicate that their stability is attributed to robust capitalisation, focused risk management and healthy profitability.

e growth story of gold-loan NBFCs is fueled by several factors. ese include their ability to retain customers, particularly evident in their steady customer base and their focus on catering to small and mid-sized loan requirements. Additionally, their efforts to expand branch networks enhance their reach and accessibility.

(Source: https://www.techmagnate.com/blog/gold-loan-market-in-india/, https://www.financialexpress.com/business/banking-finance-gold-loan-nbfcs-maintain-resilient-market-share-at-60-between-mar-2021-to-sep-2023-despite-bank-competition-3354279/)

Housing Finance

e housing finance sector has seen improvement in asset quality despite a sharp rise in interest rates over the past one and a-half years, with rising income levels helping offset higher monthly instalments. ere are no signs of stress from an a_ordability point of view with the rise in housing prices and higher interest rates, according to industry veterans and analysts tracking the sector. e affordable housing market, valued at USD 300 Billion is well-suited for individuals with low to middle incomes. It presents lending opportunities in which financial institutions offer customised solutions, benefitting both developers and buyers within this expanding industry. India’s home loan market is expected to double in the next five years, mirroring the overall trend in the country’s aspirations to become a USD 5 Trillion economy. Over the past decade, the home loan market in India has experienced significant growth, fueled by increasing urbanisation, rising disposable incomes and government initiatives to promote affordable housing. Moreover, home loan interest rates in India are subject to variation, contingent upon factors like the lender, loan amount, loan tenure and the borrower’s creditworthiness.

In 2023, homes in India became more affordable as compared to 2022, as evident in the year’s sales figures. e Indian home mortgage finance market is set to expand at a 7% CAGR during the forecast period, driven by favourable conditions like rising income levels, improved a_ordability and fiscal support, all of which contribute to the growing demand for homes. Furthermore, the real estate sector in India is experiencing an upswing, with developers exhibiting greater financial strength and discipline.

(Source: https://economictimes.indiatimes.com/news/economy/indicators/ little-stress-on-home-loan-repayment-despite-higher-interest-rates/ articleshow/105910681.cms?utm_source=contento_nterest&utm_ medium=text&utm_campaign=cppst, https://www.businesstoday. in/personal-finance/top-story/story/a_ordable-housing-market-in-india-is-valued-at-300-billion-basic-home-loans-founder-atul-monga-407440-2023-11-28, https://www.businessworld.in/article/Home-Loan-Trends-A-Year-End-Recap-2024-Outlook/18-12-2023-502674/, https:// www.mordorintelligence.com/industry-reports/india-home-loan-market, https://www.mordorintelligence.com/industry-reports/india-home-mortgage-finance-market)

COMPANY OVERVIEW

Shriram Finance Limited (referred to as ‘Shriram Finance’ or ‘the Company’) a prominent NBFC in India’s retail finance industry, underwent a name change to better reflect its diversified financial product portfolio following the merger of Shriram City Union Finance Limited (SCUF) and the remaining undertaking of Shriram Capital Limited (SCL) with the Company. e Company is a leader in organised financing of pre-owned commercial vehicles and two-wheelers. Shriram Finance has vertically integrated business model and finances passenger vehicles, construction equipment, farm equipment, MSMEs, gold, personal needs and working capital requirements, among others. e merger has started yielding significant synergies, particularly through the cross-selling of loan and insurance products. Additionally, the merged entity has benefited in improved employee productivity and lower customer acquisition costs. e technological framework of the merged organisation facilitates seamless data mining to provide best-in-class service to customers. roughout this process, Shriram Finance’s time-tested philosophy of customer centricity will remain the guiding principle.

With a vast customer base exceeding 83 Lakhs customers, Shriram Finance is dedicated to offering prompt borrowing solutions and delivering value to stakeholders. e Company has a broad reach with 3,082 branches across India and recorded an AUM of Rs. 2,24,862 Crores as of March 31, 2024. Shriram Housing Finance Limited, a subsidiary of the Company is registered with the National Housing Bank (NHB) with a specialization in offering loans for construction or purchase of residential property and loans against property.

Key Highlights for FY 2023-24

Segment–wise performance of the Company during FY 2023-24

Segment of the business portfolio	Disbursement during the	AUM as on
	F.Y. 2023-24	March 31, 2024
Commercial Vehicles	54,681.5	1,06,935.1
Passenger Vehicles	26,112.6	43,196.2
Construction Equipment	8,810.2	16,954.0
Farm Equipment	2,360.2	3,715.3
MSME	17,348.7	26,234.6
Two Wheelers	10,846.9	12,552.3
Gold Loans	12,256.8	6, 299.8
Personal Loans	9,758.2	8,974.7
Total	1,42,175.1	2,24,862.0

• e MSME loan, gold loan, construction equipments loan and passenger vehicle loan segments drove more growth in FY 2023-24

• Achieved strong financial growth through higher NIM of 8.84%

• Longer tenure resources were raised through fresh long-term borrowings

• Credit fundamentals were reinstated through strong credit ratings received from multiple credit rating agencies

• Collection efficiency and asset quality were improved through better collection mechanism and network coverage

• Strong focus on technology platforms to leverage opportunities emanating from digital-based lending trends

SWOT ANALYSIS Strengths

• Leads the pre-owned commercial vehicle financing sector with an extensive branch network across India

• Prioritises serving underserved retail markets through a unique relationship-based business model

• Boasts a strong brand pedigree and successful track record in credit appraisal and collection processes

• Operates with a well-defined and scalable organisational structure based on product, territory and process knowledge

• Employs an integrated technology platform for streamlined processes and customer onboarding

• Maintains a consistent financial track record with rapid growth in Assets Under Management (AUM)

• Ensures robust financial management with balanced Asset-Liability Management (ALM) and improved asset quality

• Supported by an experienced senior management team

• Nurtures strong relationships with all the stakeholders including lenders, investors, fixed deposit holders etc.

• Serves over 83 Lakhs customers across India

Weaknesses

• Business and growth correlate closely with the country’s GDP growth rate

• Shriram Finance’s customer base, comprising MSMEs and SRTOs (Small Road Transport Operators), is particularly susceptible to the adverse impacts of economic downturns

Opportunities

• Presenting financial opportunities, growth in the commercial vehicle, passenger vehicle and tractor markets remains significant

• Addressing working capital needs within the commercial vehicle ecosystem.

• Forming partnerships with private financiers to expand reach without substantial investments

• Expanding into rural markets to finance cargo light commercial vehicles

• Streamlining customer onboarding process through the technology platform

• Increased government allocation towards infrastructure development fuels demand for commercial vehicles

• Capitalising on cross-selling opportunities such as insurance products and invoice discounting. Utilising brand equity to gain acceptance among underprivileged sections of society.

• Expanding geographical reach and customer base facilitates deeper penetration into hinterland markets

• Rising disposable income, evolving consumption patterns and a shi_ towards spending drive demand for consumer loans

• Boosting MSME spending, government initiatives encourage demand for MSME loans, while India’s financial inclusion remains at an early stage, offering NBFCs opportunities to reach the unbanked and underbanked population

• Providing financing solutions to MSMEs that face challenges accessing credit from traditional banks. Opportunities of co-lending with the Banks to the end customer

reats

• Facing competition from captive finance companies, small banks, Fintechs and emerging players

FINANCIAL PERFORMANCE

• Managing limited access to bank finance, expected rise in the borrowing cost and incremental borrowings through privately placed NCDs.

• Addressing external risks related to liquidity strain, political uncertainties and fiscal instability

• Navigating intense competition from global and local rivals in product innovation and technological advancements, resulting in narrow margins

• Adapting to regulatory and compliance shi_s impacting the NBFC sector

• Confronting the increasing challenge of financial product commoditisation

Particulars	FY 2023_24	FY 2022_23	% Change
Total Income	34,997.61	29,802.89	17.43
Net Interest Income	19,686.85	16,963.07	16.06
Assets Under Management	2,24,861.98	1,85,682.86	21.10
Securitisation/Direct Assignment done during the Year	26,083.70	19,136.45	36.30
Net Worth	48,463.82	43,202.07	12.18
Profit after Tax	7,190.48	5,979.34	20.26
Earnings per Share	191.63	159.69	20.00
Capital Adequacy Ratio	20.30%	22.61%	(10.22)
Return on Total Assets	3.13%	2.89%	8.30
Debt Equity Ratio	3.83	3.65	4.93
Net Interest Margin	8.84%	8.37%	5.62
Interest Coverage Ratio	2.34	2.35	(0.43)
Net Profit Margin	20.55%	20.06%	2.44
Return on Net Worth	15.64%	14.84%	5.39
Gross Stage 3 Assets Ratio	5.45%	6.21%	(12.24)
Net Stage 3 Assets Ratio	2.70%	3.19%	(15.36)
Return on Equity	15.64%	14.84%	5.39

e Stage 3 Assets improved to 5.45% as on March 31,2024 compared to 6.21% as on March 31, 2023. e Stage 3 Assets net of Stage 3 Provision was 2.70% as on March 31, 2024 as compared to 3.19% as on March 31, 2023. ere are no significant changes in key financial ratios of the Company for F.Y. 2023-24 as compared to F.Y. 2022-23.

e return on net worth was 15.64% as on March 31, 2024 as against 14.84% as on March 31, 2023 due to higher AUM growth, higher Net Interest Margin and Improved Asset Quality resulting in higher profitability for the year ended March 31, 2024.

HUMAN RESOURCES

Shriram Finance highly values its human capital, recognising that the organisation’s success hinges upon the competencies, capabilities, contributions and experiences of its employees. Rooted in a core philosophy of fostering a safe, healthy, and joyful workplace, the Company prioritises nurturing an environment that supports employee well-being and productivity. Shriram Finance’s HR department actively nurtures a culture of integrity, honesty and continuous learning, while upholding principles of equality and preventing harassment. Committed to fostering respectful and secure work environments, the Company strives to provide its employees with careers rather than mere jobs, promoting trust, confidence and transparency.

In line with this philosophy, the Company’s Human Resource policies are tailored to empower its workforce with the knowledge and skills needed to thrive in a supporting work environment. rough a culture that values performance, the Company inspires its employees to pursue excellence, thereby enhancing the organisation’s brand and effectively addressing business challenges. e Company has enhanced the age of retirement from 58 years to 60 years with effect from April 1, 2024 so as to better utilise the experience of senior team in nurturing the young talent.

Furthermore, as the Company progresses and transforms into a forward-thinking organisation, Shriram Finance’s strategic focus remains on attracting and retaining top talent. Additionally, the Company fosters employee development and well-being, ensuring equal opportunities and nurturing harmonious relationships. e Company’s HR processes, shaped by clear competencies and Company values, are designed to nurture a vibrant and inclusive workplace culture. As of March 31, 2024, Shriram Finance’s workforce comprised 74,645 employees, reflecting a net addition of 10,593 employees during the FY 2023-24.

RISK MANAGEMENT

Shriram Finance places a high priority on risk management to safeguard the interests of customers, colleagues, shareholders, and the organisation itself, all while promoting sustainable growth. e Company’s risk management framework strictly adheres to industry standards, with a robust control framework serving as its foundation.

e Risk Management Committee oversees major risk categories, encompassing credit, market, legal and regulatory, operational, liquidity, interest rate, cybersecurity, information technology, strategic and economic risks. To effectively address these increasingly intricate risks, the Company’s risk management system conducts thorough risk analysis and proactively implements measures.

Shriram Finance nurtures a culture of risk awareness, supported by standards, guidelines, processes, procedures and controls. Policies undergo rigorous review and approval by the Board and its Committees, ensuring independent identification, assessment and management of risks across business verticals. Shriram Finance’s core philosophy centers on fostering a sustainable and ethical business environment, exempli_ed by its risk management practices.

Risk Management Framework Process

1. Identification of cause of the risk and its effect as it is vital for appropriate plans and controls to address the risk.

2. Assessment of risk considering all possible scenarios and thoroughly examine every aspect of the risk.

3. Respond to Risk: Develop strategies to minimize, accept, transfer, or avoid the risk.

4. Continuous risk monitoring.

5. Evaluation of risk management processes & update

Key Risks and Mitigation
Risk Type and Definition	Mitigation
Credit Risk	With over four decades of operational expertise, Shriram Finance effectively manages credit risk through stringent credit protocols and robust procedures. is involves various measures like a rigorous credit assessment process across all business segments, meticulous evaluation of borrowed capital considering customer cash flows and leveraging insights from credit bureaus’ information reports. Additionally, regular stress testing and scenario analysis of the entire credit portfolio are conducted to implement corrective measures when necessary.
Shriram Finance encounters credit risk, arising from the potential loss due to borrowers and/or counterparties failing to fulfil their contractual obligations. is risk stems primarily from the Company’s lending activities.	Furthermore, Shriram Finance relies on defined credit ratings from reputable credit rating agencies as per its established process, facilitating informed portfolio investment decisions with ongoing portfolio monitoring. Risk exposures are carefully managed through a comprehensive analysis of counterparty fundamentals, industry dynamics and sector-specific risks. Furthermore, prudent allocation strategies are employed to mitigate portfolio risk concentration across diverse asset classes, industry sectors, geographical regions and single and joint liability groups.
Market Risk	The Company effectively mitigates market risk through a comprehensive framework
Market risk refers to the potential financial loss stemming from adverse shi_s in market factors, encompassing fluctuations in elements like interest rates, credit spreads, foreign exchange rates, commodity prices and other relevant variables. ese changes have the capacity to affect both earnings and capital.	of policies and procedures that are consistently evaluated to align with market standards and regulatory mandates. e Asset Liability Management Committee (ALCO) diligently tracks market dynamics, government policies and regulatory shi_s impacting the NBFC industry, promptly adapting strategies as needed. rough the Company’s proactive approach, it systematically monitors market risks and safeguards the loan book portfolio via a robust Market Risk Management System. Additionally, Shriram Finance conducts routine stress testing across various asset classes to simulate and prepare for the potential impact of sudden market upheavals.
Operational Risk	e Company’s operational risk framework serves as a guiding structure for departments to achieve their objectives by identifying, assessing, measuring, controlling and mitigating risks effectively. Key pillars in mitigating operational risks encompass advanced corporate governance practices, adherence to a code of conduct, fostering a corporate ethos and implementing organisation-wide risk management strategies. To ensure a cohesive and skilled workforce, Shriram Finance offers skill development programmes and seminars.
Operational risk encompasses the potential for financial loss stemming from de_ciencies or failures within internal processes, personnel, systems, organisational structures. It also arises from regulatory and internal compliance frameworks, as well as from external events. e risk of loss resulting from inadequate or failed internal process, people, systems, organisation, regulatory and internal compliance or from external events.	Standard operating procedures and structures are in place to enhance governance in transactions, portfolio assessment and regulatory compliance. Rigorous audit procedures, focussed on risk orientation are conducted at regular intervals to minimise enterprise risk exposure. Furthermore, regular stress testing and audits of the Disaster Recovery (DR) plan and Business Continuity Plan (BCP) evaluate Shriram Finance’s readiness against unforeseen contingencies. Moreover, robust contingency plans are established for data security and recovery to address potential ‘force majeure’ events.
MSME Finance Risk	To mitigate risks, Shriram Finance employs a variety of strategies. e Company
MSME financing risk pertains to the possibility of financial losses or negative consequences linked with offering financial services to Micro, Small, and Medium Enterprises. is risk stems from various factors, including creditworthiness, market dynamics, operational hurdles, regulatory adherence, fluctuations in interest rates, technological advancements and external shocks.	conducts comprehensive credit assessments, evaluating aspects such as financial statements, cash flows, collateral valuations and credit history. Risk diversification is practiced by distributing the loan portfolio across various industries, geographies and borrower profiles.

Risk Type and Definition	Mitigation
Interest Rate Risk e risk arising from a financial loss, owing compliance with regulatory guidelines concerning asset and liability exposure. e to unfavourable interest rates for both Company conducts rate-sensitive, asset-liability maturity analysis to assess the lending and treasury operations. It has a relationship between the maturity profiles of its loan book and fluctuations in interest significant influence upon a Company’s rates.	Shriram Finance has implemented comprehensive policies and procedures to ensure
net-interest income and profitability	To determine interest spreads, the Company categorises assets and liabilities into various time periods based on their contracted maturities or expected re-pricing dates. Additionally, the variance between the maturity of assets and liabilities, or their potential for repricing at any given time, reflects the level of exposure to the risk of potential changes in margins on newly issued or re-priced assets and liabilities.
Liquidity Risk	Shriram Finance manages its liquidity risk through a comprehensive framework
e risk arises when Shriram Finance unable to fulfil its financial obligations (ALCO). e Company has implemented various policies, procedures and controls as required or within predetermined to effectively handle liquidity risk, in line with its Asset Liability Management (ALM) timelines.	is of policies and processes approved by the Asset Liability Management Committee policies and procedures.
	To standardise the assessment of liquidity risk on specific maturity dates, Shriram Finance utilises various techniques like maturity ladder and cumulative surplus/ deficit of funds calculation. Moreover, the Company has established a contingency plan for liquidity management during crisis situations.
	Furthermore, proactive monitoring of capital adequacy and asset exposure levels allows the Company to evaluate potential funding requirements. Shriram Finance maintains a diversified funding base, which includes borrowings from banks, financial institutions, capital markets and public fixed deposits, ensuring flexibility in meeting funding needs.
	Regular training programmes on cash management and asset-liability management are conducted to uphold the Company’s long-term financial stability.
Cash Management Risk Cash management risk related to the technology platform, emphasising digitisation. Shriram Finance has established a collection of loan instalments denotes the resilient cash management service network and actively interacts with customers possible obstacles and risks encountered through digital collections via the MyShriram Mobile Application. Various payment by a financial institution. It pertains ensuring the timely and complete receipt for their loan accounts. Additionally, Shriram Finance secures NACH mandates of payments from borrowers.	e Company maintains an indomitable focus on customer onboarding onto its to modes, including BBPS (Wallets), have been enabled to facilitate customer payments from select customers, implementing rigorous checks and internal controls across all branches. Regional branch collections undergo close monitoring and daily reconciliation.
Climate Risk Climate change has become a prominent risks head-on. e Company’s commitment to sustainability is evident through its and far-reaching global issue, influencing stringent governance and oversight at the highest echelons. e Company has achieved numerous facets of human life. e noteworthy strides in curbing energy consumption, emissions and spearheading financial sector, including NBFCs, not immune to this concern. With the technological innovations and operational strategies to drive even greater reductions observable and disruptive e_ects climate-related events, there is a mounting remains steadfast as it endeavours to play its part in building a greener future. endeavour to integrate sustainability practices into business operations.	Shriram Finance has established a robust ESG framework to tackle climate-related is tree plantation initiatives. Looking ahead, Shriram Finance is poised to leverage of in energy usage. Additionally, the Company’s dedication to mitigating climate risks

Risk Type and Definition	Mitigation
Information Technology Risk is risk stems from IT infrastructure platforms to support its business information systems. To effectively manage potential failure or threats to data integrity, leading IT risks associated with such a setup, the Company has established a robust IT risk to operational disruptions and financial management mechanism with comprehensive measures, checks and controls in losses.	Shriram Finance has invested in state-of-the-art technology infrastructure and place. Regular security drills and employee awareness programmes are conducted to safeguard the IT infrastructure and network architecture against both internal and external threats. Additionally, to enhance the Recovery Point Objective (RPO) and Recovery Time Objective (RTO), Shriram Finance has established a 24x7 operating Security Operations Centre (SoC), which conducts systematic disaster recovery drills and rigorous security testing before launching any application. Furthermore, the Company conducts periodic vulnerability assessments and penetration testing, utilising both internal resources and external expertise. In the event of any functional section becoming non-operational, Shriram Finance has contingency plans in place to ensure the continuity of critical business functions for its customers.
Cybersecurity Risk e risk stemming from cyberattacks manage and mitigate cyber threats. e Company’s critical assets benefit from and hacking has escalated due to heightened reliance on the internet digital platforms.	Shriram Finance has implemented a robust cybersecurity framework to effectively the 24x7 protection by a dedicated Security Operations Centre (SoC), complemented and by significant investments in state-of-the-art security systems. Additionally, the Company recruits skilled professionals to ensure the highest level of readiness against cyber threats.
	To ensure comprehensive information security throughout the organisation, Shriram Finance has established a detailed security framework, policies and procedures aligned with industry best practices. e Company’s employees undergo extensive training and workshops to enhance awareness of potential cyber threats, including malware, phishing, ransomware and spoo_ng.
	Moreover, the Company has obtained ISO 27001 certification for its Information Security Management System, encompassing all IT processes. Email reat Prevention (ETP) services have been deployed to quarantine potential email threats before they reach the Company’s employees.
	In addition to these measures, Shriram Finance regularly conducts penetration testing to identify vulnerabilities in its IT infrastructure and network. Moreover, the Company scrutinizes fraud protection measures to authenticate risk-based transactions effectively.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Shriram Finance maintains a well-defined organisational structure, documented policy guidelines and a clear authority matrix to ensure operational efficiency, compliance with internal policies, laws and regulations, as well as the protection of resources. e Company believes that a robust internal control system and processes are vital for its day-today operations.

In pursuit of this goal, Shriram Finance established an effective internal control system to align its business processes, operations, financial reporting, fraud control and compliance with regulatory guidelines. Stringent internal control measures are in place to uphold the highest standards of governance. e Company ensures the implementation of a standardised and effective internal control framework across the organisation, ensuring the protection of assets and precise transaction execution in accordance with authorised procedures.

Shriram Finance’s internal control system is complemented by comprehensive internal audits, regular management reviews and standardised policies and guidelines, all aimed at ensuring the accuracy and reliability of financial and other records. e management conducts periodic assessments the framework’s effectiveness, and operational efficiency, aligning with the criteria outlined in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). Shriram Finance’s Audit Committee routinely reviews internal audit reports. e Company maintains, in all material respects, adequate internal financial control over financial reporting, which operates effectively. Internal audits are conducted to assess the adequacy of internal control systems and compliance with policies and procedures. e areas of internal audit are planned based on inherent risk assessment, risk scores and other factors such as probability, impact, significance and the strength of the control environment. e adequacy and operating effectiveness of internal controls are assessed and tested. Additionally, Shriram Finance has formulated a risk-based internal audit policy as part of its oversight function. e objective of risk-based internal audit reviews is to identify key activities and controls in business processes, review the effectiveness of these processes and controls. It also involves assessing the operating effectiveness of internal controls and providing recommendations for business processes and internal control enhancements.

FUTURE STRATEGY

e Board has outlined a series of initiatives to be undertaken as part of its strategic vision for the next 3-5 years. ese include:

• Conducting regular reviews of business plans and effective liquidity management

• Streamlining business operations and expanding product offerings across all branches

• Leveraging on "Shriram One" Super App, an integrated digital platform consolidating the entire Shriram ecosystem.

• Leveraging data analytics for loan disbursement and recovery processes

• Strengthening Shriram Finance’s leadership position through continuous improvement and innovation

• Enhancing the quality of the loan portfolio through rigorous risk assessment and management

• Fostering customer loyalty and satisfaction through meaningful relationships

• On boarding maximum number of customers through digital platform

• Increased use of Artificial Intelligence and Machine learning techniques in operation to provide best services to customers

OUTLOOK

e Company has built adequate liquidity bu_er to scale up its business and also to service all its liabilities over the period of next six months. e Company continues to focus on financing pre-owned commercial, passenger vehicles and two-wheelers. All the lending products – commercial vehicles, two wheeler loans, gold loan, personal loan, MSME loans are under a single roof now to make the Company a financial powerhouse and being a market leader in all the products and consumer segments that it operates in. With this stronger and larger customer franchise, the Company will continue to enhance its product basket with new products catering to a larger universe of both retail & SME customers. As part of technological innovation, "Shriram One" Super App so_ware was developed by the Company as an one-stop solution catering to all financial needs of the customers/investors of the Company for loans, payments, investments, Insurance, credit score check which reduces the need to download multiple apps to perform different functions, with an end goal of having everything in one app i.e. social networking, shopping, banking services etc.

CAUTIONARY STATEMENT

StatementsmadeinthisManagementDiscussionandAnalysis Report may contain certain forward-looking statements based on various assumptions about the Company’s present and future business strategies and the environment in which it operates. Actual results may differ substantially or materially from those expressed or implied due to risk and uncertainties. ese risks and uncertainties include the national and global effects of economic conditions, political conditions, volatility in interest rates, changes in regulations and policies impacting Company’s businesses and other related factors. e information contained herein is as referred to. e Company does not undertake any obligation to update these statements. e Company has obtained the data and information referred here from sources believed to be reliable or from its internal estimates, the accuracy or completeness of which cannot be guaranteed.