Our focus on the Missing Middle' the economic segment that is excludedfrom the formal banking system as well the growing microfinance industry and our diverseproducts offerings in the MSME market help us acquire customers that have outgrown themicrofinance ticket size but remain un-served by large NBFC's and banks.
I am pleased to present you the 33rd Annual Report of the company for the year 2018-19.The last three years have been very tough for the NBFC business due to demonetizationliquidity crisis in the NBFC sector due to non-lending by banks and certain issues in thesector. The smaller players were hit by turbulence and business growth has impacted.
Global economy and Markets
The global growth outlook for 2018 and 2019 remains steady although the underlyingdownside risks have risen. The gradual monetary policy normalisation in advanced economies(AEs) as also the uncertainty in global trade regime may adversely affect capital flows toemerging markets (EMs) and exert upward pressure on EM interest rates and corporatespreads. In the meanwhile commodity prices particularly oil have softened mostly drivenby excess supply of US shale oil uncertainty about Chinese demand and on supply concernsfrom Iran turning out softer than anticipated.
Domestic Economy and Markets
On the domestic front growth of gross domestic product (GDP) showed slight moderationin quarter 2nd of year 2018-19 while inflation remains contained. Fiscal consolidationremains important for financial stability as global financial conditions turn adverse. Theimpact of oil prices feeding into input costs remains uncertain with potentialimplications for India's terms of trade. In the domestic financial markets structuralshifts in credit intermediation and the evolving interconnectivity between banks and thenon-banks call for greater vigilance.
Credit growth of scheduled commercial banks (SCBs) improved (13.1 per cent y-o-y) inSeptember 2018 driven largely by private sector banks (PSBs) (22.5 per cent y-o-y). Theasset quality of SCBs is showing signs of improvement with GNPA ratio declining from 11.5per cent in March 2018 to 10.8 per cent in September 2018 and annualised slippage ratiocoming down from 7.6 per cent to 4.1 per cent in the same period. The stressed advancesratio is gradually converging to the GNPA ratio following the withdrawal of variousrestructuring schemes.
An analysis of portfolio of Micro Small and Medium Enterprises (MSMEs) shows that theperformance of PSBs in the MSME segment trails that of other intermediaries (private banksand non-banking financial companies (NBFC) both in terms of inherent as well as realisedcredit risk. In terms of quality incremental credit portfolio of PCA-PSBs shows adeclining conversion rate to non-performing assets (NPA) in FY 2017-18 compared to FY2016-17 although the rate still remains significantly large vis--vis other financialintermediaries.
(Source- RBI December 2018 Financial Stability Report)
NBFCs have been complementing banks as financial intermediaries by leveraging on theirefficient and nimble operations and tailor-made products for niche areas. The need tostrengthen their regulation and supervision has come to the fore in view of their rapidexpansion in recent years. The Reserve Bank has been striving to harmonise regulatoryrequirements of various classes of NBFCs while putting in place specific policy measuresfor particular classes of NBFCs such as core investment companies and legacy NBFCs asneeded.
India has a diversified financial sector undergoing rapid expansion both in terms ofstrong growth of existing financial services firms and new entities entering the market.The sector comprises commercial banks insurance companies non-banking financialcompanies co-operatives pension funds mutual funds and other smaller financialentities.
There are 11522 Non-Banking Financial Companies (NBFCs) registered with the ReserveBank of India out of which a lion's share of 98.5% are non-deposit accepting with thebalance 1.5% being deposit accepting NBFCs. Around 218 non-deposit accepting NBFCs havebeen classified as systemically important.
NBFC Crisis in year 2018-19
NBFC Sector has been going through trouble for the last few months.
The non-banking financial companies (NBFC) sector has been facing troubled times forseveral months. The Government officials have also confirmed that the NBFC Sector isfacing an imminent crisis. There has been a credit squeeze over-leveraging excessiveconcentration massive mismatch between assets and liabilities coupled with somemisadventures by some very large entities which has put the sector in crisis.
The impact started with ILF&S crisis when it started to default in the repaymentsof loans of Rs. 91000 crores in September 2018. There were also reports in the mediaabout some other big NBFCs where there has been financial strain. Care Ratings downgradedthe rating of Reliance Capital Limited and its two arms. ICRA has also downgraded ratingof long term debt of Yes Bank Limited.
The crisis started when some NBFCs started raising short-term funds which were thenlent out as long-term loans. This leads to a situation called an asset-liability mismatch.That leads us to the second factor. The cycle was broken by a default of some firms of theIL&FS group. There were fears that this would turn out to be a contagion. Simply putbanks mutual funds and their investors were afraid that more such entities wouldn'tdefault. As this fear took hold many institutions refused to give money to NBFCs. Thecost of funds rose by as much as 150 basis points for NBFCs. The impact has been due tothe fact that NBFCs has been borrowing short term from banks and mutual funds whilelending to developers of long-term projects which got held up because of various factors.Trillions of rupees are locked in real estate construction and infrastructure projects
This has led to mismatch of Asset Liability Management in some of the companies.
Impact on Capital Trust Limited
The crisis hit all NBFCs alike. Capital Trust has also been impacted as the funds frombanks NBFCs and Financial Institutions were not freely available. This has reflected inlesser disbursements and lesser profits. However the company has been able to issue NonConvertible Debentures to Baring Private Equity Asia amounting to Rs. 150 Crores out ofwhich the company has received Rs. 75 Crores.
The asset liability management of the company is in good position. The company has nottaken any short term loans. All the loans taken by the company are long term with thetenure of 5 years. The company is providing loans with a maximum maturity of 24-36 months.So the ALM position of the company is positive.
ALM Position of the company for year 2019-20
| || |
|Quarterly Collection (Cr.) ||169.2 ||173.5 ||164.0 ||153.4 ||131.8 ||113.0 |
|Quarterly Repayment (Cr.) ||91.1 ||92.6 ||91.1 ||90.6 ||79.8 ||69.9 |
|Quarterly Surplus (Cr.) ||78.1 ||80.9 ||72.9 ||62.7 ||52.0 ||43.0 |
New era of NBFCs
With the rising innovation and growth in the sector newer business models of NBFCssuch as account aggregators' and 'peer to peer lending platforms' ("P2PLending") are catching pace.
P2P Lending is a form of crowd-funding which uses an online platform to match lenderswith borrowers to provide unsecured loans.
At the locus of technology innovation and financial services Fintechs have beengaining prominence for promising opportunities and ability to supplement capabilities ofthe lender. The Fintech industry globally has received US$17.4 billion in investment in2016-17. Fintech startups have developed offerings that are faster better and cheaperacross multiple domainslending payments brokerage credit scoring and personalfinance. More than 225 alternative lending based FinTechs (including direct lending P2Plending invoice trading crowdfunding marketplace platforms and credit scoring) werefounded in India in 2017.
Fintech lending start-ups offer differentiated capabilities
Many companies have taken up the role of an enabler in the industry using alternativedata sources to build credit scores of the 350 million credit invisible people without adocumented credit history.
Market place and Comparison Platform
Digital marketplaces connect borrowers and lenders. They reduce the loan processingtime and match borrowers to the best fit lender
Crowdfunding entails raising external finance from a large group of investors. Theinvestors can interact with the investees and view their ideas on a crowdfunding platform.
Direct Lending includes platforms that have a lending license. The digitisation ofsub-processes allow reduced costs and gives these NBFCs an edge over banks.
P2P lending involves building a marketplace to bring together individual borrowers andlenders through tech-enabled platforms.
Invoice trading assists MSMEs that often struggle with working capital and cash flowsdue to delayed payments.
While previously seen as competition lenders have now begun to find synergies incollaborating with Fintechs to differentiate or improve their businesses. This has led toseveral banks and NBFCs to leverage capabilities of Fintech partners to overcomechallenges in distribution underwriting risk management etc. and increase their accessto underserved and financially excluded customers.
(Source: Assocham Report)
Business Highlights for the year 2018-19
The company had started coming back to normalcy after the impact of demonetizationthen there was crisis in the NBFC sector. Some of the public sector banks had come underPCA imposed by Reserve Bank of India. Others also stopped lending citing wait and watchpolicy. The shortage in funds from Banks and Financial Institutions has impacted thebusiness of the disbursement and thus resulted in lesser profits.
For all disbursements post demonetization the collection percentage is above 99%. Theasset under management of the company has reached to Rs. 725 Crores.
The performance of the new states Bihar Orissa Chatisgarh and Jharkhand has beengood. Since demonitisation the company has disbursed Rs. 765 crores in the states ofPunjab Madhya Pradesh Rajasthan Bihar Orissa Chatisgarh and Jharkhand. The NPA of allthese states in 1.3%. The company at present is operating in 10 States with 251 branches.
The Capital Adequacy ratio of the company is at comfortable level of 32% providingenough room for expansion.
The Company has been growing at a 41% CAGR for the last 4 years out of 5 years andthere is no reason for us to believe that we would not be able to continue this growth inthe years to come. With the new geographical network in 10 states (Delhi Uttar PradeshPunjab Uttarakhand Madhya Pradesh Rajasthan Bihar Odisha Chatigarh and Jharkhand)the company will expand its reach. Apart from geographical expansion the company is alsofocusing on product expansion and has ventured into Magic loans and Micro Business Loans.The company is also working strategically with banks to grow its business.
The company is financially sound and its capital adequacy ratio is 32% which gives thecompany a leverage to raise funds for its future growth. From here on we expect growth tobe the only constant as our current infrastructure and capital structure is capable ofsupporting business growth multifold from the current level.
With a diverse set of products being offered through a wider branches network we arevery excited to see how things play out in the near future.
The company has developed its own software MiWeb that has an extension of a mobileapplication called Capital Sales that is available to all staff and clients in the form ofa mobile application. The application is installed on the smartphone of every fieldemployee and is also available to the lakhs of borrowers on their mobile devices. KYCinformation collection schedule and amounts credit history are all available throughthe online service. The application also allows the company to go paperless which issomething the finance industry has been attempting to do efficiently for a long time.
In future the company may go for e-signing of the documents also.
MESSAGE TO STAKEHOLDERS :
As we mark the end of another year I would like to thank the Management Team for theirunwavering commitment and guidance in leading the Company forward.
I would also like to extend our deepest gratitude to all employees for their invaluablecontributions to the company. Last but not least special Thanks to our FundersShareholders and customers for their continued support and loyalty to our Company.
With Warm Regards
Chairman and Managing Director