MANAGEMENT DISCUSSION AND ANALYSIS

GLOBAL ECONOMIC OVERVIEW

The world economy slowed down further in calendar year 2015 on account of lower global economic growth, as compared with calendar year 2014. Global activity continued to decelerate, triggered by slowing growth in emerging and developing markets as they contribute to about 70% of the global growth. Global GDP fell to 2.3% in the last quarter of the calendar year 2015, below the threshold of 2.5%, which indicates recessionary trends and hence, Morgan Stanley has commensurately raised their global recession risk probability  from 20% to 30%.

The Chinese economy is being hampered by a slowdown in imports and exports and declining investments and manufacturing activity. This is causing a spillover effect on other economies linked with trade channels. Japan received the single-biggest downgrade for any country with GDP declining by half to just 0.6% in Financial Year 2016 as compared with 1.2% in Financial Year 2015. Moreover, oil prices have fallen dramatically, which resulted in excess of production over consumption. Lower oil prices have strained  the financial position of oil exporters, impacted investments in oil and gas extraction and did not effect any substantial increase in consumption by oil importers, estimated to be so because of deleveraging and negligible pass-through of price reductions to consumers in developing economies. Unlike expected, consumers in advanced economies also failed to spend the windfall from reduced prices, opting to pay debt and save instead, further reducing consumption and affecting the economy.

INDIAN ECONOMIC OVERVIEW

It is believed that the Indian economy has started healing itself in Financial Year 2015-16. As per the advance estimates report dated 8th February 2016 of the Central Statistics office (CSo), the growth in GDP during 2015-16 is estimated at 7.6% as compared with the growth rate of 7.2% in Financial Year 2014-15. Manufacturing growth for Financial Year 2015-16 is likely to be at 9.5%, much higher than the 5.5 % growth in Financial Year 2014-15. The sectors that are likely to register growth rate of over 7% include financial, real estate and professional services, trade, hotels, transport, communication and services related to broadcasting and manufacturing. Notwithstanding weak monsoons, the agricultural sector grew by 1.1%, helped by strong growth in livestock. The growth in mining and quarrying is estimated  to be 6.9 %.

India's GDP grew by an annual rate of 7.4 % in the July-to-September quarter of Financial Year 2015-16, putting it firmly ahead of China, where growth slowed to 6.9% during the same period. Declining oil prices have helped raise the GDP, as corporate margins increased, household purchasing power improved, tax collections increased and subsidy bills declined.

FINANCIAL SERVICES SECTOR

India's financial services sector is diversified, comprising of entities such as commercial banks, co-operatives, insurance companies, pension funds, mutual funds, non-banking financial companies and other various entities. Retail credit of NBFCs stood at Rs. 4.7 trillion as on December 31st 2015 and has registered a higher y-o-y growth of 18.8% against the growth rate of 14.5% in Financial Year 2015.

Growth has majorly emanated from microfinance, gold loans and mortgage segments; however, the CV (commercial vehicle) credit segment has also witnessed a marginal increase.

With rising demand in the CV segment, growth is likely to peak-off at 16-18%. Government initiatives in infrastructure will also boost the construction equipment credit sector. However, weak rainfalls are periodically leading to declining tractor and farm implement credit services. The major chunk of the retail credit lies however, with banks, accounting for 56% of the total retail credit. Credit expansion for banks reached 16.1% in December 2015 as compared with 15.3% in March 2015. The competitive intensity is increasing with regulatory changes for NBFCs and with the increased focus on retail credit by banks because of brssures on corporate credit.

commercial vehicle industry

Continuing its positive momentum, the commercial vehicle segment in India has sustained its strong growth right through 2016. The medium and heavy commercial vehicle (M&HCV) segment has maintained its strong double-digit growth curve over the past one-and-a-half year. As regards Light Commercial Vehicles (LCVs), the sector thus far has been negative and has shown growth only for the last couple of months. While growth is slated to come soon to LCVs, it will not be sudden or as large as for M&HCVs. The total estimated market Potential of Commercial vehicles is Rs.2,160 billion.

Commercial vehicles had a 3% domestic market share while passenger vehicles accounted for 13% in the Financial Year 2015-16 out of the total number of vehicles sold. The M&HCV segment has posted positive growth of about 30% as compared with the brvious year. This has been due to increased replacement demand following the two-year deferment in the sector in addition to a capacity increase by organized fleet operators. The LCV segment reported a growth of 0.3% as compared with the brvious year. The JNNURM-II programme has re-invigorated the bus segment and participation by various state road transport undertakings is increasing. Business optimism is higher due to favourable diesel and freight rates. The government's initiative to have all vehicles comply with the BS-V standard, possibly by the year 2017 will further boost demand as there will be a gradual acceptance of advanced trucking platforms with the inclusion of ABS (anti-lockbraking systems).

br-owned commercial vehicles

The br-owned CV segment has always been largely unorganized. However, the company has been engaged in the initiative to corporatize this untapped segment. The br-owned commercial vehicles segment is the key segment of brsence for the company ever since its inception. The company has established its leadership in the segment and targets the largest market segment of br-owned commercial vehicles - those vehicles ageing between 5-12 years, accounting for 43% of the total market volume. Market for br-owned truck financing is underpenetrated with 65-70% of the market with private financiers who charge high interest rates.

These br-owned trucks being affordable for small, aspiring owner-cum-drivers are brferred to help them initiate their entrebrneurial journey as a small road transport operator (SRTo). The company empowers such SRTOs and new drivers with affordable financing and advice regarding commercial vehicles.

IMPACT OF THE PRODUCT REPLACEMENT CYCLE

The road transport ministry had mooted a proposal for 'end of life' of heavy commercial vehicles, to phase out two-axle mini trucks after 12 years, multi- axle vehicles after 15 years and trailers after 25 years. Pending formulation of an integrated policy to scrap Commercial Vehicles that are over 10 years old, the Union Minister for Road Transport and Highways has announced that there is no immediate plan to ban trucks and buses over 15 years old. While this means there will be some respite for older vehicles and for fleet operators to continue running certain CVs, a product usually changes hands four times during the lifecycle. This brsents opportunities for sale of second hand CVs and their financing. There were about 3.4 million commercial vehicles that were more than 15 years old as on March 2015. If the government is able to push the proposal and amend the Motor Vehicles Act, there would be an enormous demand for product replacement, whereas in the event of easier norms, the used CV industry would grow as a vast number of vehicles would change hands. The company targets such vehicles that ideally are between 5-12 years old by virtue of which it is ideally placed to benefit from multiple change of hands of the same product.

REVISED RBI REGULATIONS

The provision for standard assets has been increased to 0.40%. The revised norms are to be implemented in a phased manner as given below:

Z 0.30% by the end of March 2016;

Z 0.35% by the end of March 2017; and

Z 0.40% by the end of March 2018.

As per the revised asset classification norms to be implemented in a phased manner, an asset will be considered as non-performing if:

Z It remains overdue for five months or more with respect to financial year ending 31 March 2016

Z It remains overdue for four months or more with respect to financial year ending 31 March 2017

Z It remains overdue for three months or more for the financial year ending 31 March 2018 and thereafter

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

In any industry, the processes and internal control systems play a critical role in the health of the Company. The Company's well-defined organizational structure, documented policy guidelines, defined authority matrix and internal controls ensure efficiency of operations, compliance with internal policies and applicable laws and regulations as well as protection of resources. Moreover, the Company continuously upgrades these systems in line with the best available practices. The internal control system is supplemented by extensive internal audits, regular reviews by the management and standard policies and guidelines to ensure reliability of financial and all other records to brpare financial statements and other data. The Audit Committee of the Board reviews internal audit reports given along with management comments. The Audit Committee also monitors the implemented suggestions.

Human resources

Please refer to the Business Responsibility Report for details on human resources.

SWOT ANALYSIS

Strengths

Z The pioneer in the br-owned commercial vehicles financing sector

Z Knowledge-driven and relationship-based business model

Z Pan-India brsence with 853 branch offices

Z A well-defined and scalable organizational structure based on product, territory and process knowledge

Z Strong financial track record driven by rapid growth in AUMs with low non-performing assets (NPAs)

Z Experienced and stable management team

Z Strong relationships with public, private as well as foreign banks, institutions and investors

Z More than 13 lac customers across India

Weaknesses

Z Business and growth directly linked with the country's GDP growth

opportunities

Z Growth in the CV market

Z Strong demand for passenger CVs

Z Strong demand for br-owned tractors

Z Loans for working capital requirements of CV users

Z Partnerships with private financiers will enable enhancement of reach without significant investments in building infrastructure

Z Increased penetration into rural markets will lead to exponential growth in cargo LCVs

Threats

Z Regulatory changes in the NBFC and ancillary sectors Z Tighter NPA norms

RISK MANAGEMENT

Risk management is an ongoing process at the Company. The Board of Directors have constituted a Risk Management Committee comprising three members, a majority of whom are Directors. The Board has also defined the roles and responsibilities of the Risk Management Committee and has delegated the monitoring and reviewing of the risk management plan to the committee. The terms of reference of the Risk Management Committee include review of the risk management policy, approval of the risk management plan and implementing and monitoring of the risk management plan.

The Company's Enterprise Risk Management (ERM) framework was revised based on the Committee of Sponsoring organizations (Coso) Framework. The objectives of the ERM include significantly improved credit risk framework, profile and outcomes, strong market and operational risk capability, economic capital models  embedded for all major risks, reliable financial reports, compliance with applicable laws and regulations and simplifying and strengthening compliance.

The Company maintains a risk register listing all the risks likely to affect the achievement of objectives set by the Company and identifying the significant risks using a scoring methodology that was revised. The process of risk management includes risk identification and categorization, risk description and risk mitigation. The risk owners and risk managers are in-line functionaries with cross-functional job descriptions. Risk owners are accountable to the Risk Committee for identification, assessment, aggregation, reporting and monitoring of the risk related to their respective areas/ functions.

The key implementation areas for risk mitigation are as under:

1. Finance: Treasury and funds transfer

2. Information technology: Data security and UNo

3. Credit administration

The Company is exposed to credit risk, economy risk, interest rate risk, asset liability mismatch risk and cash management risk, among others. The expertise in lending operations acquired by the company over the past three decades has helped mitigate credit risk. Moreover, the Company ensures that the short-term and long-term fund resources are favourably matched with deployment. To avoid any asset-liability mismatch risk, the Company resorts to long-term funding instruments such as NCDs and securitization. The Company has continued to enjoy the trust and support from its investors, security holders, depositors, banks and financial institutions, due to its impeccable record in servicing its debt obligations on time. The Company is primarily engaged in financing of br-owned commercial vehicles and has diversified its assets portfolio to cater to the passenger vehicles segment. This has mitigated the risk arising out of industrial and economic slowdown. Besides, the substantial monthly collections are made in the form of cash due to the under-developed banking habits of our customers. This exposes our Company to cash management risks. In order to mitigate the same, the Company ensures efficient and secured collection across all its branches through a robust cash management network with leading banks. The Company has also adopted stringent checks and internal controls across all branches. At the regional level, each branch's collections are monitored and reconciled on a daily basis. The Company has also initiated the necessary steps to address operational risks arising from inadequate internal processes, people and systems or from external events. The Company mitigates its  interest rate risk through innovative resource mobilization techniques and prudent fund management practices, among others. Besides, superior credit rating of the Company's financial instruments enables it to raise funds at competitive rates. The Asset Liability Management Committee regularly reviews the interest rate and liquidity risks.

INDIAN ECONOMIC OUTLOOK FOR FINANCIAL YEAR 2016-17

Despite the bleak outlook across global markets and growth facing downside risks, India is set to emerge as the fastest growing large economy in 2016-17, growing at 7.5% and overtaking China. The growth in India is being driven by private consumption aided by lower energy prices and higher real incomes. The IMF however, flags the slowing trade growth as one of the risk factors. In order to sustain strong growth over the medium term, there is a need for labour market reforms and removal of infrastructure bottlenecks. The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened. Besides, structural reforms initiated by the Government will boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5% by the end of 2016-17.

The Economic Survey has pegged the economy's growth at 7-7.75% in 2016-17. The Finance Minister has stated that the GDP growth target could move up from 7.5% to 8-8.5% in 2016-17 if the monsoon rainfall matches the 106% of the long-period average, as per the forecast of the Indian Meteorological Department (IMD) in its first-stage forecast. Agricultural growth is also projected to increase from 1.1% in Financial Year 2015-16 to 3% in Financial Year 2016-17 on the back of a normal monsoon as well as the low base effect, driving rural incomes and spending propensity.

Focus on rural and infrastructure development in the Financial Year 2016-17 Budget will possibly boost growth in the CV sector. The road transport and highways ministry has set an ambitious target of laying more than 40-km of roads every day in 2016-17. The roads award target has been set at 25,000 km in 2016-17 against the 10,000 km awarded last year. This should boost demand for construction equipment and result in the revival of the equipment finance sector which is brsently going through a difficult phase. The improvement in equipment finance sector would help faster recovery of overdue loans and reduce the level of non-performing assets (NPAs) in the coming years. Moreover, the government's dedication to abolish the 'permit raj' and open up the road transport sector to private players is also likely to increase CV growth.

For details on financial and operational performance, please refer to the Directors' Report.

CAUTIONARY STATEMENT

This report contains forward looking statements that involve risks and uncertainties including, but not limited to, risks inherent in the Company's growth strategy, dependence on certain businesses, dependence on availability of qualified and trained manpower, economic conditions, government policies and other factors. Actual results, performance or achievements could differ materially from those exbrssed or implied in such forward-looking statements. This report should be read in conjunction with the financial statements included herein and the notes thereto.