MANAGEMENT DISCUSSION AND ANALYSIS Economic overview The full-year GDP growth for the fiscal year ending March 2015 settled at 7.3%, up from 6.9% in 2013-14, lower than an official estimate of 7.4% (figures calculated as per the new series of national accounts with base year of 2011-12). This growth was due to an improvement in the performance of the country's services and manufacturing sectors. The economy was relatively independent of factors associated with an economic slowdown - inflation, fiscal deficit, weak demand, external account imbalances and an oscillating rupee, which had choked growth during 2011-12 and 2012-13. One of the redeeming features was the emergence of India as a large economy with a promising outlook, amidst the mood of pessimism and uncertainties that continue to persist in a number of advanced and emerging economies. The Gross Value Added (GVA), a new concept introduced by CSO to measure the economic activity, rose by 7.2% in 2014-15 compared to 6.6% in the brvious fiscal. Financial, real estate and professional services showed an improvement by registering a growth of 11.5% as against 7.9% in brvious fiscal. According to the Economic Survey, India's GDP could expand by 8.1-8.5% in 201516. The Reserve Bank of India has projected India's GDP growth for 2015-16 at 7.6%. The International Monetary Fund forecast India's growth to strengthen from 7.2% in 2014 to 7.5% in both 2015 and 2016. Indian financial sector India has a diversified financial sector, undergoing rapid expansion. The sector comprises commercial banks, insurance companies, non-banking financial companies, cooperatives, pension funds, mutual funds and other smaller financial entities. The financial sector in India is brdominantly a banking sector with commercial banks accounting for more than 60% of the total assets held by the financial system. India's services sector has always served the country's economy well, accounting for more than 50% of the gross domestic product (GDP). In this regard, the financial services sector has been an important contributor. The under-banked and unbanked Indian segment Only about 35% of India's almost 1.27 billion people have any access to bank accounts, compared with a global average of 50% (Source: 2011 World Bank).Of the 24.67 crore households in the country, 10.19 crore do not have access to banking services. Some 44% rural households and 33% urban households still do not have a bank account (Source: Business Line, August 25, 2014). 2015, a watershed moment for financial inclusion The year 2015 could be a watershed moment in India's quest to provide access to a range of financial services to all its citizens. • RBI announced that 2nd February, 2015 was the last date to submit applications for small finance banks and payment banks, the first opportunity to financial intermediaries to offer a complete range of financial services that banks offer. • In September 2015, Bandhan Financial Services, a non-banking finance company - microfinance institution (NBFC-MFI), will commence operations as a bank. • In August, 2014, the Indian Prime Minister launched the Pradhan Mantri Jan-Dhan Yojana (PMJDY), a national mission for financial inclusion to ensure access to financial services (banking/ savings and deposit accounts, remittance, credit, insurance and pension) in an affordable manner. • Prime Minister launched the MUDRA Yojana that will offer loans to the unfunded, self-employed as well assmall businesses up to Rs.10 lac at a low rate of interest. Microfinance Microfinance is seen as an important poverty alleviation tool. The microfinance movement was initiated by NABARD in collaboration with banks and NGOs forming self-help groups in 1992. India's microfinance sector began evolving with private sector participation leading to the formation of microfinance institutions. The microfinance institutions accessed bulk funds from banks and lent them to the borrowers (members of self-help groups and joint liability groups). The microfinance sector received a setback during the Andhra Pradesh crisis in 2011. This was followed by combrhensive regulatory intervention and reformulation of extant guidelines. The external environment improved with RBI laying down the law for NBFCs and microfinance institutions, and the Central Government contemplating passing a new bill in this regard. Microfinance sector performance, 2014-15 • As of 31st March, 2015, microfinance companies provided microcredit to over 3.05 crore clients, an increase of 29%. • The aggregate gross loan portfolio of microfinance companies was Rs.40,138 crore (excluding non-performing (PAR > 180 days) portfolio (Rs.2600 crore) in Andhra Pradesh). This rebrsents a y-o-y growth of 61% over 2013-14. • Annual disbursements (loan) in 2014-15 increased 55%. Total number of loans disbursed by microfinance companies grew 37% in 2014-15 to 3.343 crore. • Funding to microfinance companies in 2014-15 grew 84% compared with 2013-14. • Portfolio at Risk (PAR) figures (PAR 30, 90, 180) remained under 1% for 2014-15. • Average loan amounts disbursed per account was Rs.16,327. • Indian microfinance companies covered 32 states/union territories (489 districts). • Microfinance coverage is geographically dispersed with GLP in South at 30%, East at 28%, North at 22% and West at 20%. • Productivity for microfinance companies continued to improve. GLP per branch is now at Rs.3.803 crore, up 49% over 2013-14. Growing microfinance focus As mainstream microfinance (targeting the poorest) has matured, focus has turned to the country's chronically underserved MSMEs, where, according to an IFC estimate, there is a debt gap of over US$60 billion. Already, innovative companies have been servicing this sector by building specialised acquisition and underwriting approaches. These changes are being accelerated by various government schemes: • In 2014, the RBI announced a new category of 'small' bank focusing on financially weaker customers. • In 2015, the government proposed the creation of an MSME bank (MUDRA) with a Rs.20,000 crore capital allocation for the sector. MUDRA Bank catalyses financial inclusion The emergence of Micro Units Development Refinance Agency (MUDRA) Bank, with a refinance corpus of Rs.20,000 crore and credit guarantee corpus of Rs.3,000 crore is a landmark in India's financial sector, expected to benefit 5.8 crore small businesses. The principal product of MUDRA Bank will be providing security free financial aid up to Rs.10 lac to Last Mile Financiers of the micro businesses/ units under the aegis of the Pradhan Mantri MUDRA Yojana but this funding will be based on the stage of growth of the business enterprises. The loan amount will be provided as follows: Shishu: The maximum loan amount under Shishu category will be up to Rs.50,000. Kishor: The loan amount under Kishor category will be from Rs.50,000 and upto H5 lac. Tarun: The loan amount under Tarun category will be between Rs.5 lac and Rs.10 lac MUDRA Bank has emerged as a refinancing agency for all NBFCs, addressing a long-awaited need. The recent eligibility criteria for availing refinancing by banks, MFIs and NBFCs makes all RBI-registered NBFCs eligible. Moreover, small NBFCs without an external credit rating but possessing satisfactory borrowing arrangements with a scheduled commercial bank for a minimum 2 years and net PA not higher than 3% are eligible. This frees small NBFCs from the need to seek credit ratings. Business highlights, 2014-15 • Revenue from the business grew 132%. • Disbursements grew 34.4%. • Established a brsence in Madhya Pradesh, opened eight microfinance branches and added 4700 customers. • Average ticket size per microfinance customer increased 3.2% - from Rs.13,600 in 2013-14 to Rs.14,038 in 2014-15. Much of the growth was derived from new client addition and not increasing loan amounts. • Opened four branches in Gujarat. Overview Arman conducts its microfinance business through its 100% NBFC- MFI subsidiary, Namra Finance. The beneficiaries of the organisation included micro-entrebrneurs and micro-business owners in urban, semi-urban and rural India, largely comprising economically poor and socially neglected communities (scheduled castes, scheduled tribes, other backward classes and religious minorities). The Company provides loans exclusively for income-generating activities comprising livestock rearing (especially milch animals), shop-keeping, hawking and working capital loans for micro-enterprises, among others. Namra (brsence in Gujarat and Madhya Pradesh through 39 branches) has assets under management worth Rs.66 crore and an active customer base comprising 85,000 individuals, translating into an average of Rs.8,000 outstanding loan per borrower. The branches are responsible for disbursing, collecting and monitoring loans in their respective hinterlands. Credit decision-making, accounting and MIS-related activities were centralised to accelerate expansion and enhance business control. The branch managers were responsible for maintaining portfolio quality and driving growth. Despite the significant growth opportunity, Namra has responded with a conservative lending approach backed by a robust support system The Company increases lending ticket sizes in line with the customer's repayment ability. Consequently, the Company refrained from lending amounts in excess of Rs.15,000 to first-time customers. It lent higher amounts (two-year loans) only to customers who completed at least three cycles with the Company. This rigorous approach translated into a strong loan book and quality portfolio. Business optimism Considering that ~90% of Indian households still do not have access to formal credit, microfinance is expected to play a crucial role in bridging the gap. The Andhra Pradesh crisis of CY10 and subsequent contraction in the sector resulted in a high latent demand for microfinance. The regulatory environment stabilised following RBI intervention, while the funding environment improved over FY13-15. The NBFC-microfinance institutions sector witnessed strong loan book growth in the last two years. The average ticket size disbursed per borrower remained largely constant over FY10-14 due to funding constraints faced by microfinance institutions and RBI regulatory guidelines. The global average for outstanding loans per borrower was at 18% of GDP, compared with 11% in India. This strengthens the conviction that there is a large scope for an increase in ticket sizes per borrower without affecting repayment. Based on this insight, India's potential microfinance market size is 3-4x its outstanding loan portfolio. Even as the RBI directive states that 'not more than two microfinance companies can lend to the same borrower', making it difficult for new entrants to grab market share from incumbents, there still exist a number of pockets untouched by the microfinance sector, inspiring growth and optimism. Blueprint Arman intends to grow its business and liquidity through the following initiatives: • Expand branch network in Madhya Pradesh and possibly extend into a third state in HY2 2016-17 • Analyse options to mobilise funds to reach the target microfinance segment disbursement of Rs.180 crore during 2015-16 Business highlights, 2014-15 • Revenue from the Asset Finance segment was Rs.15.25 crore • Asset finance disbursements grew 9% • Average loan outstanding per asset finance customer was Rs.23,055 (Rs.23,435 in 2013-14) Overview Arman commenced its asset finance business in 1998 when it selected to finance two- and three-wheelers in Ahmedabad (now largely in Gujarat). Although Ahmedabad remains its strongest branch, the Company enjoys a significant brsence across Gandhinagar, Kalol, Kadi, Mehsana, Sabarkantha, Palanpur, Vadodara, Kheda, Anand, Sevalia, and Tarapur. Arman created one of the most flexible two- and three-wheeler finance products in terms of tenure, down payment, instalment and fees. The Company reported 100% collections through cheque/ ECS, despite addressing under-banked customers, it entered into tie-ups with banks to open bank accounts for unbanked customers, strengthening financial inclusion. The Company invested in processes to report one of the fastest customer servicing turnaround times in Gujarat, wherein a loan can now be processed within six hours of customer engagement. Business performance Growth in the Company's two- and three-wheeler financing business slackened in two years on account of a national slowdown in two-wheeler sales. The market is reporting increased competition from manufacturing finance companies like Hero Fin Corp, Bajaj Finance, Honda Finance, TVS Finance, etc. The management will stagger its three-wheeler financing in view of the onslaught of mobile app-based taxis and increased three-wheeler competition. In view of this, Arman's new business in the three-wheeler segment could largely be derived from replacement demand. Blueprint The Company is strengthening its business, limiting its exposure to sectoral contingencies while remaining profitable. The two-wheeler business will continue to expand at a reasonable 10-15% across the foreseeable future. The management is considering limited bulk financing like dealer channel partnering, and securitisation, among others. It is also considering refinancing with MUDRA Bank for SME financing of sums between Rs.50,000 and Rs.5 lac. During FY16, Company is also expanding out of Gujarat for its two-wheeler division and opening branches in Indore (MP) and Ajmer (Rajasthan). Despite the subdued economic environment for the financial sector, Arman posted healthy business growth and improved profitability. So even as the income from operations grew by 20.96% over the brvious year, net profit accelerated faster by 35.96% over 2013-14. This was mostly due to the cost savings achieved due to economies of scale. Statement of Profit and Loss Income from operations: It grew by 20.96% from Rs.24.47 crore in 2013-14 to Rs.29.60 crore in 2014-15. Although overall interest rates declined, this growth was primarily owing to the strong increase in the microfinance vertical where business volumes increase due to the following: • A strong growth in the existing business from Gujarat • A geographic expansion into Madhya Pradesh contributed to business growth Due to increased competition in the asset-financing business, the Company strategically curtailed its resources towards that business. Net Profit: This grew by 35.96%, from Rs.4.53 crore to Rs.6.16 crore. This growth was primarily due to an increased asset and income base, a strong growth in the Microfinance segment of the business, especially the expansion into Madhya Pradesh. Employee benefits: Employee related expenses grew by 14.51% from Rs.4.55 crore in 2013-14 to Rs.5.21 crore in 201415 - primarily due to an increase in the team size to manage the fast expanding microfinance business -the Arman team increased from 317 members as on March 31, 2014 to 375 members as on March 31, 2015. But the productivity of the team (reflecting its efficiency) outweighed the expanded employee bill -average revenue (income from operation) and net profit per employee stood at Rs.7,89,638 and Rs.1,64,193 respectively in 2014-15 against Rs.7,72,027 and Rs.1,42,864 respectively in 2013-14. Finance cost: Interest expense increased by 17.65% from Rs.9.12 crore in 2013-14 to Rs.10.73 crore in 2014-15 consequent to increased disbursements and assets under management in the microfinance vertical. Assets under management increased 27% from the brvious year, which was mostly financed with debt. Going ahead, this coupon rate is likely to reduce due to the overall softening interest rates in the country and an improved credit rating for the Company. This should facilitate in improving the Company's profitability. Margins: Growing business volumes resulting in optimising costs and streamlining of business process facilitated in growth in business profitability - profit before tax increased by 38.83% from Rs.6.67 crore to Rs.9.26 crore in 2014-15. The net profit margin improved from 18.51% in 2013-14 to 20.80% in 2014-15. Balance Sheet Shareholders' fund: The balance under this head increased from Rs.33.71 crore as on March 31, 2014 to Rs.39.25 crore as on March 31, 2015 due to an increase in reserves and surplus. Reserves increased as the Company ploughed business profits into business. Debt portfolio: The outstanding debt (long-term, short-term, and working-capital) increased in relation to the increase in Loan Assets Under Management - from Rs.74.87 crore as on March 31, 2014 to Rs.92.66 crore as on March 31, 2015. As a result, the debt-equity ratio stood at 2.36x as on March 31, 2015 against 2.22x as on March 31, 2014. Of the total loans, the Company has a repayment liability of Rs.28.69 crore in the current year. Interestingly, the Company's debt portfolio shifted in favour of long- term debt - 24% of the total debt as on March 31, 2015 against 14% as on March 31, 2014. This strategic direction improved the asset-liability match and reduced the average interest cost of debt. As the corporate rating by CARE improved to investment grade, the Company could secure additional funds at lower interest rates and longer tenure. Loans and advances: This rebrsents the loans receivable by the Company from its customers - hence is the core of its business. The total under asset-backed loans increased from Rs.42.79 crore as on March 31, 2014 to Rs.46.32 crore as on March 31, 2015. The microfinance loans balance increased from Rs.45.56 crore as on March 31, 2014 to Rs.66.48 crore as on March 31, 2015. Asset-backed loans: The balance under asset-backed loans receivable was a mix between long-term and short-term in nature, short-term being the portion of loans payable within the next fiscal year. Microfinance loans: The balance under Microfinance-backed loans is largely short-term in nature to be recovered in a year. Trade receivables: The balance under this head increased from Rs.0.81 crore as on March 31, 2014 to Rs.1.23 crore as on March 2015. This head rebrsents EMIs due but not received from customers for its asset-backed loans and microfinance customers. Receivables outstanding for more than six months increased from Rs.0.42 crore as on March 31, 2014 to Rs.0.68 crore as on March 31, 2015. Managing business uncertainties Risk is the face of business uncertainty, affecting corporate performance and prospects. rman has always had a systematic approach to risk management. Its risk mitigation framework comprises studying emerging trends, conservative growth targets, framing policies and structured reporting, and most importantly, systems and controls. A disciplined approach, coupled with timely execution of proactive counter-measures, has strengthened the Company's viability across verticals, products, geographies and market cycles. Some key risks envisaged by the management are addressed below. Mitigation The microfinance space offers a huge growth opportunity. Consider this: The primary target of MFIs comprises 134.7 million 'deprived' households with an annual household income of less than Rs.112,000 and lacking access to essential financial services like credit, insurance and savings facilities. These households comprise 56.13% of the total households in India. Based on an average loan size of Rs.15,000, the total microcredit demand is estimated somewhere between Rs.202,050 crore and H673,500 crore (Source: National Survey of Household Income & Expenditure (2011), NCAER-CMCR). From a geographic perspective, of the 6 crore + population in Gujarat (as per the 2011 Census), around 57.40% live in rural areas; in Madhya Pradesh, about 72.37% of the 7 crore+ population live in rural areas - a sizeable opportunity for microfinance players. Consequently, the Company has put in place the necessary infrastructure and resources for registering a strong growth over the next two years. The Company has established a healthy brsence in Madhya Pradesh in 2014-15 and will continue to expand its footprint in other states over the coming years The Company's business growth could be impacted due to business concentration in one state and growing competition in that geography. Mitigation The Company has established a strong brsence in Gujarat with a network of 35 branches majority of which are in locations completely untouched by banks and other financial institutions. The Company has planned to strengthen its brsence in that state. Further, to de-risk the Company from an overt dependence on a particular geography, the Company established a meaningful brsence in Madhya Pradesh with 8 branches and 18 branches are all set to be established during the current year. The Company is also considering entering a new state for strengthening business growth during FY 2016-17. Mitigation The Company's microfinance business is based on the joint group liability concept where the inability of a loanee to pay the instalment is shared by other members of the group. This practice cushions the Company from the risk of non-payment. Moreover, the Company consciously abstains from providing a top-up or an emergency loan to its customers. This ensures there is no over-leveraging by customer. This is reflected in the Company's significantly low NPA of 0.11% and a Portfolio-at-Risk of 0.16% (as of March 31, 2015). The Asset Finance business is equally secure with the security of the hypothecated asset, post-dated cheques, security cheques, and very conservative underwriting principles. The NPA level is one of the lowest in the industry at 1.54% in this business vertical. Mitigation The Company's unique value proposition for its employees - free housing, frequent promotions, attractive bonuses and the responsibility to set corporate targets bottom-up - have ensured minimal attrition. The effectiveness of the Company's strategy is reflected in the following: • Average microfinance division disbursement per field officer increased from Rs.89 lac in 2013-14 to Rs.96 lac in 2014-15. • The Company implemented training and promotions from within; more than 90% of the middle management positions were filled through internal promotions. • Attrition of people with the Company for more than a year was less than 12%. • Average employee tenure in the Asset Finance business of those with the Company for more than a year was greater than five years The Company needs to remain cost-competitive to reinforce business profitability. Mitigation • The Company's thrust on providing larger ticket loans for longer tenures will facilitate reduction in the operating cost of the Company. • The Company's credit ratings were upgraded to an investment grade rating by CARE during the fiscal just passed, which will enhance its ability to garner funds in a cost-effective manner. The Microfinance grading was MFI-2, a notch below the highest level. • The Company implemented cost optimisation initiatives, complemented by growing volumes and scale economiesAs the Compan verge of its outstanding microfinance portfolio surpassing the H1 billion-mark, it has to maintain the margin cap of 10% so its profitability could be affected. Mitigation The Company currently has a margin cap of 12% size which will partially offset the drop in RoAs. which has resulted in significantly high RoAs. Economies-of-scale will also help the Company The Company is looking to increase its loan ticket increase efficiency and maintain RoAs. |