MANAGEMENT DISCUSSION & ANALYSIS

Global Economy

During 2015-16, global economic growth continued at a slow pace leaving the world economy more exposed to risks. Some of the factors for the lacklustre growth include a sharper-than-expected slowdown in China; return of financial turmoil in emerging markets; waning political solidarity in Europe and a persistent slump in oil prices. Global economic activity was muted with diminished growth in emerging markets for a fifth  straight year even as an uncertain recovery continued in developed countries. The Eurozone's economic recovery continued although overall growth remained subdued. Solid domestic data continued to drive the recovery while the external sector dragged on the economy's performance. The Japanese economy is struggling for growth against structural headwinds including a declining and aging population, weakening productivity, low return on capital, and high debt levels.

Indian Economy

In 2015-16, the Indian economy emerged as one of the few large economies with an encouraging outlook. The factors contributing to this positive outlook were controlled inflation, rise in domestic demand, increase in investments, decline in oil prices and the boost to reforms, among others. According to the IMF, India is set to become the world's fastest-growing major economy by  2016, ahead of China.

The economic fundamentals are showing healthy trends, which corroborates the expected growth in the economy. Inflation has been largely tamed. The investment cycle in India is showing positive growth and expenditure on consumption is increasing, although in a fluctuating trend. This growth is likely to be sustainable considering government's focus on industrial activities, infrastructure development and ease of doing business.

Budget 2016 is a good indicator of the government's intentions and plans. With the global economy fraught with uncertainties, it is commendable that the Indian Government is sticking to its fiscal deficit target while pursuing the growth agenda. Government targets to narrow the central fiscal deficit to 3.5% in 2016-17, after  having comfortably met its 3.9% target for 2015-16. While public investment and urban consumption were the major drivers for growth last fiscal year, a reinforcement of private investment and rural consumption is critical if growth is to remain strong in 2016-17 and 2017-18.

Indian Financial Services Industry

According to India Brand Equity Foundation, gross national savings in India are expected to reach $ 1,272 billion by the end of 2019. This in turn will trigger further savings and investments in Indian households, leading to their greater engagement.

Technology in financial services industry is getting dramatically transformed with several drivers responsible for the change. The willingness of consumers to use the technology for availing financial services is also a major facilitator of technological change.

In August 2015, the RBI granted licenses to 11 new payment banks. This marked a new revolution in the country's financial services sector. The move was to boost financial inclusion and up the ante of mobile revolution in the industry. The payment banking model will transform the way conventional banks approach customers. The risk to traditional banks right now is that the payment banks will track the entire transaction and customer engagement in parallel. Small and Medium Enterprises (SMEs) will have advantage going forward. SMEs play a major role in the development of economy and providing employment in developing countries. They contribute 33% of the Gross Domestic Product (GDP) in developing economies. As the barriers are being cleared, SME sector could experience substantial growth and offer expanded markets for financial services firms.

NBFC Sector

NBFCs are emerging as an alternative to mainstream banking. They are also emerging as an integral part of Indian Financial System and are contributing commendably towards Government's agenda of financial  inclusion. NBFCs in India have recorded marked growth in recent years. Between 2005 and 2015, their share of credit in India went up from 10% to 13%.  (Source: The Boston Consulting Group - NBFC 2.0).

The success of NBFCs has been driven by factors like their ability to control risks, to adapt to changes and create demand in markets that are likely to remain unexplored by bigger players. Thus the need for uniform practices and level playing field for NBFCs in India is crucial. NBFCs, in India, are today operating in a very dynamic scenario especially after the revised regulatory framework by the RBI launched with the objective of harmonizing working of NBFCs with banks and financial institutions and address regulatory gaps and arbitrage.

According to ICRA, retail credit of NBFCs as on 31st December 2015 stood at Rs. 4.7 trillion, showing a year-on-year growth of 18.8% as against 14.5% in 2015 and 9.5% in 2014. NBFCs are set to gather momentum in the CV segment and, given the anticipated pick-up in the overall business environment, will grow by 18-20% in 2016 and further by 19-22% in 2017, as against 14.5%  in 2015. However, the segments that could see subdued growth include tractors as lenders remain watchful in view of the weak rainfalls over the past three crop cycles. Further, credit off-take in the construction equipment (CE) segment is also expected to be slow in 2017 and will only pick up a bit when the steps initiated by the Government to boost infrastructure activity start giving results.

Government Initiatives

Several measures have been outlined in the Union Budget 2015-16 that aim at reviving and accelerating investment:-

The Prime Minister of India has launched the Micro Unit Development and Refinance Agency (MUDRA) to fund and promote Micro Finance Institutions (MFIs), which would provide loans to small and vulnerable sections of the business community.

$ Government of India's 'Jan Dhan' initiative for financial inclusion is gaining momentum, as the number of bank accounts opened by July 15, 2015 has more than doubled to 169 million from 68.7 million at end of October 2014. Government of India aims to extend insurance, pension and credit facilities to those excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY).

NBFCs shall be eligible for deduction to the extent of 5% of their income in respect of provision for bad and doubtful debts (NPAs).

FDI will be allowed beyond the 18 specified NBFC activities in the automatic route in other activities which are regulated by financial sector regulators.

The Pradhan Mantri Mudra Yojana (PMMY) was launched for the benefit of bottom of the pyramid entrebrneurs. Banks and NBFC-MFIs have reported that the amount sanctioned under PMMY had reached about Rs. 1 crore to over 2.5 crores  borrowers by early February 2016, while the target next year is raised to Rs. 1,80,000 crores.

Investment limit for foreign entities in Indian stock exchanges will be enhanced from 5 to 15% on par with domestic institutions.

It is proposed to provide additional options to banking companies and financial institutions, including NBFCs, for reversal of input tax credits with respect to non-taxable services provided by them by way of extending deposits, loans and advances with effect  from 1 April 2016.

The first home buyer is given deduction for additional interest of Rs. 50,000 per annum for loans up to Rs. 35 lacs sanctioned during the next financial year provided the value of the house does not exceed Rs. 50 lacs.

NBFC SECTOR GROWTH DRIVERS

Automotive

Indian automobile industry is gearing up for good times after a long period of uneven and jaded performance. Indian automotive industry is expected to witness high growth in Passenger Vehicle (PV) over the period 2016­20 as the economic environment improves amid a strong reform push by the new government. This growth is brdicted in view of positive GDP growth and lauch of several new country specific models along with high technology adoption by automotive industry.

According to the Society of Indian Automotive Manufacturers (SIAM), Indian automotive sector today is a $74 billion industry and by 2026, it is expected to achieve a turnover of $300 billion clocking a CAGR of 15%. Government of India aims to make automobile manufacturing the main driver of 'Make in India' initiative as it expects passenger vehicles market to triple to 9.4 million units by 2026 as highlighted in the Auto Mission Plan (AMP) 2016-26.

Housing Finance

India is expected to emerge as the third largest economy in the world by 2030 with an estimated 590 million people inhabiting the cities. The launch of "Housing-For-All by 2022" scheme in 2015 signalled a new era in the housing finance sector. It provided much-needed impetus to the real estate and housing finance industry by creating an enabling and supportive environment for expanding credit flow and increasing home ownership. The agenda of 'housing for all' is a key component of the government's strategy for making Indian cities inclusive and productive.

According to ICRA, the total housing credit outstanding as on 31st December 2015 crossed Rs. 11.9 trillion showing a growth of 18% in the 9 Month period of 2016 as compared to Rs. 10.5 trillion as of 31st March 2015. The growth was seen from second quarter onwards and was driven by disbursements against construction linked loans, growth in the small ticket affordable housing segment and demand from Tier II and Tier III cities.

The growth during the year 2015-16 was fairly broad based with a keen focus on affordable housing. Housing Finance companies were at the forefront in catering to the financial needs of the under-banked masses in the rural and semi-urban areas through strong linkages with these segments. Housing finance companies also gained market share during the period which can be attributed to large population base, rising income levels and rapid urbanisation.

Many new initiatives and policies focused on lending for housing were introduced in the last 12 months. The highlight was to bring housing loans of up to Rs. 50 lacs under affordable housing and bringing loans up to Rs. 28 lacs in urban and Rs. 25 lacs in other centres under Priority Sector Lending. The decision of the RBI to increase LTV ratio to 90% for loans up to Rs. 30 lacs or less was another positive step which will enable companies to lend more to customers desirous of owning a home.

Tractor

The volumes of domestic tractor industry continued to be under brssure in 2015-16, resulting in decline of 12.1% on a year-on-year basis in April-February 2016. Some of the reasons for this low performance include weak farm sentiments, a result of stressed farm incomes on account of successive crop failures, a second consecutive year of weak south-west monsoon and a modest increase in Minimum Support Price (MSPs) of various crops. Additionally, non-agricultural demand has remained weak and a slow pick up in infrastructure and construction activities constrained demand for transport purposes.

The domestic tractor market has chiefly remained a medium HP market, with more than 80% of the total tractor sales being that of models in 31-50 HP range. The 41-50 HP segment continues to remain the most favoured segment, with about 45% of the domestic sales of tractors in the 10 month period of 2015-16 being covered by this segment alone. The inclination to medium HP tractors can be assigned to both suitability of medium HP tractors to a large addressable geographic region and their affordability vis-a-vis higher HP tractors.  Source: ICRA

Infrastructure and Real Estate

The Indian Infrastructure and Construction Sectors have grown out of their nascent stage. For the past few decades, both government as well as private developers are targeting projects which were easy to execute and provide maximum economic benefit. Greater impetus to develop infrastructure in the country is attracting both domestic and international players. Private sector is  emerging as a key player across various infrastructure segments, ranging from roads and communications to power and airports. The construction equipment industry is expected to nearly double to around $ 5 billion by 2019­20, according to the Indian construction equipment manufacturers association (ICEMA).

2015-16 witnessed a number of government initiatives to further push the real estate and infrastructure sector in right direction:-

Relaxation of foreign direct investment (FDI) norms. 3 Clarifications about Real Estate Investment Trusts  (REITs).

Approval of the Real Estate (Regulation and Development) Bill by the Cabinet.

Launch of Smart City campaign announcing first 20 cities to be developed under Smart Cities Mission.

Capital expenditure outlays on the Railways and roads to touch Rs. 2,18,000 crores by 2016-17.

Total outlay for infrastructure is Rs. 2,21,246 crores.

 Central Government to draw a plan to revive 160 un-served or underserved airports to enhance local connectivity.

An initiative to transition infrastructure projects into a new credit rating system which will enable correct risk analysis of such projects, resulting in efficient loan funding.

Mutual Fund Industry

The mutual fund industry continued to post gains in  2015-16, with its Assets Under Management (AUM)  touching Rs. 13,58,559 crores in the quarter ended March 2016. According to Association of Mutual Funds of India (AMFI) the average AUM of Mutual Fund industry rose by Rs. 1,63,940 crores or 13.7%, primarily driven by record net inflows into equity mutual funds and strong inflows into balanced, income and liquid schemes. The retail investors continued to invest in mutual funds despite weak markets over the last year .

Assets (or MF business) from India's smaller cities and towns, called B-15 cities (beyond top 15 cities, or T-15), grew 15.4% in 2016 to Rs. 2.19 lacs crores from Rs. 1.9 lacs crores last year. Assets from T-15 stood at 11.3%; total asset growth was 12%.

Outlook

The outlook for the sector over the next year looks comparatively better on account of positive trend of growth in economy which is expected to boost credit demand. This, along with renewal of certain infrastructure projects which have been cleared by the cabinet committee in recent months and rise in industrial growth and corporate capital expenditure also is expected to benefit most of the commercial assets financed by the NBFCs. It is also expected to ease the brssure on the cash flows of their borrowers through improved utilisation of their assets. Going deeper across the country's unbanked regions, we at MMFSL, are optimistic that we would continue to address a wider customer base through our extensive operational  network. We shall continue to expand our loan book and monitor our margins to ensure sustainable stakeholder returns.

Company Overview

Mahindra & Mahindra Financial Services Limited (MMFSL) is a subsidiary of the Indian conglomerate, Mahindra & Mahindra (M&M). It is a leading Non-Banking Financial Company (NBFC), catering to the financing needs of the large population residing in rural and semi-urban areas of India. We provide a range of retail products and services, such as financing utility vehicles for commercial use and personal use, tractors, SME loans, and many other commercial products

Recognising the demand in niche segments, we have introduced Mutual Fund Distribution, Fixed Deposit Schemes and Personal Loans.

Through a vast network of 1,167 offices and human resource strength of over 15,000 employees, Mahindra Finance has established more than 4.1 million customer relationships across India. Mahindra Finance has financed assets of about 26,706 crores, generated income of 5,90,510.05 lacs and PAT (Profit after Tax) of 67,259.60 lacs.

Credit Ratings

India Ratings has assigned 'IND AAA'/Stable, CARE Ratings has assigned CARE AAA, Brickwork has  assigned BWR AAA/Stable and CRISIL has assigned  "CRISIL AA+/Stable" rating to the Company's long term and subordinated debt.

Key Competitive Advantages

Diversified Product Portfolio: Mahindra Finance has a large diversified product portfolio including vehicle financing, SME financing, Personal loans, mutual fund distribution, insurance broking and housing finance, serving varied needs of both rural and urban customers across the country.

Quality service: Mahindra Finance provides financial services through simple processes and procedures in sanction and disbursement of credit as well as timely, friendly and flexible terms of repayment aligned to the unique features of its clientele. Easy and fast appraisal and disbursements make the Company the brferred choice for many of its customers.

Round the corner: An established reach and network helps the Company to cater to the remotest of geographies in India. More than 90% of the unorganised sector has no link with banks and 60% of the rural consumers do not have bank accounts. The Company has significant business brsence in semi-urban and rural areas.

Customer Insight: Focus on customer is one of the key factors that have driven the Company policies all these years. A strong business model and an insight in the needs of its customers give the Company a competitive edge. Better risk management has also contributed in Mahindra Finance achieving commendable growth.

Strong Balance Sheet: On the asset side, loans and advances make up nearly 92.6% of the total assets of the Company. This primarily includes auto loans. Most of  these loans are retail loans, and therefore are sbrad over a large customer and geographic base.

Consistent innovation: Our technology deployment has resulted in superior sales productivity, better market coverage, improved channelisation and customer experience.

Transparent approach: We have always valued transparency while engaging with employees, investors, business associates and a wide fraternity of stakeholders.

Operational Review

The key operational highlights during the year are as below:

3 Opened more branches at the village level to remain close to customers, to understand their cash flows and approach the customer for recovery when he has the money. These branches will seize new opportunities when the economic cycle and farm cycle improve.

3 Increased number of offices to 1,167 as on 31st March 2016, up by 5.32% from 1,108 offices as  on 31st March 2015.

3 Increased employee base to 15,821 as on 31st March 2016 as against 14,197 as on 31st March 2015.

3 Total Income increased to Rs. 5,905.10 Crores in 2015-16 from Rs. 5,585 Crores in 2014-15, an increase of 5.73%.

3 Assets Under Management (AUM) raised to Rs. 40,933 Crores from Rs. 36,878 Crores in 2014­15, an increase of 11%

3 The customer base reached 4.1 million people, from 3.63 milllion in 2014-15, an increase of 12.95%

The Company has always been following norms that are more prudent than those brscribed by the RBI. The Company has put in place processes to meet the RBI's new regulations.

Financial Review

The following table brsents MMFSL's standalone abridged financials for the financial year 2015-16, including revenues, expenses and profits.

Risk Management

MMFSL has formulated a robust Enterprise-wide Risk Management program (ERM) which involves risk identification, risk assessment and risk mitigation planning for business, strategic, operational, financial and compliance related risks. The ERM framework has been deployed across various processes in the organisation and is governed by the corporate risk office. A robust internal check process is deployed to brvent and limit risk of non-compliance.

Human Resource

MMFSL believes in taking care of its employees and ensuring that their career aspirations are met through professional growth, personal development and fair economic rewards. Thereby, giving rise to the Employee Value Proposition (EVP):

Growth is a Way of life

Employees are empowered

People Matter

The Mahindra Finance Human Resource Management focuses on the following processes:

Talent Positioning: It is based on the Business Plan followed by effective identification and placing of the right talent in the right position.

Talent Development: The development initiatives and competency development plans leads to an increased capability and improved productivity.

Talent Management: Career growth map for all roles in the organisation are defined and High Potentials are identified based on published criteria.

Succession Planning: It is implemented and measured through identification and development of successors for all critical roles.

Employee Engagement Process: It continuously strives to make the organisation a great place to  work through creating a happy & engaged workforce. The organisation has implemented a wide range of programs, to effectively engage the employees.

9 Quality Management: Quality is a way of life at Mahindra Finance. In line with the core Value - "Quality Focus" and the continuous quest for excellence, the organisation benchmarks itself with the best practices both at industry level and at the group level. Mahindra Finance has been certified by CMMI Institute LA at People Capability Maturity Model (PCMM) Maturity Level 3.

In addition to the above, MMFSL upholds the dignity of all its employees and enables them to flourish in an inclusive environment. The organisation believes that diversity and inclusion rebrsents business and economic potential, therefore, it ventures out exploring opportunities to make the work environment more sensitive and inclusive towards its diverse employee composition. The organisation is currently striving to create diversity through the spectrum of Gender, Generation, Differently Abled Diversity and Race / Religion.

Information Technology

In the past year, MMFSL moved up the maturity curve of systems leverage. Exclusive systems training content was created and over 10,000 employees were trained in requisite systems; systems usage has increased by over 30%. Network connectivity has been enhanced to reach about 800 branches, with a large increase in bandwidth. Mobility has been leveraged through apps for customers and field processes. The usage of a new, mobility based lead capture cum loan origination system has begun in select regions and the learning has been incorporated into the subsequent phases of rollout. Technology solutions to implement smart branches, new accounting standards, collection campaigns, asset recovery etc have been launched successfully. Communication among employees has been improved by expansion of the video conferencing and webcast services. Outsourced services are being leveraged to leverage specialised skills and better service levels. Investments have been made in state-of-the-art IT infrastructure and security solutions.

Internal Control

The Company has put in place an adequate internal control system to safeguard all assets and ensure operational excellence. The system also meticulously records all transaction details and ensures regulatory compliance. The Company also has a team of internal auditors to conduct internal audit. Reputed audit firms also ensure that all transactions are correctly authorised  and reported. The reports are reviewed by the Audit Committee of the Board. Wherever necessary, internal control systems are strengthened and corrective actions initiated

Cautionary Statement

Certain statements in the Management Discussion and Analysis describing the Company's objectives, brdictions may be "forward-looking statements" within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates, new regulations and Government policies that may impact the Company's business as well as its ability to implement the strategy. The Company does not undertake to update these statements.