MANAGEMENT DISCUSSION AND ANALYSIS

ECONOMIC REVIEW

From an economic perspective, FY 16 was one of the most volatile years in recent times. The international economic environment was shrouded in plunging oil prices, debrciating currencies because of a strengthening dollar, and diminishing GDPs. Global economic activity therefore remained subdued and grew at 3.1%. This is projected to increase to 3.4% in 2016 and 3.6% in 2017 (Exhibit 1). The pickup in global activity is expected to be strong especially in emerging markets and developing economies where the GDP growth is projected to be at 4.3% in 2016, up from 4.0% in 2015

In advanced economies, a modest and uneven recovery is expected to continue, with further gradual narrowing of output gaps. The picture for emerging markets and developing economies is diverse and in many cases, challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh down growth prospects in 2016 and 2017. The projected pickup in growth over the next two years, despite the ongoing slowdown in China, primarily reflects forecasts of gradual improvement in growth rates in countries currently in economic distress; notably Brazil, Russia, and some countries in the Middle East, although this projected partial recovery could become diminished by new economic or political shocks.

Overall, the global economy looks well poised for growth despite the volatility, and this will be led by productivity measures and policy reforms in the emerging economies.

India has emerged as the fastest growing major economy in the world as per the Central Statistics Organisation (CSO) and International Monetary Fund (IMF). According to the IMF World Economic Outlook Update (April 2016), the Indian economy is expected to grow at 7.5% during FY 17, despite the uncertainties in the global market. The Economic Survey 2015-16 had forecasted that the Indian economy will be growing by more than seven per cent for the third successive year in 2016-17 and may even reach eight per cent or more in next two years.

Improvement in India's economic fundamentals has accelerated in 2016 thanks to the combined impact of strong government reforms, RBI's focus on bringing down inflation and benign global commodity prices.

Furthermore, initiatives like Make in India and Digital India are expected to play a vital role in driving the Indian economy. Foreign Direct Investment (FDI) in India increased by 43% post the launch of Make in India campaign between October 2014 - March 2016, compared to the 15-month period before the launch. According to a Goldman Sachs report released in September 2015, India could grow at a potential 8% average during fiscal 2016 to 2020 powered by greater access to banking, technology adoption, urbanisation and other structural reforms.

The Government of India has embarked on a mission to create 100 smart cities as well as launched the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for 500 cities with an outlay of T 48,000 crores US$ 7.47 billion) and T 50,000 crores (US$ 7.34 billion) respectively. Smart cities are satellite towns of larger cities. They will have modern infrastructure and be digitally connected. The program was formally launched on June 25, 2015.

India, backed by strong policy reforms and reviving global demand, is steadily moving upwards on its recovery trajectory. The GDP growth based on the revised 2011-12 base is projected to be 7.4% in FY 16, up from 7.2% in FY 15 (Exhibit 2). The IMD forecast of good and above average rainfall in 2016 will help to revive the rural economy, boosting output in agriculture. With significant fall in global crude prices, the wholesale price index (WPI) inflation has continued to remain in the negative territory for the whole of 2015-16 (Exhibit 3). Also the current account deficit for FY 16 is expected to further contract to 1.1% of GDP as against 1.5% in FY 15. This enhances expectation of a stable INR even after continuous monetary tightening measures by the US. With inflation well under control, RBI reduced the repo rate by 50 basis points from 7.25% in June 2015 to 6.75% in September 2015 and further reduced it to 6.50% in April 2016 (Exhibit 5), which will give a boost to India's GDP growth.

This year, the path for growth is dependant on fiscal consolidation and the introduction of various measures to spur the rural economy and improve business environment.

GROWTH PROSPECTS VEHICLE FINANCE (VF)

VF business recorded very healthy growth in FY 16, and the company expects the momentum to pick up further in FY 17, both on the basis of strong macroeconomic fundamentals (CV sales growth, uptick in infrastructure spends, fuel price drop, strong retail demand and OEM focus on rural penetration), as well as internal business initiatives (continuous engagement with OEMs, improving market share, building strong relationships with dealers and brokers, field activities such as Uttam Mela, etc.). The business will continue to retain its sharp focus on maintaining best in class asset quality, lower net credit losses, and aim for consistent reduction in Gross Non Performing Assets (GNPA).

The combrhensive organisational restructuring initiative carried out within the business in FY 16, is now well embedded and the team is working cohesively to drive revenue generation, overall profitability and increased return on assets.

The TAB project, a breakthrough initiative for the business in FY 16, is a first-of-its-kind in the NBFC space, and is expected to give CIFCL a competitive advantage by enabling faster customer response time and improved sales force productivity.

The company plans to expand its branch network to capture untapped markets for deeper penetration, customer reach and the strengthening of the hub and spoke model for large area offices and branches.

Industry Sales Trends

During FY 16, the domestic CV industry sales registered a growth of 11.5% in volumes in comparison to a decline of 2.8% in FY 15. The recovery was driven by continuing healthy replacement-led demand in the case of MHCV (Trucks), renewal as well as fleet expansion by various SRTUs and increasing pick-up in demand from the mining and construction sectors. In addition, the industry also benefitted from the implementation of BS-IV emission norms, which became mandatory across North India and some nearby regions from October 2015. Accordingly, the MHCV (Truck) segment registered a growth of 31.9% during FY 16. The demand for LCV (Trucks) also started picking up from H2 FY 16 after showing a decline for the past two years. In terms of market share, Tata Motors continued to witness decline in market share from 47.2% (in FY 15) to 44.4% (in FY 16) as Original Equipment Manufacturers (OEMs) like Ashok Leyland expanded brsence in non-south markets, while Mahindra & Mahindra benefitted from industry trends shifting in favour of Pick-up trucks and new model launches.

Industry Outlook

Commercial Vehicles: Domestic CV industry to grow between 11-12% in FY 17.

The MHCV (Truck) segment is likely to register a growth of 13-15% in FY 17 driven by continuing replacement of ageing fleet, br-buying before BS-IV is implemented across India and expectations of pick-up in demand from infrastructure and industrial sectors in view of reforms being initiated by the Government. In addition, the company expect that the demand is likely to pick-up for LCV (Goods) segment on the back of replacement-led demand (i.e. three years of declining sales) and gradual improvement in viability on the back of lower diesel prices and a pick-up in consumption-driven sectors. With overall recovery and new orders placed by SRTUs (under the JNNURM programme), the overall bus segment is expected to register a growth of 10- 12% during FY 17. Apart from existing orders, domestic bus sales is likely to benefit from a) Government's recent proposal of opening up the passenger transport sector to private players, b) higher allocation towards urban development projects and other initiatives such as "Smart Cities" etc.

A revival in industrial and infrastructural activity is expected in the forthcoming years. The favourable benign interest rate scenario coupled with fall in fuel prices will result in sustainable cash flows for the operators, thereby driving the growth of the industry.

HOME EQUITY

The home equity (loan against property) market in India has witnessed strong growth over the last 5 years. As per CRISIL Research, the home equity market is expected to reach an assets under management (AUM) of T 5 lakh crore by March 2019, up from T 2.30 lakh crore as on 31 March, 2015.

The Home Equity market has been growing at a CAGR of more than 30% in the last 3 years, CRISIL expects the growth to slow down in the coming year and is estimating a CAGR growth rate of 20-22%. Being a secured lending product and given the potential of this business, there is increasing focus on this business by NBFCs and banks, potentially leading to increased competition. However, the overall pie will continue to grow at a steady rate over  the medium-term.

Key growth drivers for the home equity market:

a. Increased requirement of funds by self-employed non-professionals to support their business growth and to tap bigger opportunities

b. Promotion and increased awareness of the product

c. Better brferred product as compared to personal loans, as home equity attracts lower interest rates

d. Low levels of mortgage penetration in India

HOME LOANS

As per ICRA's India mortgage finance update, the total housing credit outstanding in India as of December 2015, stood at T 11.9 trillion with an annualized growth of 18% with the top 5 players holding more than 60% share. The market has been steadily growing. Of this the banks hold 63% of the overall market while the NBFCs and HFCs hold 37% of the market. While the overall banking sector growth remained muted, housing credit grew at 18%.

As per a recent ICRA report, the growth for FY 16 will be around 16-18% (compared to a 5 year growth of 18% from FY 2010-15). This is primarily due to the overall slowdown in primary sales and new launches. As per the report, the long term outlook looks positive with the government's focus also on this sector. Amid the challenging economic environment the book quality for many financers has been stable. As per ICRA, the asset quality of the housing finance companies continues to remain strong with gross non-performing assets (GNPA) of 0.71% as of December 2015. This makes housing finance one of the most secured lending products in India leading to increased competition. Reduction in base rate of lending institutions will further propel the growth engine of this industry.

India's housing finance industry holds great potential in terms of the untapped low-to-mid income segment with no clear or formal income proof. If tapped, this segment would add to new growth avenues. Certain new players have sensed this opportunity and its high growth potential, and have started to enter niche segments like affordable housing and self employed borrowers. Given the Government's impetus on Housing for All and the reduction in the risk weightages for small ticket home loans, the affordable housing segment is all set to see higher growth and entry of many more players.

DIVISIONAL ANALYSIS

VEHICLE FINANCE (VF)

The VF division posted a disbursement growth of 32% and PBT growth of 60% in FY 16. The disbursements during the year were Rs. 12,383 crores against Rs. 9,363 crores in the brvious year. The PBT during the year was Rs. 555 crores against Rs. 346 crores in the brvious year. The division continued its focus on strengthening its business operations and improving its book quality which also helped in reduction of its GNPA from 4.8% to 3.7% (4 months overdue). The NCL to average assets has come down to 1.6 % from 1.9 % even after early adoption of the 4 month NPA provisioning norm. The VF division will continue to remain optimistic and remain focused on maintaining a balance between growth and book quality.

The VF division has won two major awards in FY 16:

1. Mahindra Transport Excellence Awards 2015 for "Commercial Vehicle Financier of the year" under the category Driving Positive Change

2. Daimler India Commercial Vehicles Award 2015 for "Best Financier in Lead Generation"

KEY STRATEGIC INITIATIVES TAKEN DURING THE YEAR

? Focused on enhancement of branch profitability by increasing revenue through desired product mix and by providing value added services to customers

? Focused on improving portfolio quality by keeping track of infant delinquency through joint collection drive by sales, credit ops, collection and legal teams.

? Enhanced focus on cost optimisation by eliminating non-value adding activities.

? Increased repeat business through customer retention activities achieved by reducing customer response time by creating new value stream maps for various product lines.

? Increased revenue from insurance business and shortfall recovery through a structured approach.

? Entered into brferred financier tie-ups with manufacturers and increased engagement with the used vehicle dealers to drive disbursements.

HOME EQUITY (HE)

Despite the brvailing slowdown in the overall economic environment, home equity business continued to maintain a healthy growth trajectory. The overall disbursements during the year FY 16 stood at Rs. 3,476 crores registering a growth of 14% and the AUM was at Rs. 8,852 crores as against Rs. 7,280 crores as of March 2015, a 22% YoY growth. HE business as a percentage of the overall loan book stands at 30%. The company continued to expand its reach in the HE business and added 14 branches during the year, taking the total branch count to 92. Cost rationalisation continues to be a focus area in this business and the operating cost as a percentage of average asset stands at 1.2%, one of the lowest in the industry.

Amidst a debrssed macroeconomic scenario in FY 15, the business contained GNPA to 1.9%. The recent announcement in the Union Budget about extending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to NBFCs, will enable the company to have better and quicker enforceability of dues against delinquent customers. Having extended the applicability of SARFAESI Act to NBFCs, it is yet to be notified by the Government.

The company adopted early, the provisioning for 4 months overdue from this financial year which resulted in a GNPA of 3.4%. Competition continues to intensify with more and more NBFCs and PSU banks moving towards this lucrative and fast growing business as they are facing growth constraints in credit off take across product lines. This has led to an aggressive pricing scenario amongst industry players in this segment. To stand out in the competitive environment, the company remains highly focused on building and maintaining a stable and long-term relationship with its customers and channel partners. The company has always been focusing on a faster turnaround time (TAT) leading to better customer service. With this focus, the business is confident of continued progress on its growth trajectory.

RBI's circular on wavier of foreclosure charges for individual loans, has reduced the exit barriers further for the customer, giving way to higher foreclosures. The business is ensuring higher engagement with the customers for retention and arresting such foreclosures.

The business continues to focus on self-occupied residential properties as its brferred asset class - a safer asset class to lend against. Its target segment continues to be the self-employed, non-professional customers. The business has built deep expertise in understanding and assessing this customer segment.

HOME LOANS

The affordable home loans business was launched in FY 13 and has been growing at a steady rate. The business is at brsent operating from 45 branches in the states of Tamil Nadu, Karnataka, Andhra Pradesh, Gujarat, Rajasthan and Maharashtra. The company has also planned to enter new markets such as Chhattisgarh in the coming year.

The customer base for this business is over 1,700 and the total AUM stands at Rs. 264 crores. The prime focus of the business is the self-employed non-professional customers seeking to buy / construct a new home.

CORPORATE FINANCE

Under corporate finance, the business offers short-term financing products such as bill discounting and working capital loans. AUM in this business stood at Rs. 423 crores as of March 2016. The business will continue its increased focus on MSME loans in FY 16.

The Rural Financing product was launched during FY 15 at 40 Mana Gromor Centres operated by Coromandel International Ltd., to finance the agri input procurement needs of the farming community. The number of Mana Gromor Centres was increased to 50 during FY 16, all of them in the state of Telangana.

The company plans to increase the number of Mana Gromor Centres to 100 in the coming year, including the locations in the state of Andhra Pradesh. The division catered to the needs of about 4,800 customers during FY 16.

ASSET LIABILITY MANAGEMENT (ALM)

During FY 16, the company maintained its strong ALM position by optimizing the mix of borrowings between bank borrowings and market borrowings, while ensuring cost of funds is kept low. The company was successful in getting subscription for its Commercial Paper (CP) from banks apart from Mutual Fund (MF). The ALM position was also strengthened with long term borrowings in the form of medium-term loans and medium /long-term Non Convertible Debenture (NCD) which contributed ~60% of the incremental borrowings.

Sale of receivables by way of securitization / bilateral assignments amounting to T 3,066 crores helped in the matching of inflows and outflows, over the tenure of the loan book.

The increase in working capital (consortium) limit from T 3,485 crores to T 4,000 crores also helped in providing adequate lines to support the ALM.

RESOURCES & TREASURY

During the year, the company shifted the mix of borrowings towards market borrowings from bank funding to support the growth of its businesses at lower interest rates. This was done without compromising the right mix of long and short-term borrowings and thereby maintaining a healthy asset liability position. The borrowing profile as on 31 March 2016, is given below:

WING

In FY 16, the company mobilised T 3,935 crores of medium-term loans and T 470 crores (net) of working capital and cash credit facilities from banks.

MARKET BORROWING

During FY 16, the company raised T 4,459 crores and repaid T 2,205 crores of commercial papers (CP). CP outstanding as at the end of the year was T 2,726 crores. Medium and long-term secured non-convertible debentures (NCD) to the tune of T 2,216 crores (net) (brvious year T 2,085 crores) were mobilised at competitive rates. At the end of FY 16, outstanding NCD stood at T 4,847 crores (brvious year T 3,969 crores). New investor profiles were added to ensure no undue concentration in any single / group of investors.

MOVEMENT IN INTEREST COST

The company's interest cost, as a percentage of average borrowings, decreased from 10.1% in FY 15 to 9.7% in FY 16. Interest cost was monitored closely and by selecting the right mix of borrowings, kept under control.

Though the availability of bank loans to NBFCs remained robust, lending rates remained stagnant till Q2 of FY 16. Only after RBI's repo rate reduction by 50bps on 29 September 2015, there was tangible reduction of base rates in the following quarter by most of the banks.

In FY 17, the impact of Marginal Cost based Lending Rate (MCLR), in the form of lower pricing of long-term and short-term loans is expected to come in, albeit slowly. Currently there is no major difference between the MCLR based rates offered by banks (with sbrad) and their respective brvailing base rates.

The money market rates moved in tandem with reduction in Repo rates till Q2. From Q2 onwards, owing to fear of defaults in corporate bond markets, there were heavy outflows from debt schemes. This phenomenon reduced the appetite of traditional players like Mutual Funds to invest in NBFC papers. Further, in January 2016, SEBI imposed several regulatory caps (sectoral/ group/single entity) with a view to safeguarding the debt investors. This too had a sobering effect on the ability of mutual funds to invest in NBFC's papers. The company had proactively adopted the strategy of leveraging its banking relationship by way of subscription to its money market instruments. The company thus obtained a more diversified investor base with effective cost management in comparison to FY 15.

To further rationalise the cost of borrowings, the company adopted the following measures:

? Renegotiated the interest rates with lenders on borrowings resulting in reduction in interest cost of T 0.44 crores in FY 16. The benefit of interest cost reduction will continue to accrue to the company in FY 17 and FY 18.

? Securitisation / bilateral assignment of receivables to the tune of Rs. 3,066 crores at fine rates, has resulted in good savings of interest costs. The benefits of the low interest cost on these deals will continue to accrue to the company in subsequent financial years.

CAPITAL ADEQUACY RATIO (CAR)

As at the end of FY 16, the capital adequacy ratio stood at 19.7% (Tier I : 13.3% and Tier II : 6.4%)

INVESTMENTS

During the year, the company acquired an equity stake of 63% in White Data Systems India Private Limited (WDSI) for an investment of Rs. 8 crores. WDSI provides integrated solutions for the Road Freight & Transport Sector through their i-Loads platform.

The company's investments of Rs. 66.57 crores include investments in subsidiaries of Rs. 63.37 crores (net of provisions), investments in pass through certificates of Rs. 1.89 crores and investments in equity shares of Rs. 1.31 crores.

FINANCIAL REVIEW

The company's aggregate loan disbursements grew by 28% from Rs. 12,808 crores in FY 15 to Rs. 16,380 crores in FY 16. This was primarily on account of a 32% growth in vehicle finance disbursements. Home equity disbursements grew by 14% over brvious year. The total AUM for the company as a whole grew by 16% (YoY) and the growth of on-balance sheet assets was 16%. The Business AUM (including on book & assigned and net of provisions) in FY 16 stood at Rs. 29,650 crores as against Rs. 25,452 crores recorded in FY 15.

The company follows a prudent and stringent provisioning policy, due to which, the company holds excess provision buffer over and above the brscribed norms. Considering the improved collections performance during the year and as a matter of prudence, the company decided to advance its adoption of the RBI regulations relating to recognition of NPAs at 4 months overdue and increased its standard asset provisions from 0.3%

to 0.35% (this is mandatory only from FY 17). Consequently, the early adoption resulted in a GNPA of 3.5% and NNPA of 2.1% in FY 16 as compared to a GNPA of 3.9% and NNPA of 2.7% in FY 15 at 4 months overdue basis.

Also, in the current year, the company adopted early, the provisioning for standard assets at 0.4% which is mandated by the RBI for compliance by FY 18. An additional provision on standard assets is also created on a prudent basis to cover the revised asset classification norms of 3 months overdue which should be complied by FY 18.

A balanced disbursement mix with a focus on higher yield products, effective collection of over-dues and a reduction in interest costs due to favourable money market conditions, resulted in improved net income margin (NIM) of 8.7% in FY 16 as against 7.9% in FY 15. During the year, the company continued to remain focused towards cost rationalisation and maintained the operating cost to asset ratio at 3.4%.

The net profit after tax for the year rose by 31% from Rs. 435 crores in the brvious year to Rs.568 crores.  Earnings per share for the year stood at Rs. 37.50 and the book value per share stood at Rs.234 as against Rs. 30.09 and Rs. 204 in the brvious year respectively.

HUMAN RESOURCES (HR)

HR Interventions for FY 16 focused on assessing organisation structure and its effectiveness, guiding and facilitating change, improving managerial effectiveness, performance management and HR process re-engineering to align / calibrate with organisational goals and to ensure that the function adds value by fostering productivity and customer service and promoting individual responsibility and accountability.

Key Achievements for FY 16:

? VF organization restructuring followed by change management workshops: The restructuring process was carried out to bring in synergy and move away from the practice of working in silos. Zonal level change management workshops focused on the importance of the structural changes and also detailed changes in roles and responsibilities post the structure change.

? Appraisal action communication was moved online.

? As part of the HR lean management initiative, a value stream mapping was introduced for key HR processes. The team studied the current state and mapped the future state map (FSM) for the following process:

¦ On-boarding

¦ Confirmation

¦ Employee separation

? We Believe & We Heal - Flood Relief - a program to support the flood impacted employees: 480 colleagues from Tamil Nadu reported damage. Relief support which included provision of supplies for the affected employees, financial grants to manage immediate family expenses, vehicle repair reimbursements & interest free loans to re-build their houses, was extended.

? Employee connect — a platform for employees to share their Believe stories was launched. This initiative gained a lot of attention and won a best practices award amongst Group companies. The initiative was brsented in the 8th National Summit organized by CII in New Delhi. Employees shared their experiences, journey and success stories, leading to imbrssive feedback.

? Confirmation & attendance tracking for the employees was moved online

? Medical insurance claim process handling de-centralised at Regional Level: regional collection centres have been formed to manage this process

? Voices, a dip stick survey was rolled out for a pulse check on progress made in the last 18 months post the Voices survey action planning

? Digitization of employee personnel file was initiated

Learning & Development:

During the year, the company rolled out the following e-learning programmes for enhancing organizational capabilities:

? Shiksha: Supporting the team by implementing learning through WhatsAapp

? E-Test in People power: Vehicle Finance Credit employees have taken the online test on KYC, ED & PSA Policy

? Patashala: Rolled out learning tips on descriptive words and brpositions in English language

? BCP: through e learning

The company also facilitated a workshop on building a leadership pipeline to groom future leaders.

The company has in place a brvention of sexual harassment policy in line with the requirements of the Sexual Harassment of Women at the Workplace (Prevention, Prohibition and Redressal) Act, 2013. An Internal Complaints Committee (ICC) has been set up to redress complaints received regarding sexual harassment. All employees are covered under this policy. During the calendar year 2015, the committee received two complaints which have been settled by terminating the employees from the services of the Company on reasons of misconduct. The company introduced  a series of initiatives to bring about awareness on 'Prevention of Sexual Harassment' at the workplace through an e-learning awareness course, mailers and brsentations.

TECHNOLOGY INITIATIVES

Technology continues to be a strategic enabler for the company and is the fulcrum of its future business growth and cost optimisation plans.

The company has taken the mobility solution to the next level. The field forces at the company are being equipped with Tablet based solutions to spot service the customer. This solution endows the company with confidence for targeting better productivity, improved TAT and operational excellence, by utilizing the resources optimally and eliminating non-value adding activities. This is expected to increase customer delight and further strengthen their bond with the Company.

The company launched various mobility related initiatives to assist customers in their day-to-day matters. This year it rolled out 2 applications (Customer Facing App (CFA) and Drive 2 Decide) for both customers and the public. CFA is a self service application for all loan related services. This app increases the customer engagement thereby reducing customer support cost and generating significant customer revenue.

Drive 2 Decide simplifies the process of identifying dealer networks around the customer location for purchase of new vehicles, service centers and sale of cars.

During the year, development work on the business planning and budgeting model was undertaken on the Hyperion platform. This will allow the company to delve deeper and plan combrhensively both from a top-down and a bottom-up perspective.

The team has also been working on building a holistic business MIS which is an interactive application. This will enable managers to generate combrhensive reports of the various businesses both at a macro and micro level.

RISK MANAGEMENT

The company is committed to creating value for its stakeholders through sustainable business growth and with that intent has put in place a robust risk management framework to promote a proactive approach in reporting, evaluating and resolving risks associated with the business. Given the nature of the business the company is engaged in, the risk framework recognizes that there is uncertainty in creating and sustaining such value as well as in identifying opportunities. Risk management is therefore made an integral part of the company's effective management practice.

Risk Management Framework: The company's risk management framework is based on (a) clear understanding and identification of various risks (b) disciplined risk assessment by evaluating the probability and impact of each risk (c) Measurement and monitoring of risks by establishing Key Risk Indicators with thresholds for all critical risks and (d) adequate review mechanism to monitor and control risks.

The company has a well-established risk reporting and monitoring framework. The in-house developed risk monitoring tool, Chola Composite Risk Index, highlights the movement of top critical risks. This provides the level and direction of the risks, which are arrived at based on the two level risk thresholds for the identified Key Risk Indicators and are aligned to the overall company's risk appetite framework approved by the board. The company also developed such risk reporting and monitoring mechanism for the risks at business / vertical level. The company identifies and monitors risks periodically. This process enables the company to reassess the top critical risks in a changing environment that need to be focused on.

Risk Governance structure:

The company's risk governance structure operates with a robust Board and Risk Management Committee with a clearly laid down charter and senior management direction and oversight. The Board oversees the risk management process and monitors the risk profile of the Company directly as well as through a Board constituted Risk Management Committee. The Committee, which meets a minimum of four times a year, reviews the Risk management policy, implementation of risk management framework, monitoring of critical risks, and review of various other initiatives with a structured annual plan. The risk management division has established a combrhensive risk management framework across the business and provides appropriate reports on risk exposures and analysis in its pursuit of creating awareness across the company about risk management. The company's risk management initiatives and risk MIS are reviewed monthly by the managing director and business heads. The key risks faced by the company are credit risk, liquidity risk, interest rate risk, operational risk, reputational and regulatory risk, which are broadly classified as credit risk, market risk and operational risk.

CREDIT RISK

Credit risk arises when a borrower is unable to meet financial obligations to the lender. This could be either because of wrong assessment of the borrower's payment capabilities or due to uncertainties in future. The effective management of credit risk requires the establishment of appropriate credit risk policies and processes.

The company has combrhensive and well-defined credit policies across various businesses, products and segments, which encompass credit approval process for all businesses along with guidelines for mitigating the risks associated with them. The appraisal process includes detailed risk assessment of the borrowers, physical verifications and field visits. The company has a  robust post sanction monitoring process to identify credit portfolio trends and early warning signals. This enables it to implement necessary changes to the credit policy, whenever the need arises. Also being in asset finance, most of the company's lending is covered by adequate collaterals from the borrowers. During the year under review, the company achieved major milesstones in the area of credit risk management. The company developed a business decision model for one of its retail portfolios, Vehicle Finance, to help the segment plan the volume with adequate pricing of risk at regional level for the respective portfolio, reckoning the risk characteristics of the micro-markets. It also developed a credit scoring model to assess the credit worthiness of the individual retail borrowers for underwriting decisions and adequately pricing them with respect to the risks thus assessed.

MARKET RISK

risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates and other asset prices. The company's exposure to market risk is a function of asset liability management activities. The company is exposed to interest rate risk and liquidity risk.

Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates and other asset prices.

The company's exposure to market risk is a function of asset liability management activities. The company is exposed to interest rate risk and liquidity risk. The company continuously monitors these risks and manages them through appropriate risk limits. Asset Liability Management Committee (ALCO) reviews market-related trends and risks and adopts various strategies related to assets and liabilities, in line with the Company's risk management framework. ALCO activities are in turn monitored and reviewed by a Board sub-committee.

OPERATIONAL RISK

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events.

The operational risks of the Company are managed through combrhensive internal control systems & procedures and key back up processes. In order to further strengthen the control framework and effectiveness, the Company has established Risk Control Self-Assessment at branches to identify process lapses by way of exception reporting. This enables the management to evaluate key areas of operational risks and the process to adequately mitigate them on an ongoing basis. The company also undertakes Risk based audits on a regular basis across all business units / functions. While examining the effectiveness of control framework through self-assessment, the risk-based audit would assure effective implementation of self-certification and internal control adherence, thereby, reducing enterprise exposure.

The company has put in place a robust Disaster Recovery Plan, which is periodically tested. Business Continuity Plan (BCP) is further put in place to ensure seamless continuity of operations including services to customers, when confronted with adverse events such as natural disasters, technological failures, human errors, terrorism, etc. Periodic testing is carried out to address gaps in the framework, if any. DR & BCP audits are conducted on a periodical basis to provide assurance regarding the effectiveness of the company's readiness.

The effective BCP program helped the company in sailing through the real BCP situation in December 2015. BCP was invoked for the first time as the Central Processing Unit in Guindy was severely impacted by the unbrcedented Chennai floods. Critical resources were moved to the alternate site to continue business operations. BCP was carried out successfully as per the established plan. In spite of poor telecom connectivity and commuter facilities, operations were carried out smoothly and the employees stood by the company, meeting month-end business operations requirements.

The company is continuously engaged in creating risk awareness and culture across the organization through training on risk management tools and communication through risk e-newsletters.

INTERNAL CONTROL SYSTEMS

An internal control framework including clear delegation of authority and standard operating procedures are available across all businesses and functions. Clear segregation of duties exists between various functions. Key operational processes (finance and operations) are centralised at head office for better control. The company has instituted a strong IT security system to ensure information security. All policies are reviewed and approved by the board on a periodic basis.

The company adopts a co-sourced model of internal audit. Both the in-house internal audit department and M/s. Price Waterhouse & Co. Bangalore LLP, the company's external internal auditors, executed a rigorous audit calendar spanning multiple business processes. Critical audit observations are shared with the audit committee on a quarterly basis to effectively monitor controls and implement recommendations.

On compliance matters, a methodical system of monthly self-assessment exists in all functions. A robust mechanism exists to control, detect and brvent fraud. The investigations are reviewed by a disciplinary committee comprising senior management members and chaired by the managing director.

The internal financial control systems are constantly monitored both by an in-house team as well as external auditors. The risk and  control matrices are reviewed on a quarterly basis and control measures are tested and documented. These measures have helped in ensuring the adequacy of internal financial controls in line with the scale of operations.

The statutory auditors of the company have also certified on the existence and operating effectiveness of the internal financial controls as of March 16