Over the past five years your Company has invested heavily in expanding its portfolioto affordable housing commercial vehicle and equipment finance microfinance andpersonal loan products.
Building a well-diversified NBFC franchise
I am delighted to share with you our 27th Annual Report for FY19.
Our diversification initiatives started yielding results contributing to volume andprofitability. Our consolidated assets under management (AUM) grew 23.3% to about B 200billion and net profit rose 36% to B 9.20 billion. The gold loan business continued togrow while the new non-gold verticals expanded rapidly accounting for 33% of ourconsolidated AUM. We are well on track to achieve parity between our gold and non-goldbusinesses.
The Indian economy went through a challenging period especially in the second half ofFY19 primarily due to weak industrial output and subdued rural and urban demand amidturbulence in financial markets largely affecting NBFCs. We expect the Indian economy torecover to above 7% growth level in FY20 though global economic challenges remain.
On the positive side Goods and Services Tax (GST) collections have picked up and arelikely to improve further which will help contain deficits and improve allocation ofdirect resources towards enhancing economic output. In addition the new government at thecentre is likely to continue with its structural and financial sector reforms initiatedearlier. In the near term a stronger fiscal consolidation framework is needed to bringdown India's high public debt.
The government has taken significant steps to strengthen financial sector balancesheets including accelerated resolution of non-performing assets under the Insolvency andBankruptcy Code 2016. Private investments will get a boost from the faster resolution ofstressed assets and consistent attempt to increase and broad-base the credit offtake.
With inflation staying within the Reserve Bank of India's (RBI) comfort zone thecentral bank has moved to a more accommodative policy stance to boost growth.
Outlook for Non-Banking Financial Companies (NBFCs)
NBFCs have had a challenging year following the IL&FS default. The ripple effectswere felt by most especially with significant asset-liability mismatches (short-termborrowing to fund long-term lending). However as gold loans which are primarily shortterm in nature account for about 66% of our loan book our portfolio was insulated fromthe crisis.
We expect the NBFC sector to bounce back strongly. NBFCs have undoubtedly played acrucial role in bridging the credit gap in India and reducing dependence on bankinginstitutions by providing an alternative source of finance to the underbanked andunbanked. The share of NBFCs in total credit rose from 9.5% in 2008 to 15.5% in 2017.
The RBI decided to harmonise the various categories of NBFCs which would easeregulatory complexities. The decision to allow banks to risk-weight their exposure toNBFCs based on credit rating will further reduce cost of funds. We believe the RBI shouldalso consider our proposal to do away with the cap on Loan-to-Value (LTV) for gold loansand move towards a progressive risk-weight based approach for this product. Such a movewould enable marginal borrowers to better leverage the underlying value of their meagregold holdings.
Outlook for Gold Loans
The organised gold loan market in India is expected to grow to over B 3 trillion by2020 at a 3-year CAGR of 13.7% according to a recent KPMG report. Though banks offergold loans at relatively low interest rates NBFCs offer a better value proposition tocustomers with their exclusive focus on gold loans lower turnaround time flexibleschemes more extensive branch network and longer working hours. The emergence of SmallFinance Banks is likely to intensify competition further in this space. However we aim toretain our competitive edge by proactively investing in technology and automation andmitigating gold price volatility by offering shorter tenure products of 3-6 months.
Regulations must evolve with the times
Access to finance especially at the grassroot or micro-entrepreneurial level is keyto poverty alleviation as well as inclusive economic growth. However India is yet toevolve a dependable mechanism for providing credit to the needy forcing many to approachinformal channels. Easy availability of credit for low-income families is critical tobreaking the back of the informal moneylenders.
The RBI should consider removing the cap on LTV and adopt the value at risk (VaR)methodology because loan against gold is secured and the collateral remains in directpossession of the lender until the loan is repaid. Given that gold is regularly tradedthe collateral is also immediately available for liquidation in case of any default.
The RBI may also consider a more straightforward approach by assigning zerorisk-weight for gold loans with LTV of up to 75% and 100% risk-weight for LTV between 75%and 90%. We believe that a shift from capped LTV towards specific risk-based capitalrequirements would be a more prudent policy framework.
Partnering with aspiring India
Your Company has made conscious efforts to provide financial services to fulfil theaspirations of a vibrant and young India that is home to a fifth of the world's youth.Half of its population is below the age of 25 and a quarter is below the age of 14. Overthe past five years your Company has invested heavily in expanding its portfolio toaffordable housing commercial vehicle and equipment finance microfinance and personalloan products. We have devised innovative ways to assess creditworthiness of economicallyactive borrowers with no documented proof of income. This segment is relatively untappedand offers good potential.
Performance of new businesses
Our diversification efforts which began in FY15 have started to pay off as ournon-gold businesses especially microfinance and commercial vehicle loans arecontributing significantly to our growth and profitability. These businesses accounted for25.5% of our consolidated AUM in FY19.
Performance of your Company
Our consolidated AUM rose 23% y-o-y to about B 200 billion in FY19. Returns alsoimproved with an ROA of 4.9% and an ROE of 22.1%. Our net worth stood at over B 45.25billion and our standalone capital adequacy ratio was at a healthy 23.8%.
To summarise we did well on growth and profitability and as we are well capitalisedour performance will improve significantly going forward.
I thank all our stakeholders for being part of our exciting journey over the past threedecades. I also thank the regulators and policymakers for their progressive steps towardsimproving the transparency and risk management practices in the industry. I seek yourcontinued support in our endeavour to become a preferred multi-product NBFC for ourcustomers.
With best wishes
V.P. Nandakumar MD & CEO