MANAGEMENT DISCUSSION AND ANALYSIS

GLOBAL ECONOMY

The global economy grew at a moderate pace of 3.4% in 2014 reflecting a pickup in growth in advanced economies relative to the brvious year and a slowdown in emerging market and developing economies. Despite the slowdown, emerging market and developing economies still accounted for three-fourths of global growth in 2014. Complex forces that affected global activity in 2014 are still shaping the outlook. These include medium and long-term trends, such as population aging and declining potential growth; global shocks, such as lower oil prices; and many country or region-specific factors, such as crisis legacies and exchange rate swings triggered by actual and expected changes in monetary policies. Overall, global growth is projected to reach 3.5% and 3.8% in 2015 and 2016. Growth is projected to be stronger in 2015 relative to 2014 in advanced economies, but weaker in emerging markets, reflecting more subdued prospects for some large emerging market economies and oil exporting economies.

INDIAN ECONOMY

Following several years of robust growth in the lead up to and immediately after the global financial crisis, India's growth slowed sharply during 2011-13. This reflected the combined effects of political uncertainty prior to the 2014 national elections, a less than fully effective macroeconomic policy framework, and increasingly binding supply side impediments to activity that led to a generalised slump in investment. Despite the weakening domestic demand, large domestic and external imbalances emerged on rising food prices and gold imports, rendering the economy sensitive to external financial shocks. As a result, the economy was hit hard by the mid-2013 taper tantrum, which led to large capital outflows and left the rupee considerably weaker. Since then, however, the 1ndian economy has made a remarkable turnaround in response to more effective policies and resolution of political uncertainty.

Domestic and external vulnerabilities have moderated on the sharp decline in the current account deficit (CAD) and inflation, the fiscal position has begun to improve, and a resumption of capital inflows allowed a significant build up in foreign reserves. This confluence of achievements has made India one of the bright spots in the global economy. Nonetheless, downside risks remain, including from potential surges in global financial market volatility and slower global growth, as well as policy implementation risks within 1ndia.

The 1ndian economy has made a remarkable turnaround since mid-2013. After bottoming at 5.1% in 2012, growth rose steadily, reaching an estimated 7.2% in 2014. At the same time, CP1 inflation declined from 10% during 2012-13 to about 5.2% in March 2015, reflecting the tight monetary policy stance, lower global commodity prices, remaining economic slack, as well as government efforts to contain food inflation, which afforded the Reserve Bank of India (RBI) space to lower its policy rate by 50 basis points in early 2015. External vulnerabilities have subsided on the reduction in the current account deficit (CAD) from 4.7% of GDP in 2012 to below 1.5% in 2014, robust capital inflows, and an accompanying build up in reserves. The 2014-15 budget deficit target of 4.1% of GDP was met, helped by the decline in global oil prices and recent deregulation of domestic fuel prices. As a result, India is now better placed to deal with external financial shocks. Nonetheless, challenges remain as growth continues to be constrained by supply-side bottlenecks; brvious weak growth and delays in implementing infrastructure projects have placed brssure on banks' asset quality (particularly public sector banks that lent heavily to infrastructure companies); and corporate vulnerability indicators, while showing signs of stabilisation, remain elevated.

1mportant economic reforms have been initiated following the decisive outcome of the 2014 national elections. The new government introduced numerous economic reforms, including deregulating diesel prices and raising natural gas prices, moving to create more flexible labour markets and introduce a goods and services tax, enhancing financial inclusion, and relaxing FD1 limits in several key sectors. The RBI has adopted a flexible inflation-targeting framework. These actions have also served to buoy investor sentiment.

Although 1ndia's near-term growth outlook has improved, its medium-term prospects remain constrained by longstanding structural weaknesses. With higher political certainty, improved business confidence, reduced external vulnerabilities and lower commodity prices, real GDP growth (on a 2011/12 National Accounts basis) is provisionally estimated at 7.2% in FY 2014-15, accelerating to 7.5% in FY 2015-16. While several recent policy measures have helped ease supply-side constraints, further measures are needed in the energy, mining, and power sectors. Reforms to streamline and expedite land and environmental clearances, increase labour market flexibility, and simplify business procedures should continue to improve 1ndia's business climate, which is crucial for sustaining faster and more inclusive growth. (Source: 1nternational Monetary Fund)

NBFCs IN INDIA

NBFCs being financial intermediaries are engaged in the activity of bringing the saving and the investing community together. 1n this role they are perceived to be playing a complimentary role to banks rather than competitors, as it is a known fact that majority of the population in the country do not yet have access to mainstream financial products and services including a bank account. Therefore, the country needs institutions beyond banks for reaching out in areas where banks' brsence may be lesser. Thus, NBFCs have carved niche business areas for them within the financial sector space and are also popular for providing customised products. 1n short, NBFCs bring the much needed diversity to the financial sector thus diversifying the risks, increasing liquidity in the markets thereby promoting financial stability and bringing efficiency to the financial sector

In 2014, NBFCs held 14.3% of banking assets in the country, as compared to 10.7% in 2009. This fact alone is an evidence of NBFCs gaining more systemic importance in the country and is gradually evolving into structured business models. Today, NBFCs strongly compete with banks and has been instrumental in taking financial services beyond urban vicinity.

Regulations

The NBFC sector has evolved considerably in terms of its size, operations, technological sophistication, and entry into newer areas of financial services and products. NBFCs are now  deeply interconnected with the entities in the financial sector, on both sides of their balance sheets. Being financial entities, they are as exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movement and risks pertaining to liquidity and solvency, as any other financial sector player. Reserve Bank Of India has over the last 50 years streamlined the NBFC regulations, addressed the risks posed by them to financial stability, depositors' and customers' interests, regulatory arbitrage and helped the sector grow in a healthy and efficient manner. RBI addressed these risks, without impeding the dynamism displayed by NBFCs in delivering innovation and last mile connectivity for meeting the credit needs of the productive sectors of the economy. Among them, the latest was the revision of regulatory framework for NBFCs in November 2014 based on recommendations made by the Working Group on 1ssues and Concerns in the NBFC Sector (Chairperson: Smt. Usha Thorat) and the Committee on Combrhensive Financial Services for Small Businesses and Low Income Households (Chairman: Dr. Nachiket Mor).

The following are the key changes:

a) All NBFCs irrespective of date of registration to have Net Owned Funds of Rs. 2 Crores by March 2017

b) Systemically Important NBFC limit revised to asset size above Rs. 500 Crores

c) Asset sizes of all NBFCs in a group would be viewed on a consolidated basis to ascertain Systemic 1mportance

d) Introduction of leverage ratio of 7 for NBFC-ND having assets less than Rs. 500 Crores

e) Deposit acceptance reduced to 1.5 times of Net Owned Funds for all categories of deposit taking NBFCs

f) 1ncrease in Tier 1 capital requirement to 10% for NBFC-

ND-S1 and NBFC-D from 7.5%

g) NPA recognition norm changed to 90 days from 180/360 days norm brsently, to be complied stage wise by March  2018

h) Provision for standard assets increased from 0.25% to 0.40% to be complied stage wise by March 2018

i) Credit concentration norms for NBFC-AFC to be in line  with other NBFCs

j) Corporate Governance and Disclosures in Annual Report

GOLD

Gold demand in India

Despite fall in gold in prices in FY 2014-15, India accounts for 25% of the total world gold demand, as per the reports of World Gold Council. For 1ndians, gold is an auspicious metal bought on various occasions and demand remains inelastic irrespective of prices. Domestic production is quite negligible and it imports almost all its gold demand. 1t is the second largest import item in the country's import bill, after petroleum. Being a stable asset and a store of value, gold demand has risen steadily over the years. Gold consumption serves a dual purpose - it is a financial asset and also a social capital for the majority of Indians and the best resource in an emergency, especially with the advent of the consumer-friendly gold loans. The gold imported during FY 2014-15 was 915 tonnes [Source: Ministry of Commerce & Industry, Government of India], as compared to 665 tonnes in FY 2013-14.

GOLD LOAN SECTOR

The country's organised gold loan market has witnessed a significant expansion in the last one decade. The large domestic household gold holding of the country enabled the creation of this market. The magnitude of this holding could be more than 18,000 tonnes. Most of the gold is held by people in rural areas and in many cases this is the only asset they have in their possession though in small quantity. All the while, rural 1ndians know that if his crop fails or his family is sick, he can raise cash in a moment from the goldsmith or may be pawnbrokers and moneylenders, because the rural 1ndia lags in availing banking facilities. Therefore, even the pattern of saving in India differs for various income groups. While richer sections diversify their portfolio according to risk-return equation, the poor rely more on commodities like gold as well as silver. The jewellery bought in times of prosperity has been pawned or sold for cash in periods of distress or need.

Over the years, some portion of this is being used as collateral for borrowing in the unorganised market, though estimates is not available. 1t is a common practice in 1ndia that gold is pawned, bought back and re-pawned to manage day-to-day needs of the poor and middle class. The pledging of gold ornaments and other gold assets to local pawnbrokers and money lenders to avail loans has been brvalent in the 1ndian society over ages. Due to the increased holding of gold as an asset among large section of people as also the non-transparent practices of lending against gold in the unorganised sector, entities like 'Muthoot Finance' started providing loans against the collateral of used gold jewellery many years back and over a period transformed itself as NBFCs with core focus on gold loans. Some independent estimates indicate that rural 1ndia accounts for about 65% of total gold stock in the country. At times of emergency, gold ensures a loan almost instantaneously for the poor and without any tedious documentation process. Most of the loans are for meeting unforeseen contingencies. The demand for gold has a regional bias with southern 1ndian states accounting for around 40% of the annual demand,  followed by the west (25%), north (20-25%) and east  (10-15%). Accordingly, even the gold loan market has also developed on the same lines, where a large portion of market is concentrated in southern 1ndia.

NBFCs in Gold Loan business Strengths

Core focus: The primary focus of the gold loan NBFCs is to provide gold loans. Thus, NBFCs can focus more on ensuring customer delight through better and faster customer service. A higher concentration on one product allows a proper structuring of the offerings and adopts faster corrective measures to meet the changing needs and behaviour of the customer.

Branch network: Branches play a significant role in building an institution's brand image. A wide network of branches enable NBFCs to be closer to the customers. Location and access to branches are key criteria for customers choosing a service provider. This expansion strategy by NBFCs led to significant customer addition.

Faster turnaround time: Superior service creates loyalty and deeper customer relationships. At the same time, a lack of appropriate service can destroy those relationships. Gold loans also enjoy an advantage of having a quick-turnaround time at NBFCs. This is achieved without any compromise on documentation discipline and KYC compliance requirements.

Transparent and standard operating practices: NBFCs offer a transparent transaction, capturing all the terms clearly in the loan document and operate with standard operating procedures, which could provide enhanced customer comfort.

Flexible Repayment Option: Customers get a trouble free loan period where he is not troubled for any payment of equated monthly instalment rather would be allowed to make payment of interest and principal on closure of the loan.

Resources availability: NBFCs have access to organised credit and hence do not face any constraint. The unorganised sector operates on proprietary funds, which limits its ability to lend and on better terms.

Value to the customer: Customers stay with a service provider if they pay a price they deem fair for quality of the products they receive. Customers expect to pay an appropriate price for the services they receive, not necessarily the lowest. NBFCs have been able to run on this philosophy and have been offering loans at rates of interest lower than the unorganised segment.

Low-cost structure: The Company has built network with a minimum investment corresponding to the potential of business in which it is going to operate. Employees are sourced locally and are provided training to deliver various skills keeping the operating cost low. This has enabled the Company to reach the break-even level faster as well as start contributing to the bottom line of the Company. This also provides downside protection in terms of closing down the operation in case desired level of business is not achieved.

Oppportunities

Untapped market: The gold loan industry is driven by multiple factors. Since the loan is granted against gold jewellery, the quantum of gold jewellery available with the customers is of utmost importance. The large gold holding especially among the rural folk positioned the product well for the development of this activity through the unorganised market. The needs of the borrower coinciding with various purposes like cropping season, business season, academic year, festivals, medical purposes etc, are critical in determining the demand for gold loans. Further, easy availability of loans on flexible terms and changing attitude of customers to avail loans and relative constriction by banks for giving personal loans enabled the popularisation of the product. To tap the opportunity, aggressive network expansion by NBFCs on a pan-1ndia basis, enabled the product to reach the masses and thereby widening the customer base. Further, aggressive marketing campaigns by the NBFCs increased awareness among the people and renunciation of stigma attached to pledging of gold jewellery. NBFCs, since having core focus, invested in infrastructure thereby building service quality. Customers found comfort and confidence in their transparent practices and started shifting their loyalties from the unorganised sector to the organised sector.

Level playing field: The regulatory Loan to Value cap of 60% on gold price for NBFCs denied the sector a level playing field with banks. The increased focus of banks on retail lending consequent to lack of adequate opportunities for safe corporate lending created disequilibrium in gold loan business. In January 2014, RBI relaxed the LTV norms for NBFCs by increasing the cap to 75% from 60%. Subsequently, RBI made the LTV cap applicable for banks also. This measure will pave way for stability in the business of gold loans by NBFCs going forward and healthy development of the sector

Threats

Competition: Though NBFCs like ours are pioneers in scaling up and popularising gold loan business, banks which has significant advantage in terms of cost of funds can scale up gold loan business by offering it at interest rates lower than the rates of NBFCs. At the same time, banks have significant disadvantage in terms of higher operating cost for running this business. Unorganised sector, for which no data is available on its size, can remain catering to their niche customers.

Fall in collateral value: Though several risk management mechanism is in place to meet the eventualities of fall in collateral value i.e. fall in gold price, a steep decline in value and it remaining at those levels and simultaneously borrowers losing sentimental attachment towards the collateral, can pose a threat to our business.

Adverse regulatory changes: Though our sectoral regulator has framed adequate regulations for regulating the sector, any future developments necessitating framing of additional regulatory framework, can adversely affect the growth and sustainability of this sector.

Alternative loan products: Growth of this sector is primarily based on availability of gold jewellery with the borrowers and  his willingness to pledge. Popularisation and availability of other loan products like personal loan, loan against property and home loan, among others can reduce the demand for gold loan.

Outlook

The Indian retail credit market stood at Rs. 21.0 trillion as on 31st March, 2015 and grew 17% in FY 2014-15, as against 15% in FY 2013-14. NBFC credit in the gold loan segment stood at Rs. 468 billion as on 31st March, 2015 and registered a YoY growth of 4%, against a de-growth of 15% in FY 2013-14. Monetising idle gold is crucial for creation of productive resources for India. Gold loans help address needs of a largely unbanked population, and are essential in bringing financial inclusion to many Indians in rural areas. NBFCs can continue to play a major role in this process.

MUTHOOT FINANCE LIMITED.

Muthoot Finance Limited is the flagship Company of the Muthoot Group, which has pioneered the concept of gold banking in the country. 1t is a 'Systematically 1mportant Non-deposit taking NBFC', which is listed on the country's brmier stock exchanges, namely BSE and NSE. 1t has emerged as a leader in gold loan business and has a network of 4,245 branches all over 1ndia. 1t has become a trusted pan-1ndia name in the gold loan business providing financial assistance to the needy on reasonable and convenient conditions.

Financial performance review Gross retail loan assets under management

Consequent to relaxation by RBI of LTV cap of 60% to 75% in January 2014, the Company saw growth in retail loan portfolio, after continuous decline for 5 quarters, in second quarter of FY 2014-15. Thereafter, loan portfolio increased in the third and fourth quarter. Thus, the Company's retail loan portfolio increased by Rs. 1,547 Crores for FY 2014-15, a net growth of 7%, to Rs. 23,408 Crores from Rs. 21,861 Crores in FY 2013-14.

Average gold loan outstanding per branch

The Company's average gold loan outstanding per branch increased from Rs. 5.06 Crores in FY 2013-14 to Rs. 5.50 Crores in FY 2014-15 on account of increase in gold loan portfolio.

Revenues

The Company's revenues declined by 13% from Rs. 4,947 Crores in FY 2013-14 to Rs. 4,325 Crores in FY 2014-15. This was on account of decline in average yield on loan portfolio from 20.27% in FY 2013-14 to 19.31% in FY 2014-15.

Profit before tax

The Company's Profit before tax declined by 14%, from  Rs. 1,194 Crores in FY 2013-14 to Rs. 1,028 Crores in FY 2014-15.

Profit after tax

Muthoot Finance's Profit after tax declined by 14% at Rs. 671 Crores in FY 2014-15 from Rs. 780 Crores in FY 2013-14.

Capital adequacy ratio

The Company's capital adequacy ratio increased from 24.69% in FY 2013-14 to 24.78% with Tier 1 capital of 19.96%, on account of ploughing back of profit for the year net of dividend payment.

Earnings per share (EPS)

Earnings per share declined to Rs. 16.97 in FY 2014-15 from Rs. 20.99 in FY 2013-14 on account of lower profits generated during the year.

RISK MANAGEMENT

The objective of risk management systems is to measure and monitor the various risks the Company is subject to and to implement policies and procedures to address these. The Company continues to improve its operating processes and risk management systems that will further enhance its ability to manage these risks.

1. Operational risk

Operational risks are broadly defined as the risk of direct or indirect loss due to the failure of systems, people or processes, or due to external events. 1t includes employee negligence, fraud, petty theft, burglary and embezzlement. The Company has started installing offsite surveillance cameras in its branches, and intends to implement this across its branch network. As of 31st March, 2015, it had installed centralised monitoring and surveillance cameras in 3,855 branches across 1ndia. The Company has instituted a series of checks and balances, including an operating manual, and both internal and external audit reviews. Although, the disbursements of loans are very quick, a well defined appraisal method as well as KYC compliance procedure exists to mitigate the risk involved in the business. Additionally, it continues to train existing and new employees in appraisal skills, customer relations, and communication skills and risk management procedures.

This enables replication of talent and a smooth transition on employee attrition. 1t also periodically updates its employees with the latest developments to mitigate risks against frauds, cheating and spurious gold and strengthen their gold assessment skills. 1nternal audit department and Centralised monitoring systems assist in the overall management of operational risk.

2. Collateral risk

Collateral risk arises from the decline in the value of the gold collateral due to fluctuation in gold prices. This risk is in part mitigated by at least 25% margin retained on the value of jewellery for the purpose of calculation of the loan amount. Besides, risk is reduced because the price of gold jewellery is higher given that the production costs, design cost and the gemstones associated with making the item which is not considered for arriving at the value of jewellery for the calculation of the loan amount. The Company appraises the jewellery collateral solely based on the weight of its gold content, excluding weight and value of the stone studded in the jewellery. 1n addition, the sentimental value of gold jewellery to the customers may induce repayment and redemption of the collateral even if the value of the collateral falls below the repayment amount.

3. Credit risk

Credit risk is the possibility of loss due to the failure of any counterparty to abide by the terms and conditions of any financial contract with the Company. Muthoot aims to reduce credit risk through a rigorous loan approval and collateral appraisal process, as well as a strong NPA monitoring and collection strategy. This risk is diminished because the gold jewellery used as collateral for loans can be readily liquidated, and there is only a remote possibility of recovering less than the amount due to the Company due to adequate collateral being available.

4. Market risk

Market risk refers to potential losses arising from the movement in market values of interest rates in the Company's business. The objective of market risk management is to avoid excessive exposure of Muthoot's earnings and equity to loss and to reduce its exposure to the volatility inherent in financial instruments. The majority of the Company's borrowings, and all the loans and advances it makes, are at fixed rates of interest. This minimises the Company's interest rate risk.

5. Liquidity risk

Liquidity risk is the risk of being unable to raise necessary funds from the market at optimal costs to meet operational and debt servicing requirements. The purpose of liquidity management is to ensure sufficient cash flow to meet all financial commitments and to capitalise on opportunities for business expansion. An Asset and Liabilities Committee (ALCO) meeting is held regularly to review the liquidity position based on future cash flow. 1n addition, the Company also tracks the potential impact of brpayment of loans at a realistic estimate of its near to medium-term liquidity position. The nature of Company's business is such that source of funds, primarily proceeds from issue of debentures and bank loan, has longer maturities than the loans and advances given resulting in low liquidity risk in its operations.

6. Business cycle risk

Business cycle risk is the risk associated with the seasonal or cyclical nature of a business. As customers include both individuals and business loan products are used by customers in various industries, trade cycles have limited impact on Company's business. 1n additional, the geographic sbrad of branches will allow the Company to mitigate the cyclical brssures in the economic growth of different regions.

INTERNAL SYSTEMS AND THEIR ADEQUACY

Muthoot Finance Limited has an adequate internal control system in place to safeguard assets and protect against losses from any unauthorized use or disposition. The system authorises, records and reports transactions and ensures that recorded data are reliable to brpare financial information and to maintain accountability of assets. The Company's internal controls are supplemented by an extensive programme of internal audits, review by the management, and documented policies, guidelines and procedures.

CAUTIONARY STATEMENTS

Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be 'forward looking statements' within the meaning of applicable laws and regulations. 1mportant developments that could affect the Company's operations include a downtrend in the financial services industry - global or domestic or both, significant changes in the political and economic environment in 1ndia or key markets abroad, tax laws, litigation, labour relations, exchange rate fluctuations, interest and other factors. Actual results might differ substantially or materially from those exbrssed or implied. This report should be read in conjunction with the financial statements included herein and the notes thereto.