MANAGEMENT DISCUSSION & ANALYSIS

ECONOMIC OVERVIEW

The Indian economy began on an optimistic note in FY 2014-15. One crucial trigger was the general election, held in May 2014, which culminatedina majority man date for the NDA government. This boosted investor and business confidence, which hinged on expectations that the brvalent policy paralysis would finally be lifted. Another factor that contributed to the buoyant mood during the year was the steady moderation in headline inflation, which resulted from a persistent decline in crude prices and a fall in global prices of base commodities. In response to falling inflation and stability in other macroeconomic indicators, the Reserve Bank of India (RBI) cut the repo rate twice, by a total of 50 basis points, bringing it down to 7.50% and signaled a softening in its monetary policy stance. This has fueled hopes of further easing and would result in a boost to business activities with a marginal lag.

Both the Budgets brsented by the incumbent government - the interim Budget in June 2014 and the Union Budget in February 2015 - were well received. Their focus on Infrastructure and Housing, Financial inclusion and the thrust on boosting industrial growth through the 'Make in India' program also ignited positive sentiments in individuals and businesses. As per the Economic Survey, the economy which grew at 5.1% in FY 2012-13 and 6.9% in FY 2013-14 [Gross Domestic Product (GDP) at constant market prices; base year FY 2011-12] was projected to touch 7.4% in FY 2014-15. This will augment per capita income at constant prices by 6.1% during FY 2014-15 as compared to a rise of 5.4% in FY 2013­14, and translate into greater disposable incomes.

Looking ahead, the Economic Survey 2014-15 suggested that in Fiscal 2016, GDP could grow at anywhere between 8% and 8.5% during FY 2015-16 on the back of favorable oil prices, buoyant capital flows, favorable reforms undertaken by the government, monetary easing and tax cuts.

SECTOR OVERVIEW

Given the market environment, the financial sector has been undergoing some structural changes in terms of the composition of providers of finance. The NBFC (Non-Banking Financial Company) segment has witnessed considerable consolidation, with the number of companies declining steadily over the past seven years from 12,968 in FY07 to 12,029 in FY14. At the same time, there has been a marked decline in non-performing assets - both gross and net, indicating that the segment has only become more robust.

Concurrently, the assets of the NBFC segment have been growing steadily, climbing from Rs. 3,17,900 crores in FY07 to Rs. 12,70,100 crores in FY14. The return on these assets has remained relatively stable and at a higher level than that of banks.

NBFCs - PERFORMANCE AND REGULATORY ENVIRONMENT

Over the past few years, the significance of NBFCs has been growing, both in terms of funding as well as reach. From 10.7% of banking assets in FY09, this category of lenders increased its brsence to 14.3% in FY14 on the strength of its competitive advantages, including focus on niche segments, expertise in specific asset classes and growing penetration into unbanked and rural markets. On the other hand, the growth in non-food  credit and bank credit to commercial sector from scheduled commercial banks has been displaying a definite downward trend since the second half of FY14.

Based on the segments they cater to, NBFCs can be classified into eight broad categories.While Housing Finance Companies (HFCs) are regulated by the National Housing Bank (NHB), all institutions falling into the other seven categories come under the purview of the Reserve Bank of India (RBI).

MSME SECTOR AND NBFCS

The Micro, Small and Medium Enterprise (MSME) sector is crucial to India's economy as it accounts for 45% of the country's industrial output and 40% of its exports and employs over 70 million people in about 30 million units. Although 94% of MSMEs are unregistered, the contribution of the sector to India's GDP has shown a consistent increase of 11.5% a year, which is higher than the overall GDP growth of 5.5-7%, in recent times. MSME sector is important for the national objective of growth, equality and inclusion.

In a recent survey by the International Finance Corporation (IFC), about 28% of respondents cited lack of timely and adequate finance as a major challenge to this segment. Financial institutions have limited their exposure to the sector due to a higher risk perception and limited access of MSMEs to immovable collateral.

These constraints notwithstanding, the sector offers humungous opportunities for growth. According to a study by the International Finance Corporation, titled A Research Study on Needs, Gaps and Way Forward, "There is a total finance requirement of Rs.32.5 trillion ($650 billion) in the MSME sector, which comprises Rs.26trillion ($520 billion) of debt demand and Rs.6.5 trillion ($130 billion) of equity demand." In FY15, the new government undertook a number of initiatives to promote funding to this segment, including opening payment banks, setting up MUDRA bank with a corpus of Rs. 20,000 crores.

Real Estate sector and NBFCs

The real estate sector is of strategic economic importance to India. It is the second largest employment generator, after agriculture, and contributes about 6.3% to India's GDP. According to a study Indian Real Estate Industry Analysis -October 2014 by the India Brand Equity Foundation (IBEF), this sector is growing at a compound annual growth rate (CAGR) of 11.6% and is expected to post annual revenues of US$ 180 billion by FY20, against US$ 66.8 billion in FY11.

A number of factors have been instrumental in the rapid development of this sector in recent times. These include higher levels of income and purchasing power, growing need for entertainment, leisure and shopping, the government's focus on infrastructure development, rapid urbanization driven by rural-urban immigration and an emerging trend of nuclear families. Greater availability of loans to finance residential and commercial purchases has also contributed to the growth of this sector.

Despite its significance and growth, this sector has not yet been awarded industry status and, as a result, often suffers from inadequate funding. Bank funding, at 12-14%, is the cheapest source of funds for the real estate sector. However, due to end-use restrictions and close scrutiny of the use of these funds in construction, the real estate sector has not been able to extensively use these funds for growth capital, such as land acquisition. According to data from the Reserve Bank of India (Deployment of Gross Bank Credit by Major Sector), bank credit exposure to the real estate and housing sector as a percentage of Gross Bank Credit declined from 10% in FY10 to 8.1% in FY14. This has resulted in significant opportunities for NBFCs to tap this sector.

NBFCs have been actively pursuing last mile funding opportunities, especially in projects with substantial investments but inadequate 'last mile funding. While NBFCs typically charge around 18-19% for early stage financing and 15-16% for inventory financing, Private Equity firms charge much more at 25-30%. It is this combination of willingness to fund, coupled with mid-range interest rates that make NBFCs a popular funding option for real estate projects.

Revised Regulatory Framework

The Reserve Bank of India (RBI) has notified new norms for the regulation of NBFCs in a bid to strengthen the structural profile of companies in this sector, while safeguarding the interests of the depositors and other stakeholders. In November 2014, RBI issued the 'Revised Regulatory Framework for NBFCs', tightening rules related to minimum net owned funds, deposit acceptance ratio, capital norms, asset classification rules and corporate governance norms. This new regulatory framework will strengthen the balance sheets of NBFCs as it mandates an increase in tier I capital requirements for both NBFC-SI (i.e. systemically important NBFCs) and NBFC-D (i.e. deposit accepting NBFCs). It will also restrict leverage for smaller NBFCs, as their core tier I requirements will now be as high as those of banks under the Basel III guidelines. Where NPA recognition norms and provisioning on standard assets are concerned, banks and NBFCs will come at par by FY18. The augmented disclosure requirements and corporate governance norms will also improve the transparency levels of NBFCs, besides increasing the accountability of their management and board, while also improving investor awareness.

Overall, the revised regulations are a sound step for the NBFC sector. In fact, at the current juncture, their profitability levels will be able to absorb the impact of additional provisioning requirements. At the same time, the sector will become structurally stronger, more transparent and make it more resilient to economic downturn and enhance stakeholder confidence.

To further fortify the NBFC sector, in the Budget, the finance minister proposed that NBFCs with assets of Rs. 500 crores and above be allowed to use the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002, like any other financial institution. This move will help bring about parity in regulation for NBFCs registered with the RBI and other financial institutions like Banks, in matters relating to recovery.

BUSINESS OVERVIEW

Capri Global Capital Limited (CGCL) / 'Company' is a NBFC-ND-SI registered with RBI, with a net worth of Rs. 1,03,313.84 lacs and extensive brsence across the country in major metros and tier I towns, including Mumbai, Bengaluru, Pune, Chennai, Ahmedabad, Surat, Rajkot, Ludhiana and the NCR.

The Company's Wholesale Lending (WL) vertical focuses on meeting the needs of developers in the real estate sector, particularly for residential projects. It offers them combrhensive financial solutions that facilitate the entire real estate transaction cycle. WL division has adopted the model of asset-based lending, which are meant for construction. However, CGCL also offers tier I developers and existing customer loans for general corporate purposes.

CGCL's Wholesale Lending business continued at a steady pace over the brvious year with an aggregate disbursement of Rs. 21,075.00 lacs.

As part of its diversification and growth plans in alignment with the RBI and government focus on the MSME space, CGCL launched its MSME vertical in January 2013 with an objective of creating a niche for itself as a MSME focused financier, bridging the unfunded gap that existed between MSME borrowers and traditional fund providers. The endeavor has resulted in the creation of a book worth Rs. 44,592.37 lacs as of March 31, 2015 which rebrsents a growth of 93% over the brvious year. Company has operationalized its five new branches for developing its MSME business in Rajkot, Surat, Pune and two in Delhi, and disbursed Rs. 30,586.91 lacs through the branch network sbrad over ten locations, which translates into a growth of 26.40% in disbursements over the last year.

The Company successfully built its MSME vertical during the year under review while sustaining the performance of the Wholesale Lending vertical, which remained focused on the residential realty space.

The Company has continued with its strategy of having a well diversified loan portfolio with a healthy mix of MSME and Wholesale Lending. Funds deployed in the MSME business have steadily grown over the last four years and constitutes 46.86% of the total loan book of the Company.

Notwithstanding some improvement in the macroeconomic indicators, FY 2014-15 was an extremely difficult year for the financial sector as interest rates plateaued and the monetary policy remained tight. These conditions had an adverse impact on the margins and profitability of most of the companies in the financial space. Despite the trying conditions, CGCL delivered improved results with increased disbursements and negligible delinquencies. Its robust risk management systems, innovative business development strategy and ability to diversify its loan portfolio enabled the Company to deliver sustained growth.

The revenues of the Company increased by 15.64% to Rs. 19,216.08 lacs during the year due to larger deployment of funds, recovery of dues and negligible delinquency in loan portfolio.

The Net NPA to Net advances decreased from 4.92% to 0.88% during the year, which in value terms decreased from Rs. 3,600 lacs to Rs. 834 lacs.

The Profit before Debrciation & Taxes (PBDT) was Rs. 13,946.47 lacs as against Rs. 12,512.79 lacs in the brvious year, registering an increase of 11.45%. Net Profit increased by 4.12% to Rs. 8,518.33 lacs as against Rs. 8,176.01 lacs in the brvious year.

The basic EPS for the year was Rs. 24.33 per share as compared to Rs. 23.38 per share in the brvious year registering a growth  of 4.06%.

OUTLOOK

The Company will continue to build the MSME lending business by expanding its branch network in tier II and tier III locations and steadily grow the Wholesale Lending business.

Company's growth objectives are in alignment with the government's initiatives to promote small and medium enterprises and its multi-pronged approach to augment the housing base in the country and develop smart cities.

This strategic approach will enable the Company to deliver increasingly stable returns for its stakeholders, irrespective of monetary cycles.

RISKS AND CONCERNS

In the financial services sector, it becomes imperative to ensure that profitability does not come at the cost of asset quality. The Company has put in place adequate risk identification, risk management and mitigation processes to keep any such trade-off at bay. The Company has built robust systems and processes for both its verticals i.e. MSME and Wholesale Lending, to take care of the respective risks associated with them. It is also constantly gauging the external macroeconomic environment, market conditions, and government policies to ensure that the business is one step ahead of the industry and monetary cycles, thereby insulating the Company from downtrends and enabling it to ride uptrends.

Nevertheless, there are certain fundamental risks glued to lending business such as Credit Risk, Business/Market Risk and Operational Risks. The Company has instituted clear strategies to mitigate these:

Credit Risk

The Company maintains a well-diversified and balanced credit portfolio with a low risk profile, wherein the entire loan book is fully collateralized and sbrad across sectors and lending segments. The credit appraisal system adopted at the Company, both for MSME and Wholesale Lending, is one of the best in the industry. Selection of borrowers after thorough screening of creditworthiness and then exhaustive credit appraisal, mitigates the credit risk to the bare minimum. During the year, the Wholesale Lending vertical of the Company has implemented an all-inclusive internally developed 42-point risk rating model for assessing the risk profile of proposed borrowers most objectively and in line with its business principles and objectives. Credit risk does not end at good br-sanction appraisal. To maintain the asset quality throughout the tenor of the loan, and to avoid delinquencies, the post disbursement monitoring of the loan account is equally important. The Company continues to monitor credit exposure post disbursement through a very active monitoring mechanism via dedicated teams, in both the business verticals, to ensure end use of funds lent, maintenance of asset financed, monitoring continuity/ progress of project/business underwritten and timely recovery of principal and interest.

Business Risk

Business risk pertains to bearing of peripheral factors on business profitability and continuity. These risks are basically Interest Rate Risk, Eco-political Risk and Competition Risk. Asset Liability Management Committee ('ALCO') meets every month to take stock of the developments in economy, financial markets, including trends in interest rates and its impact on the portfolio. ALCO also regularly deliberates on the funds' management of the Company. The Company has a dedicated research team, which keeps a constant vigil on the developments in the market and the economy. Carefully chosen business segments i.e. funding to residential real estate and MSMEs, would provide risk balanced secured returns over a longer period of time.

Operational Risk

The business model, both for MSME and Wholesale Lending, is such that there are enough checks and balances to ward off any operational risks. Apart from its three independent business functions, viz., sourcing, underwriting and post money monitoring, CGCL has a full-fledged Internal Audit and Inspection Division. The Company has in place systems and procedures that enable monitoring of all activities on a real time basis. All operations are fully computerized, leaving very little scope for human error or intervention. IT architecture/ infrastructure put in place ensures seamless operations on a continuing basis. Attrition at the Company is much below the industry average. Company has transparent HR policies and has in place second line of domain leaders and adequate redundancy to cope with attrition that it faces. The Company stringently adheres to regulatory guidelines and proactively brpares for any impending changes.

INTERNAL CONTROL SYSTEMS AND THEIR

ADEQUACY

CGCL has employed appropriate and adequate internal control systems to ensure the protection of all its assets. These controls are backed by full authorization, recording and correct reporting of all transactions. Further, there is a series of regular internal audits and checks that are carried out to ensure that approved activities are executed in line with policies and processes and those systems are adequately strengthened to ensure compliance. The Company also undertakes process and system audits across functions to ensure that its policies and systems are adhered to in letter and spirit.

The Audit Committee of the Company oversees the internal audit function as well as the internal control systems and procedures to ensure that business is conducted efficiently. The Company maintains adequate internal control systems, which are designed to provide assurance regarding the efficacy of operations, the adequacy of safeguards of assets, the reliability of financials controls and compliance with applicable laws  and regulations. It has also implemented suitable controls to ensure all the resources are utilized optimally, that financial transactions are reported with accuracy and that there is strict compliance with applicable laws and regulations.

Lastly, the Company uses insurance as risk transfer tool. During the year, insurance cover was taken to transfer risks of fire and theft of assets of the Company, as also towards Directors' and Officers' liabilities.

HUMAN CAPITAL

As CGCL continues to integrate continuous improvement into business planning, human resources play a critical role in ensuring that it has a high-performing and engaged workforce equipped to deliver results.

The Company believes that its success depends on the high level of skills and professionalism of its people and makes continuous endeavor to improve their efficiency through training and reward programs. The focus during last year was primarily on implementing sustainable leadership and succession planning strategies for building a collaborative work culture.

The Company continuously recruits and retains personnel who possess the competencies and skills required for effective implementation of its strategies and plans. The Company's Remuneration Policy is designed to attract, motivate and retain manpower in a competitive environment considering qualification, positive attribute, integrity and independence. In addition, the Company has adopted innovative and competitive ways to recognize and reward employee performance.

An open door culture with transparency at all levels within the organization has been the Company's USP in hiring and retaining talent giving it an edge over the competition.

As of March 31, 2015, the Company has a total of 216 employees as compared to 142 during the last year. Of these, 20% are professionally qualified and the average age of the executive staff is 33 years. Over 55% of the employees are hired through employee referrals and the attrition rate for FY 2014-15 was 13.2% compared to 18.7% last year, translating into a reduction of around 42%.

CAUTIONARY STATEMENT

The statements made in this report describe the Company's objectives and projections that may be forward-looking statement within the meaning of applicable laws and regulations. The actual result might differ materially from those exbrssed or implied depending on the economic conditions, government policies and other incidental factors which are beyond the control of the Company. The Company is not under any obligation to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments, information or events.