MANAGEMENT DISCUSSION AND ANALYSIS During the year, Bajaj Finserv Ltd. ('Bajaj Finserv' or 'the Company') became a Core investment Company (CIC) under the regulations of the Reserve Bank of India (RBI). it is the holding company for the various financial services businesses under the Bajaj Group. it serves millions of customers in the financial services space by providing solutions for asset acquisition through financing, asset protection through general insurance, family protection and income protection in the form of life and health insurance and retirement and savings solutions. More specifically, the areas are: Lending • Bajaj Finance Ltd. (BFL), is a company listed on The Stock Exchange, Mumbai (the BSE) and the National Stock Exchange (NSE). During the year BFL made a Qualified institutional Placement (QiP) of Rs. 1,400 crore; and further raised Rs. 102 crore by way of warrants issued to the Company, which was 25% of the payment due on the convertible warrants issued by BFL to Bajaj Finserv. As a consequence, Bajaj Finserv's holding in BFL, which was 61.53% at 331 March 2015, became 57.28%. When the warrants are exercised, Bajaj Finserv's holding in Bajaj Finance Ltd. will increase to 58%. Protection and Savings • Life insurance and retirement plans through Bajaj Allianz Life insurance Company Ltd. (BALIC). • General insurance including health insurance through Bajaj Allianz General insurance Company Ltd. (BAGIC). BAGIC and BALIC are both joint ventures with Allianz SE, one of the world's leading — composite insurers. As on 31 March 2016, the Company held 74% of the equity capital in BAGIC and BALIC, the balance being held by Allianz. Bajaj Finserv also has investments in renewable energy in the form of 138 windmills situated in Maharashtra with an aggregate installed capacity of 65.2 MW. The financial year 2015-16 (FY2016) began on a positive note with high expectations of a robust economic performance, given the various initiatives announced by the Central Government coupled with a growth in gross value added (GVA), low oil prices, significant drop in inflation levels, reduced policy rates and a comfortable current account deficit. The RBI also cut interest rates by 100 basis points between April 2015 and April 2016. These did translate to a real GDP growth of 7.6% for FY2016, and a growth of real GVA of 7.3%, as per the advance estimates released by the Central Statistical Office of the Government of india. it is a fact that such growth is the highest compared to all developed countries and major emerging markets including China. However, it is also true that we have not seen concomitant credit growth, which remained at its lowest level in many years. Thanks to lack of overall demand, capital investments by the corporate sector continued to remain sluggish. Despite favourable liquidity conditions and lower interest rates, banks have found it difficult to increase lending as they have struggled with large non-performing assets (NPAs) from their loan books. Moreover, a second consecutive year of poor monsoons, weakening currency and falling exports due to deflationary conditions in many importing countries dampened economic sentiments. Overall, the key factors that drive our businesses — credit growth, capital investments and savings — were muted, resulting in another challenging year despite real macroeconomic growth in excess of 7%. Under these conditions: • BFL has performed extraordinarily well and has been able to continue the stellar growth that it has been delivering over the past few years; • BAGIC has also done well, growing by 12% in a generally muted market; and • BALIC, which has been facing growth challenges, modestly grew its new business brmium. Lending Bajaj Finance Ltd. (BFL) Over the last few years, BFL has established itself as one of the brmier non-banking financial companies (NBFCs) in India. It has consciously built a diversified lending business covering retail consumers, small and medium enterprises and commercial borrowers. The business model of BFL is built on well-defined customer segmentation, multiple product offerings and extensive use of data analytics within a robust risk management and operational excellence framework. BFL had a strong year aided by a diversified product mix, robust volume growth, prudent operating cost management and low NPAs. With assets under management of H 44,229 crore, BFL has emerged as one of the leading NBFCs in the country. The Company delivered strong all-round results in FY2016, the highlights of which are given below. BFL focuses on six broad categories: (i) Consumer lending, (ii) SME lending, (iii) Commercial lending, (iv) Rural lending, (v) Fixed deposits; and (vi) Value added services. Chart A depicts BFL's assets under management (AUM) over the last five years, while Table 1 gives its break down across major business verticals. Business update Consumer lending • BFL is one of the largest consumer durable lenders in India. Present in 192 cities and over 9,200 points of sale across the country, it deployed Rs. 12,972 crore in FY2016 — registering a growth of 29% over the brvious year. Its unique Existing Member Identification (EMI) card, with a base of over 5.6 million, enables customers to avail instant credit after the first purchase. In April 2016, BFL has expanded its EMI card proposition with finance offerings in retail fashion, travel and small appliances. • Operating at the brmises of 3,500 Bajaj Auto dealers and sub-dealers across the country, BFL is the largest financier of Bajaj motorcycles and three-wheelers in FY2016. Its unique Direct Cash Collection (DCC) model in rural and semi-urban markets enabled customers with no banking habits to repay their EMIs in cash. • BFL launched a first of its kind consumer durable mobile app for its customers in FY2016. This app provides the customer ease and convenience of 'anytime anywhere' loan approval with minimal data entry, and is available across all mobile platforms. • Over the years, BFL has expanded its consumer durable financing to digital and lifestyle products. It has tied up with leading global manufacturers for its digital products financing. It has rolled out lifestyle products financing (for furniture, home furnishings, etc.) and digital product financing nation-wide across some 6,400 dealer counters. • An e-commerce finance business was launched with a 'Seller Finance' offering for registered sellers of Flipkart and Snapdeal in FY2016. This offers customers the ease and convenience of EMI-based purchasing on the online platforms. • Personal loans cross-sell and salaried personal loan deployments increased, respectively, by 63% and 75% over FY2015. SME lending • SME lending offers secured and unsecured loans to its customers. Secured lending is done through three product offerings: loan against property, lease rental discounting and home loans. During the year, BFL transitioned its retail mortgage business to a 100% 'Direct to Customer' model, to lower costs and build sustainable return on equity. • Unsecured lending is done through two product offerings: business loans and professional loans. During the year, BFL launched a decision support system for underwriting SME customers for unsecured loans. This aids in removing personal judgment in underwriting and significantly reduces processing costs and allows for higher volume growth. Commercial lending • The commercial lending business expanded its offerings in the mid-market client segment through launch of a structured finance business and identified three new industry verticals to expand coverage. These were corporate finance, financial institutions group (FIG) lending business and the light engineering business. BFL auto component manufacturers' financing business remained stable in FY2016. Rural lending • BFL widened its rural footprint by setting up branches in Karnataka, Madhya Pradesh and Rajasthan, and launched a medium and small enterprise (MSME) business as a part of its rural operations. The rural lending consumer business is done through six product offerings: Consumer durable finance, digital product finance, personal loan cross-sell, salaried personal loans, gold loans and refinance loans. The newly launched MSME business is done through three product offerings: business loans, professional loans and loan against property. • BFL disbursed Rs. 1,985 crore to 4.47 lakh rural customers in FY2016. Assets under management of the rural business as at 31 March 2016 was Rs. 1,339 crore, versus Rs. 333 crore in FY2015. Protection and Savings General Insurance: Bajaj Allianz General Insurance Company Ltd. (BAGIC) BAGIC is a composite insurer offering various types of general insurance including motor, marine, health and various forms of corporate insurance. In an extremely competitive market, BAGIC has, over the years, built a very strong retail franchise and has retained a leading position among private insurers. It is one of the most respected brands in general insurance and focuses on building a quality portfolio with strong underwriting, multi-channel distribution and prudent financial management. Industry update The general insurance industry posted a growth of 12.6% for FY2016, which was higher than 10% growth recorded in FY2015. A major reason for higher growth across the industry during FY2016 was increased business in the health and motor insurance segments. The growth rates in gross direct brmium in India (excluding reinsurance accepted) of the industry and of BAGIC are shown in Table 3. Business update FY2016 was a tough year in terms of claims for the industry as well as BAGIC. November 2015 witnessed unbrcedented floods in the state of Tamil Nadu, with Chennai being hit the most. BAGIC expeditiously settled over 6,000 claims worth Rs. 164 crore. After reinsurance, the net br-tax impact of this event on BAGIC's results was Rs. 80 crore. In the year, BAGIC continued to participate in the National Crop Insurance Programme which is primarily a weather-based crop insurance scheme. BAGIC wrote business of H 368 crore (brvious year was Rs. 459 crore) issuing over 50,000 policies across 22 districts covering more than four million farmers. Limited opportunity for the private insurance companies to get into the crop insurance programme of the states and deficient monsoon conditions affected the growth as well as profitability of this agriculture-based business for FY2016. Despite these losses, BAGIC has been able to remain the most profitable general insurance company among peers of comparable size, thus demonstrating its ability to absorb large losses without impairing financial security. Its solvency margin remains healthy and well above the minimum required by regulations. During FY2016, BAGIC initiated a low-cost channel which works solely through electronic hand-held devices with minimum paperwork. This initiative contributed over 1.25% of the Company's total gross written brmium. Effective 1 April 2016, the Insurance Regulatory and Development Authority of India (IRDA) has dismantled the Indian Motor Third Party Declined Insurance Pool. This is not expected to have a material impact on the Company's profitability as BAGIC had met its obligations under that pool for the last three years. In FY2016, BAGIC continued its focus on balancing growth with profitability supported by expanded geographical reach and a strong customer orientation. It did so by: • Robust and prudent underwriting practices. • Generation of cash flows through strong retention of brmiums and judicious investments of the proceeds. • Strong focus on social media and digital brand building. BAGIC's focus continues to be on retail business, where it has strengths in distribution and claims handling capabilities. With its strong retail focus, BAGIC wrote 70% of its GWP from motor and health insurance, with the rest coming from fire, marine, agricultural insurance and miscellaneous lines. Retail channels like agency, motor and banc assurance continue to be the mainstay of BAGIC's channel mix, contributing to around 69% of the business. It has one of the largest networks of independent partner banks, including nationalised banks with strong regional brsence, as well as cooperative and rural banks. BAGIC's online sales channel, which offers 24x7 ease of buying, grew by over 15% during FY2016. It is ideally suited for off-the-shelf retail products like motor and health. Capital and solvency Paid up capital, including share brmium, stood at Rs. 277 crore as on 31 March 2016. No fresh capital was infused in FY2016. Shareholders' equity of BAGIC was at Rs. 2,790 crore as on 31 March 2016, compared to Rs. 2,225 crore a year earlier, growing by 25.4%. As on 31 March 2016, BAGIC's solvency margin was at 251%, which is well above the normal regulatory requirement of 150% in spite of the natural catastrophe in Tamil Nadu. Investments BAGIC's cash and investments as on 31 March 2016 stood at Rs. 9,211 crore versus Rs. 7,859 crore in the brvious year, growing by 17.2%. Cash flow generation continues to be strong. Life Insurance: Bajaj Allianz Life Insurance Company Ltd. (BALIC) Industry update The insurance industry registered a growth in new business brmium of 22.6% in FY2016 after a degrowth of 5.8% in FY2015. Table 5 gives the data on new business brmium over the last two years of the industry and BALIC. As indicated in the table above, though there has been growth in the industry of 23%, the private sector grew by 18%. Individual new business during 9 months of FY2016 continued to be dominated by unit-linked insurance, with share of this segment increasing from 38% of new business brmium in FY2015 to 44% in FY2016. Business update BALIC's growth has been positive, albeit lower than the industry and private sector growth rates. In a market where savings rates have been below historical peaks, growth has favoured bank-sponsored insurance companies who have a natural advantage of bundling insurance with their loan and savings products through banc assurance. BALIC's new business brmium increased by 7% in FY2016, compared to a growth of 4% in the brvious year. " — Bajaj Allianz Life Insurance: Performance Highlights FY2016 New business brmium grew by 7% in FY2016 to Rs. 2,885 crore versus Rs. 2,702 crore in FY2015. BALIC was ranked 4th among private companies on the basis of new business brmium, thus retaining its position of being the largest non-bank promoted life insurer. It maintained a healthy product mix on its individual new business brmium in FY2016 with 59% contributed by unit-linked brmium and 41% by non-unit-linked business. Gross written brmium was Rs. 5,897 crore, compared to the brvious year's figure of Rs. 6,017 crore. Net worth as at 31 March 2016 was Rs. 7,631 crore, compared to Rs. 6,749 crore a year earlier Investments As on 31 March 2016, BALIC's assets under management (AUM) stood at H 44,108 crore — up from H 43,554 crore on 31 March 2015. Table 7 gives the data. Capital and solvency • The total capital infused by the shareholders' in BALIC was Rs. 1,211 crore as on 31 March 2016. • Including accumulated profits of Rs. 6,412 crore as on 31 March 2016, the shareholders' net worth was Rs. 7,631 crore. For the brvious year, accumulated profits were Rs. 5,533 crore, and shareholders' net worth was Rs. 6,749 crore. • BALIC is soundly capitalised with a solvency ratio of 793% as on 31 March 2016, which is well in excess of the minimum regulatory requirement of 150% Renewable energy Bajaj Finserv Ltd. has 138 windmills in Maharashtra with total installed capacity of 65.2 MW. During FY2016, the project generated net wind energy of 772 lakh units of electricity compared to 746 lakh units in FY2015. Revenue generated from wind-farm activity in FY2016 was H 58 crore versus Rs. 50 crore in the brvious year. Financials of Bajaj Finserv Standalone financials The standalone financials of the Company are given in Table 8. Consolidated financials The consolidated results are given in Table 9. These include the results of subsidiaries and joint venture and are brpared in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India and notified by the Ministry of Corporate Affairs. Cautionary Statement Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be 'forward-looking' within the meaning of applicable laws and regulations. Actual results might differ materially from those exbrssed or implied. |