Star Housing Finance Ltd Management Discussions

? GLOBAL ECONOMIC REVIEW

Global economic activity is experiencing a broad-based and sharper than expected slowdown, with in ation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russias invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth pro le since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.

The economic outlook depends on a successful calibration of monetary and scal policies, the course of the war in Ukraine, and growth prospects in China. Risks remain unusually large: monetary policy could miscalculate the right stance to reduce in ation; diverging policy paths in the largest economies could exacerbate the US dollars appreciation; tightening global financing could trigger emerging market debt distress; and a worsening of Chinas property sector crisis could undermine growth. Multilateral cooperation remains necessary to fast-track the green energy transition and prevent fragmentation.

The Global in ation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and scal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the ght against in ation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.

? INDIAN ECONOMIC REVIEW

The Strong economic growth in the first quarter of FY 2022-23 helped India overcome the UK to become the fth-largest economy after it recovered from repeated waves of COVID-19 pandemic shock. Real GDP in the first quarter of 2022 23 is currently about 4% higher than its corresponding period of 2019-20, indicating a strong start for Indias recovery from the pandemic. Given the release of pent-up demand and the widespread vaccination coverage, the contact-intensive services sector will probably be the main driver of development in 2022 2023. Substantially increasing private consumption, supported by rising consumer sentiment, will support GDP growth in the coming months.

Indias economic condition during the first half of the current financial year highlighted the unwavering support the government gave to its capital expenditure, which reached Rs 4.1 lakh crores (US$ 49.53 billion) during April-October 2022 which is 61.5% higher than the corresponding period of last year. The resilient growth of the Indian economy in the first half of FY 2022-23 has been the fastest among major economies, thereby strengthening macroeconomic stability. India registered a broad-based expansion of 9.7% in the first half of FY 2022-23, supported by robust domestic demand and upbeat investment activity. As a result of the comeback in economic activity across all sectors, Indias overall employment situation has improved As we head into 2023, global economic developments are expected to complicate the outlook further, and therefore continued vigilance is a critical aspect in maintaining Indias external resilience. Going forward, India needs to focus on medium-term challenges such as securing technology and resources for energy transition and skilling its youth for the 21st century economy, while staying the course on scal consolidation. With continuous efforts during the last several years, a strong platform has been erected on which the superstructure of a middle-income economy can be constructed.

? NEW REGULATORY FRAMEWORK

Scale Based Regulations (SBR) for NBFCs:

The contribution of NBFCs towards supporting real economic activity and their role as a supplemental channel of credit intermediation alongside banks is well recognised. Over the years, the sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector. Many entities have grown and become systemically significant and hence it has been felt to align the regulatory framework for NBFCs keeping in view their changing risk pro le. The RBI therefore, came out with the revised regulatory framework Scale Based Regulations (SBR) for NBFCs vide its circular dated Oct 22, 2021. These directions are applicable w.e.f. Oct 1, 2022 The SBR framework encompasses different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, etc. Regulatory structure for NBFCs shall comprise of four layers based on their size, activity, and perceived riskiness. NBFCs in the lowest layer shall be known as NBFC - Base Layer (NBFC-BL). NBFCs in middle layer and upper layer shall be known as NBFC - Middle Layer (NBFC-ML) and NBFC - Upper Layer (NBFC-UL) respectively. The Top Layer is ideally expected to be empty and will be known as NBFC - Top Layer (NBFC-TL).

All the HFCs irrespective of their size fall into Middle Layer. The relevant additional provisions applicable on the Housing Finance Companies under the revised framework are:

Experience of the Board - Considering the need for professional experience in managing the affairs of NBFCs, at least one of the directors shall have relevant experience of having worked in a bank/ NBFC.

Internal Capital Adequacy Assessment Process (ICAAP)

- NBFCs are required to make a thorough internal assessment of the need for capital, commensurate with the risks in their business.

Concentration of credit/ investment - The extant credit concentration limits prescribed for NBFCs separately for lending and investments shall be merged into a single exposure limit of 25% for single borrower/ party and 40% for single group of borrowers/ parties. Further, the concentration limits shall be determined with reference to the NBFCs Tier 1 capital instead of their Owned Fund

Regulatory restrictions on loans NBFCs shall be subject to regulatory restrictions in respect of the Granting loans and advances to directors, their relatives and to entities where directors or their relatives have major shareholding, to Senior Officers of the NBFC.

(i) While appraising loan proposals involving real estate, NBFCs shall ensure that the borrowers have obtained prior permission from government / local governments / other statutory authorities for the project, wherever required.

Key Managerial Personnel - Except for directorship in a subsidiary, Key Managerial Personnel shall not hold any office (including directorships) in any other NBFC-ML or NBFC-UL.

Independent Director Within the permissible limits in terms of Companies Act, 2013, an independent director shall not be on the Board of more than three NBFCs (NBFC-ML or NBFC-UL) at the same time. Further, the Board of the NBFC shall ensure that there is no conflict arising out of their independent directors being on the Board of another NBFC at the same time.

Disclosures - NBFCs shall, in addition to the existing regulatory disclosures, disclose the following in their Annual Financial Statements, with effect from March 31, 2023:

• Corporate Governance report containing composition and category of directors, shareholding of non-executive directors, etc.

• Disclosure on modified opinion, if any, expressed by auditors, its impact on various financial items and views of management on audit quali cations.

• Items of income and expenditure of exceptional nature.

• Breaches in terms of covenants in respect of loans availed by the NBFC or debt securities issued by the NBFC including incidence/s of default.

• Divergence in asset classification and provisioning above a certain threshold to be decided by the Reserve Bank.

Chief Compliance Officer In order to ensure an effective compliance culture, it is necessary to have an independent compliance function and a strong compliance risk management framework in NBFCs. NBFCs are, therefore, required to appoint a Chief Compliance Officer (CCO), who should be sufficiently senior in the organization hierarchy. NBFCs shall put in place a Board approved policy laying down the role and responsibilities of the CCO with the objective of promoting better compliance culture in the organization.

Compensation Guidelines - In order to address issues arising out of excessive risk taking caused by misaligned compensation packages, it has been decided that NBFCs shall put in place a Board approved compensation policy. The guidelines shall at the minimum include, a) constitution of a Remuneration Committee, b) principles for xed/ variable pay structures, and c) malus/ claw back provisions. The Nomination and Remuneration Committee shall ensure that there is no conflict of interest.

Other Governance Matters - NBFCs shall comply with the following:

• The Board shall delineate the role of various committees and lay down a calendar of reviews.

• NBFCs shall formulate a whistle blower mechanism for directors and employees to report genuine concerns.

• The Board shall ensure good corporate governance practices in the subsidiaries of the NBFC.

Core Banking Solution - NBFCs with 10 and more branches are mandated to adopt Core Banking Solution. A glide path of 3 years with effect from October 01, 2022 is being provided.

? INDIAN HOUSING DEMAND SCENARIO & HOUSING FINANCE OPPORTUNITY

The housing market continued to witness a trend of increased number of rst-time homebuyers and those moving up the property ladder by opting for larger homes or acquiring homes in another location. The residential real estate market in India had astounding progress in 2022, setting new sales records of 68% YoY, further demonstrating the industrys prominence as one of Indias fastest-growing industries. After two years affected by COVID, Tier 2 and Tier 3 cities have arisen as fresh major real estate trends in 2022, and the real estate market has set unprecedented benchmarks which continued its growth momentum from 2021 amid the global slowdown.

The growing awareness of home ownership and the governments favourable affordable housing schemes has led to significant growth in the affordable housing segment. With people realising the long-term potential of owning a house, v/s renting led to sustainable growth in the segment. An increase in earning potential, a need for a better standard of living and the growing base of aspirational consumers and their lifestyle changes have led to substantial growth in the sector. With suited economic growth, the premium housing segment will also witness higher demand in the years to come. Reforms in stamp duty, the introduction of affordable rental housing complexes and government-aided schemes will boost this asset class while providing relief to the many who do not have access to it. . The momentum of growth continued in 2022-23 on the back of strong demand, and housing sales may jump around 12 per cent year-on-year in the current financial year. The rating agency has maintained an improving outlook for the residential real estate market for the financial year 2022-23. "Between adapting to the pandemics impact, industry issues and government policies, the Indian real estate sector anticipates a robust end-user demand in FY23. The steady performance and quick revival in FY22 have likely helped the sector regain buyers trust."

? GOVERNMENT INITIATIVES FOR THE HOUSING FINANCE COMPANIES

The Union Budget 2023 - 2024, presented on February 1, 2023, remains committed to affordable housing. The budget underscores the governments focus on "Housing For All". Pointing out the need for efficient use of land resources, Finance Minister Nirmala Sitharaman announcements related to credit allocation in PM Aawas Yojana and urban infrastructure development fund are set to trigger acceleration in credit demand for housing nance companies. The higher allocation may lead to higher loan demand in the lower income segment. The union budget has increased the outlay for PM Awas Yojana by 66% to Rs 79,000 crore. "The PMAY allocation increase would boost demand for home loans from the economically weaker and middle income segment "Affordable housing needed a boost since the sector had faced rising input costs. However, the broadening the de nition of affordable homes would have given even a bigger boost to the housing industry."

Affordable Housing: The Union Budget 2023 - 2024 announced the allocation of Rs. 48,000 crores for the Pradhan Mantri Awas Yojana (PMAY), which is 75% higher than the Rs. 27,500 crore budget allocation made in the previous financial year. Around 80 lakh homes are expected to be completed by 2023. The programme has been extended to December 31, 2024 to complete the houses sanctioned till March 31, 2022.This announcement is expected to boost affordable housing and act as an incentive to the developers who are building affordable homes.

? KEY GROWTH DRIVERS

The Non-Banking Financial Company gearing up for Growth as Assets under management (AUM) of NBFCS set to grow 12-13% on-year this scal and 13-14% next scal.

• The Strong balance sheets with higher provisioning and lower leverage to support growth and asset quality concerns also receding with continued improvement in key metrics.

• Cost of borrowings for NBFCs stated to rise amidst the rising interest rate scenario by 100-120 bps in scal 2023. Hence, NBFCs are realigning their strategy, with growth to be led by non-traditional segments.

• Unsecured loans, used vehicles and MSME segments expected to propel growth.

• While traditional segments will also post growth, it will be at a slower pace compared with pre-pandemic levels

• Business model gravitating towards partnerships

The Home loan borrowers have benefitted on multiple counts in terms of affordability based on following factors

1) Borrowing rates being among the lowest in the past two decades, even lower than the current 10-year G-Sec rates;

2) Concessions offered in stamp duty rates by certain states;

3) Government push through Credit Linked Subsidy Schemes along with continuing income tax exemptions;

4) Relatively stable real estate prices for the past few years along with developers offering incentives to clear their inventories; and

5) Wage growth maintaining its pace higher than property price rise for the past few years which bodes well for nanciers to grows its AUM.

The Reserve Bank of India liquidity measures during the pandemic have increased banks appetite for funding the segment. This along with higher accretion of public deposits aided by lower bank deposit rates has supported large housing nanciers. Whereas, affordable housing nancers have been supported through a rising share of funding from the National Housing Bank-re nance schemes, helping them lower their cost of borrowings and containing any significant margin compression.

The industry has navigated the COVID-19 pandemic with moderate disruptions in collection efficiency and a build-up in asset quality, partially also led by the implementation of the circular on NPA classi cation. It believes the sector could grow at 13% yoy in FY23 (FY22: 11%) with gross stage 3 numbers increasing to 3.3% from 2.8% in 3QFY22 (FY22: 2.9%), largely due to slippages from the restructured book (FY23: 1.7%; FY22: 2.1%). Additionally, 2% of AUM is supported by lending under Emergency Credit Line Guarantee Scheme which could also see slippages. The broad stage 3 number could rise by 70bp as it was seen in 3QFY22, due to the change in NPA recognition norm.

? INDUSTRY OUTLOOK

The NBFCs would begin the year with sufficient capital buffers, system liquidity would aid funding. Nevertheless, an expected increase in systemic interest rates and asset quality issues in some segments due to the lagged impact of pandemic would be a drag on the operating performance.

The sector has been facing increased regulatory oversight and push towards convergence with banks through various measures such as scale-based regulation, realignment in asset quality classification and Prompt Corrective Action norm. The incremental impact of the noti cation on NPA recognition however will be moderate as the maximum impact has already been seen in 3QFY22 gures and NBFCs are holding adequate provisions.

? STAR HFL: FUTURE OUTLOOK

Star Housing Finance Limited, as a lender, is active in providing housing nance assistance to the EWS / LIG segment customers wishing to purchase / construct own homes in Tier II, III towns, semi-urban and rural geographies. The operational geographies of Star HFL has remained intact and has withstood the test of disruption due to Covid-19 pandemic. The demand has remained robust and has been further bolstered by virtue of reverse migration of population in these geographies from urban sectors.

The space in which Star HFL operates has traditionally outpaced the overall mortgage market growth. Star HFL, as a company, is well poised to exhibit growth in future if its focus remains in this particular segment. Despite government level interventions, there is a latent demand in this space at any point of time thereby creating a need for a nancier to cater to them on fair terms. Star HFL stands to gain from such dynamics and can look forward to making a substantial contribution to boosting housing stock in India as well as enhancing overall growth supported by quality.

? CAUTIONARY STATEMENT

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

"Positive Outlook for NBFCs as Assets Under Management Projected to Grow Steadily"