MANAGEMENT DISCUSSION & ANALYSIS

Management Discussion & Analysis

FY 2015-16 has been a year of excellent growth in business and profitability triggered by enhanced scale of operations and improved productivity of existing staff. Additionally, continuous focus on reducing the costs helped us report a 134% growth in our Net Profit.

The Year at a Glance:

Business Growth: Our overall gross loan book including growth in managed assets grew by 65%. GL book grew by 60% while the MSE and the Housing business collectively grew by 102%. Healthy New Custumer Acquisition contributed to 34% of the GL business, while our focus on reducing TAT and customer retention enabled a solid 59% contribution by Repeat GL business. Our successful loyalty program, in its second year, formed 8% of the GL Business.

Our IL gross loan book doubled from that in FY2014-15 triggered by excellent GL to IL conversion contributing to 60% of IL business. Open market Business contributed to 22% of overall IL Business. Our overall Secured portfolio stood at Rs. 27 crore, of which 21 crore came from Secured Housing Business seeing a healthy take off in FY2015-16

Productivity: FY2015-16 saw an all-round improvement in branch and field staff productivity. Borrower per CRS improved to 761 from 568 in March 2015. Gross loan book per branch increased to 11.5 crore from 7.7 crore. Average GL TAT improved from 5.78 days to 4.32 days while average IL TAT improved from 6.45 days to 6.27 days

Network Expansion: 47 new branches were added to our network, taking the tally to 469 branches. We added 7 new branches in Punjab, Haryana, Chandigarh cluster, 8 in North Eastern States of Assam and Tripura and 4 in Chhatisgarh.13 new branches were added in Gujarat and Maharashtra while our footprint in Rajasthan was augmented by 3 new branches. Karnataka added 1 new branch while Tamil Nadu saw the largest expansion with 11 new branches.

Our client outreach expanded by 12 lakh new customers, 26% of which came from the branches in 0-12 months category, 44% from the branches in the >60 months vintage and 31% was contributed by branches in the 24-60 months vintage

Cost Efficiency: Our Opex Ratio (on net book) stood at 7.5% against 8.5% in last FY, a marked improvement over PY on account of enhanced scale of operations (65% growth in gross loan book ) and improvement in productivity -Borrower/Branch increased from 5,192 borrowers to 6,504

Credit Quality: Portfolio quality held up well with PAR at >0.27% in March 2016 against 0.18% in March 2015. There was an increase in the overall PAR on account of sporadic incidents of over-borrowing in some geographies across the country (MP, Orissa, and Maharashtra), massive growth of IL portfolio and increased proportion of death cases

Funding: We diversified our funding basket by raising NCDs with domestic Mutual Funds, Commercial Papers, and 7 securitization transactions. We raised Rs. 3,393 crore of Term borrowings and NCDs in FY2015-16 against Rs. 2,803 crore last year. We saw significant reduction in Cost of funds (12.68% to 12.30%) during the year, leading to reduction in interest rates offered to customers: Group loans - 23.6% to 22% and unsecured Individual Loans - 28% to 24%.

Capital Raise: Pre-IPO round closed with Rs. 291.84 crore of domestic equity. Domestic holding stood at 77% at the year-end against 10% in March 2015. Our IPO clossed sucessfully in May 2016 with 41 times subscription, fresh issuance of shares worth Rs. 358.4 crore and secondary sales worth Rs. 524.33 crore

Regulations: Grant of in principal approval for Small Finance Bank License, Conversion to a public limited company

Awards: Forbes Entrebrneur of the year with Social Impact, 16th Best Place to work for in Asia, Corporate Citizen of the Year- Chanakya Awards; 3rd Best Place to Work in India Consolidating on an accelerated growth in business volumes last year, FY2015-16 was a year of growth with a focus on building new business verticals) and all round improvement in productivity. Our gross loan book grew by 65% over last year to close at Rs. 5,389 crore. We disbursed Rs. 6,619 crore, a 53% growth over last year

Our branch network grew moderately with 47 new branches and our staff strength was augmented by 960. New Customer Acquisitions and Customer Retention with repeat conversions were the key drivers for this year's business, contributing to 89% of the overall volumes. Akarshan loans, a higher ticket offering targeted at attracting new customers with good credit history from other institutions, was instrumental in acquiring new customers in highly competitive areas. Additionally, expanded working area for increased penetration and rewards and recognition programs were the key enablers for increase in new customer acquisitions in mature branches. We added 12 lakh new customers, crossing the 10 lakh mark for the second consecutive year. Our commitment to quality customer service, better customer connect, reducing loan turn-around time and wait time at branch for disbursement ensured good persistency and healthy repeat conversions. Our customer retention rate stood strong at 86%, dipping marginally from 87% in the brvious year on account of increased drop out of existing customers to comply with the 2 MFI Rule of the RBI even for our non - PSL compliant business.

Our second year of the loyalty program, a limited period offering specially designed for existing customers with good credit track record to enable micro trade facilitation during the festive season, successfully added Rs. 445 crore of business.

Our core GL business contributing 87% of our Gross Loan Book grew 60% over that in the brvious year. We launched a new product called Agriculture and allied loan to meet loan requirements for activities such as crop cultivation, purchase of small equipment and animal husbandry etc. for the marginal and tenant farmers under Group Lending.

We raised the ticket sizes of the loans going up to Rs. 30,000 allowing the customer an option to repay in 1 or 2 years depending on her repayment capacity in line with revised RBI regulations.

Taking off on the big leap last year, our Individual lending Business registered a collective growth of 102% constituting 13% of our Gross Loan Book. This year, we looked beyond converting the captive eligible pool of higher vintage group loan customers and focused on open market business to expand our outreach and ramp up our volumes. Open market business contributed to 22% of our overall volumes this year compared to 10% last year while GL to IL conversion contributed to 60% of our overall volumes this year compared to 75% last year. Focus on process efficiencies, reduced loan service time and product level initiatives ensured better persistency. Repeat IL Business contributed to 18% of overall volumes compared to 15% last year. Our client outreach increased from 71 thousand active borrowers in March 2015 to 151 thousand active borrowers in March 2016. Our Individual Lending Business is operational in 374 branches. The offering was rolled out in 69 additional branches during the year

Our Secured Housing Finance Business, piloted in January 2015 gathered momentum, amassing a portfolio of Rs. 21 crore with 703 active borrowers across 109 branches.

Another product innovation launched this year was the introduction of Priority Sector Lending (PSL) compliant variant of Individual loans - Pragati Loans with lower interest rates and simplified procedures. The Product contributed a third of overall volumes and Individual Lending borrower base.

Our objective reward and recognition programs (Public ka Champion, Referral Campaigns, Best Branch Awards, and Large Branch Allowance) motivated the field staff to deliver their best performance. Our marketing initiatives helped create better brand and product awareness while fostering stronger customer connect. Our evangelical marketing initiatives at over 100 locations saw the participation of thousands of customers. The evangelical campaigns celebrated the success stories of existing customers and shared them with potential customers. Our mass-marketing activities such as wall branding, auto rickshaw branding, van campaigns, Loan fairs helped generate healthy customer interest and were instrumental in expanding our client outreach.

The MSE Segment, identified as the main target segment within Individual Lending for product diversification and driving future growth, registered a growth of 65% over last year. The Pragati loans and open market business helped fuel the growth in the segment

The Housing vertical grew by 121% over last year. 92% of the Business in the segment was driven by the unsecured home improvement loans. A third of the unsecured business came from Pragati variant of the Home Improvement loans. Secured Home Loan Business portfolio ramped up to Rs. 21 crore post a successful pilot in January 2015. The product did very well in South, West and North

Others include Agri, Animal Husbandry and Higher Education Loans. Livestock loan is the key component of the segment, constituting 90% of the portfolio. The livestock loans grew by 163% over last year to close at a Gross Loan Book of Rs. 153 crore. Higher Education Loans and Agri Loans are seasonal in nature and were both piloted in FY2014-15. Agri Business grew from 2 crore in March 2015 to Rs. 8.5 crore of portfolio while the Higher Education loans grew 151% over last year to close with a gross portfolio of Rs. 7.7 crore

Improving Productivity

A key focus area for this year was improvement of branch and field staff productivity. Enhanced targets were set to raise the bar on performances of our matured branches. We stopped adding more than 8 field staff for branches handling less than Rs. 10 crore of portfolio. Our reduced loan turnaround time, reduced wait time for disbursement at branches, roll out of handheld devices (tablets and mobile phones) to capture data for loan processing, repayments and handling enquiries, meticulously planned rewards and recognition programs with due weightage on productivity parameters helped improve the productivity of our branches and field staff dramatically across the quarters and across the regions.

A key initiative this year was extention of the repayment window from 3 weeks to 4 weeks, easing caseloads for staff in repayment collections and customer servicing.

Our Borrowers/CRS increased to 761 in March 2016 against 568 in March 2015 while our Gross Loan Book/Branch increased to 11.5 crore per branch in March 2016 from 7.7 crore in March 2015 were disbursed to the bank accounts of the customers compared to 9.76lakh last year, a 71% growth. Our Average GL TAT improved from 5.78 days to 4.32 days while average IL TAT improved from 6.45 days to 6.27 days. Our Fresh Loan TAT is at 7.02 days, 63% of the loans are disbursed under 7 days

Regulatory Compliance:

Ujjivan is compliant with all the applicable RBI regulatory norms. The revised RBI regulations for Qualifying Assets for the NBFC-MFIs, released in April 2015 and November 2015 have opened up additional business possibilities tempered with requisite risk management.

Financial Performance

Ujjivan closed a successful year with br-tax profits at Rs. 271.9 crore and post-tax profits of Rs. 177.2 crore. Our ROA improved to 3.7% in FY2015-16 from 2.5% in FY14-15

Improvement of NIM to 10.5% in FY from 9.3% last year on account of reducing lending rates from banks. Our Cost of Funds reduced significantly (12.68% to 12.30%) during the year and we passed on the benefits of reduced borrowing costs to our customers, reducing interest rates offered on Group loans - 23.6% to 22% and Unsecured Individual Loans - 28% to 24%.

The Operating Cost Ratio improved to 6.4% (on Average Assets) in FY15-16 from 6.8% in FY14-15 on account of enhanced scale of operations and backend efficiencies

Our cost to income ratio improved to 51% in FY15-16 from 60.4% in FY14-15 on account of growth in Interest Income by 69% due to higher volumes and growth in Other Income by 58% (incremental income from processing fee, securitization income and treasury income) coupled with improved productivity of staff and enhanced scale of operations.

Credit Cost Ratio on Average Assets remained in check at 0.59% in FY15-16 compared to 0.69% in FY14-15 in spite of the increase in GL portfolio by 60% and IL portfolio by 102%. March 2015 ratio is higher as FY14-15 was the first year provisioning on IL was raised from 1% to 2%

Resource Mobilization

Debt Funding:

Ujjivan's policy is to borrow centrally; using a mixture of long term and short term capital market issues and borrowing facilities in order to meet anticipated funding requirements. These borrowings, together with cash generated from operations, are used for lending operations. The company's excellent fund management ensured a very comfortable funding position at all times, ably supporting the massive growth in business volumes during the year.

Ujjivan raised Rs. 3,393 crore (21% increase over the last year) from Banks and Financial Institutions and alternative sources. Ujjivan's borrowings as on March 31, 2016 stood at Rs. 4,338.00 crore (brvious year Rs. 3,121.79 crore).Ujjivan has significantly diversified its borrowings basket to include Commercial paper of Rs. 100 crore, Refinance loans of Rs. 200 crore , Securitization of receivables of Rs. 394 crore and Non- convertible debentures of Rs. 300 crore at the most competitive rates.

As on 31st March 2016, 50% (2015: 54%) of the total borrowings were floating and we were also able to take benefit of reduced interest rates scenario in the economy. With increased capitalization levels and better credit ratings, Ujjivan negotiated lower rates for borrowings. The reduced borrowing cost was passed on to our customers we were able to reduce lending costs to customers by around 160 bps during the FY.

Key focus areas for next year will be further diversification of the borrowings profile by tapping Capital Markets, Refinance and Securitization.

Cre.dit Rating

CRISIL has re-affirmed Ujjivan's grading at 'mfR1' in October 2015. CARE re-affirmed Ujjivan's Bank Loan rating at 'CARE A' for its bank loan facilities of Rs. 3,500 crore. The rating factors in Ujjivan's consistent and robust improvement in earnings and profitability in FY 15-16 with increasing scale of operations and efficiency, geographically well diversified client portfolio with good asset quality, experienced management and well-developed portfolio management systems.

Risk Management

Ujjivan has an established risk management and audit framework to identify, assess, monitor and manage credit, market, liquidity and operational risks. This framework is driven actively by the Board through its Audit, Risk Management and ALCO committees, and supported by an experienced senior management team. Our Risk Management Committee, consisting of an independent director, the Managing Director, and two nominee directors meets every quarter, and is responsible for the review of prudential risks including, but not limited to, credit, market, liquidity and operational risks. We have a strong credit function, which is independent of our business and a key controller of the overall portfolio quality. Our effective credit risk management is reflected in our portfolio quality indicators such as robust repayment rates, stable portfolio at risk ("PAR") and low rates of GNPA and NNPA. Our portfolio quality has remained consistent in spite of the increase in the size of our operations, and our venturing into new products and customer segments.

We manage operational risks by implementing best practices such as the Risk and Control Self-Assessment ("RCSA") program to monitor high risk areas across all departments and Key Risk Indicator ("KRI") program for monitoring critical industry-specific risks such as high staff turnover and cash handling. The KRIs effectively monitor liquidity risk and interest rate risk, and ensure diversified funding in compliance with key ratios as brscribed by the RBI.

Audit and Internal Controls

Ujjivan has a well-established Internal Audit and Control Systems in place that monitors the company's adherence to policies, procedures and systems. The Board Audit Committee reviews the adequacy and effectiveness of the internal audit function, including the structure of the internal audit department, annual audit plan, staffing etc., and ensures effective and independent review process.

The Internal Audit Department is responsible for monitoring and evaluating the internal controls of the organization as well as its adherence to various statutory and regulatory compliances. These audits cover Branches, Regional offices and Head Office at regular intervals.

Branch and Field Audits

Ujjivan has a strong and well trained audit team in all the four regions headed by the Regional Audit Managers. The Regional audit team executes branch and field audits as per the risk based audit plan. Each branch is audited 3 to 4 times in a financial year, based on the risk of the branch. The combrhensive audits, that span 10 to 14 man-days, cover end-to-end branch processes, loan documentation, statutory compliances and independent customer visits. Based on the audit observations and scores, branches are assigned audit rating for Group Lending and Individual Lending Businesses. The branch audit rating forms a key component for annual performance evaluation of the Branches and the staff. The Internal Audit team also carries out other key activities such as area cross-checks for all new branch openings, survey of branch working areas, negative area cross-checks, fraud investigations, fixed assets verification and special audits.

Functional Audits

Internal audits at Regional Offices and Head Office is carried out on a quarterly basis by a board-appointed independent audit firm, covering all key functions including HR, Operations, Credit, Administration, Finance and Accounts etc., The firm also audits the company's adherence to all Statutory and Regulatory Guidelines that have been brscribed for NBFC-MFIs. The scope of various audits are reviewed and continuously modified to keep pace with a dynamic business environment. A strong compliance monitoring mechanism ensures that all critical issues are tracked until closure within specified timelines. All significant audit observations of Internal Audits and follow-up actions are reported and discussed by the Board Audit Committee, which meets every quarter. Monthly audit updates are also circulated to the board, summarizing audit trends and critical issues.

Vigilance

Our focus for 2015-16 was to move towards Predictive Vigilance in Group Lending Business; basis the knowledge and the experience we gained in the past, and Preventive Vigilance through Fraud Control Unit (FCU) in the Individual Lending.

While we witnessed a considerable increase in break-in theft and cash snatching incidences, we had improvised on introducing risk mitigants like the concept of 'repayments by customers at Ujjivan branches' in the pockets affected by such incidences in addition to appointing Cash Collection Executives (CCE, a low cost cash carrying facility). On an average, 92% of centers (around 6000 centers), from the affected branches in Bihar, Jharkhand and UP have successfully followed either of the above options.

Setting deterrent is an effective way of infusing control in the system. Earlier during the fiscal year the actions taken to set deterrent were not as expected with the sudden increase of cases. Two main reasons were, the early exit of accused from the system and delayed response from the law enforcement agencies in few clusters. We consciously on-boarded retired police officers across the regions, who assisted in cases requiring police intervention ab-initio.

Under the core vigilance and multi-function Task Force Committee was formed in Kerala and Karnataka to address issues of Operations Kubera and Farmer's Suicide impact respectively.

Under the Secured Lending and Individual Lending business, FCU activity was successfully standardized across the regions. Necessary actions were initiated on the individuals who were identified in process lapses. The Hit Rate (ratio of negative/fraud cases to total sampled) for Ujjivan stood at 14% with North (25%) region topping the chart followed by East (16%). However, the reason for cases reported as negative, or fraud were more for the systemic failure of issuing authorities working for government agencies in select geographies of our operations. Desired outcome of brventive risk mitigating measures in Fraud Control Unit still stands as an expectation and challenge for this vertical which we plan to achieve in 2016-17.

The Collections Unit, under the Vigilance department was able to recover over Rs. 2.06 crore from the allocation of overdue cases (hard bucket)during the year.

Credit

Financial year 2015-16 was an eventful year in the history of Ujjivan. As the company completed a decade of progress in its journey of Financial Inclusion, the robust Credit Risk Management continued to spur the business growth by effectively managing risk. While the loan book grew at an imbrssive 65%, the Repayment Rate stood at a healthy 99.81% and GNPA at 0.15% vis-à-vis the Industry GNPA of 0.20%1 as on 31st March'16. The Individual Lending Business which saw a growth of 102% was complemented by a Repayment Rate of 99.44% and GNPA of 0.39% as on 31st March'16.

Independent Credit function is unique to Ujjivan. We have a strong team of over 400 sbrad across operating geographies, giving us real time insights on portfolio. It is responsible for developing credit policies, monitoring portfolio quality and driving collection initiatives to ensure healthy portfolio growth. Group lending business is supported with centralized credit decisions, it reviews every application independently along with bureau reports and ensures adherence to internal credit policies and guidelines. In case of Individual Loans, independent credit check on field forms an integral part of the loan underwriting process.

The stellar portfolio performance is an outcome of the sound Credit Policy Framework and robust Loan underwriting process at Ujjivan. This has not only helped us acquire quality customers but also maintain a healthy portfolio quality. As we continue to scale up our Individual Lending business, we plan to adopt a customized Credit Application Score to further enhance our loan decisioning process. We also took another significant step towards prudent risk management by introducing a Branch Risk Scorecard. The scorecard jointly developed by Credit, Audit and Vigilance aims to monitor, manage and mitigate internal and external risks proactively. This scorecard also helps in integrating all elements of risk and provides a combrhensive view of branch risk.

In its pursuit of process advancements, Ujjivan has embarked on various key projects. Ujjivan was the first in the MFI industry to be on-boarded by UIDAI as an Authorized User Agency (AUA) and KYC User Agency (KUA). This will allow us to undertake E-KYC authentication for Aadhar IDs submitted by our customers in real-time, thus helping us to improve our efficiencies and brvent identity frauds. We are also one of the first in the MFI industry to automate collection process through the Collection Software. This will make overdue collection processes and related activities real-time and system-driven, thus allowing better and timely operational control. Other key technological development envisaged is the implementation of Business Rule Engine that will automate the credit check and credit decisioning process.

Ujjivan also set the stage for better MIS and Analytics by building on its Data Warehouse (DW) and Business Intelligence (BI) tools by procuring IBM's COGNOS BI tool and engaging with Equifax as the implementation partner. The Data Warehouse will serve as the 'Single Source of Information' for all customers. The information so integrated through various data points will in turn be instrumental in driving strategic decisions, tapping business opportunities-by identifying potential segments, allowing up-sell and cross-sell, identifying white spaces and keeping a tab on behavioral and portfolio trends.

As we embark on our journey to become a Small Finance Bank, we will continue to leverage on technology in gaining better insights on customers and their credit behavior that will help us serve them better at the same time ensuring robust portfolio quality.

Operational Risk

High staff turnover and Cash Handling risk remain critical influencing factors in this service industry. Ujjivan has successfully contained attrition at 18.4% with several employee engagement and retention initiatives.

To minimize cash handling risk, we have focused on cashless disbursements and cashless collections. This year 61% of our disbursements were effected through the cashless route, and 38% of our the collection proceeds were channelized for cashless disbursements. 92% of the high risk centers in Bihar and Jharkhand and UP have been secured through customer carrying repayment to the branch to minimize cash handling risk. 56 branches have been brought under CCTV surveillance and Safe vault grouting (strong room alternate) have been completed at 30 high risk branches. Fraud Containment Unit (FCU) has been set up at all regions from July'15

Service Quality

Our Service Quality Program continues to be a differentiating factor for us in the MFI sector. The program has evolved over past years with a variety of customer care, service and client protection initiatives which have positively fostered strong customer connect and retention and helped reduce service TAT and customer wait time. We have strengthened our customer retention programs, fair practices and grievance redressal mechanism built over the past few years. In FY14-15 we launched out-bound call centres for making various service calls to customers for collecting feedback from our customers and improving our services and products. Our key achievements this year towards customer centricity and service include

o More than 135,000 dormant and dropout customers were met by Customer Care Rebrsentatives (CCRs) for exit interviews and 44% (59,039) of them were retained after addressing their concerns

o We were accredited with S1 rating - "Excellent SPM (Social Performance Management)" on social rating, evaluated by an external independent rating agency during April 2015

o 173,487 customer enquiries and 2,200 customer grievances were addressed through our multi-channel grievance redressal mechanism.

o Customers' wait time at branch for loan disbursement reduced, number of customers waiting for disbursement up to 15 minutes increased from 24% to 39% and for 15 to 30 minutes from 37% to 41%

o Repayment window was extended from 3 weeks to 4 weeks, allowing borrowers an option to choose one of 4 different repayment windows (weeks) of the month, easing caseloads for staff in repayment collections and customer servicing. 28% of borrowers make their repayments during first week of the month, 35% in second week, 30% in 3rd week and 7% in 4th week respectively.

Information Technology

A strong IT infrastructure to seamlessly run backend business operations and deliver financial services to customers has always been a top focus area for Ujjivan. The IT division is dedicated to servicing Ujjivan's customers in processing and communication while maintaining infrastructure that ensures high quality support and uptime .

Key Highlights of the year include:

• Collections System: We are using Indus R-systems as our collections management system. This has a structured workflow for managing bucket-wise over-dues. This will help us largely in customer risk management, understanding the customer portfolio, and improving recovery rates.

• Business Intelligence and Data Warehousing: We are in the process of implementing a Business Intelligence System by Cognos to monitor business online for data mining, online analytical processing, querying and reporting. The Business Intelligence System will help us largely in making improved decisions, cutting costs and identifying new business opportunities.

• Oracle Financials: During the year we migrated to Oracle Financials, comprising of different modules for fixed asset management, purchases, accounting and reporting. Multi-dimensional reporting is one of the most prominent features of the application which gives in-depth vision into different reporting paradigms.

• Rule Engine: We are in the process of implementing Rule Engine for Automating Credit Approval process and straight through processing, which will improve the productivity of the organization in processing loans and thereby the quality of processing.

Our IT infrastructure is undergoing a major transformation in the run up to the conversion to a Small Finance Bank.

We have evaluated various options, visited other banks and studied their systems and assimilated our learning to formulate our IT transition strategy. Our strategy is to leverage our current IT ecosystem and enhance its capabilities through a robust core banking solutions ("CBS"), business intelligence tools, collection management tools and treasury management tools customized for SFB operations to optimize the cost of IT transition.

Human Resources

Employee engagement was a focal area for the Human Resources Department this year. Ujjivan's 10th anniversary celebration was kicked off with a series of staff contests including logo designing, photography competition in June 2015 culminating in Dushotsav - cultural events organized across regions to commemorate the anniversary and celebrate the success of the branches and field staff. Employee morale was boosted by distribution of iPads and Lenovo tablets for the managers as part of the Digital Evangelism Program - Ujjivan 2.0. The program helped usher in a technological revolution in the company.

The Human Resource ably supported the demands of the growing business and expansion by recruiting and onboarding 2,303 new staff members with requisite basic level induction and training. Additionally, the department also conducted several refresher/capacity development courses, sales training, functional training, leadership development training, interviewing skills training, and communication training for the existing staff.

Our staff retention, one of the best in the industry was stable at 82%. High staff turnover remains a critical challenge in this service industry. The grant of in principal approval for Small Finance Bank License was celebrated across regions. Our employees are very positive about the transformation and the vista of opportunities it is going to generate for them. Training sessions (Parivartana) to sensitize staff about the transformation to a Small Finance Bank and the mind set change it entails, changing from a lending company to a deposit taking and a lending company were conducted across regions. 154 Parivartana sessions were organized covering 4,134 participants. Market rationalization of compensation was made for our field staff and management. Our on-going reward and recognition programs and performance based incentives helped sustain the motivation level of our front line staff.

The sixth performance based ESOP scheme was launched in 2015. Over 54% of our current employees across the organization are recipient of the ESOP. Post our successful IPO in April 2016, the employees could witness the market valuation of the ESOPs they hold and this generated excitement and pride in ownership of the company

Our commitment to employee engagement ensures that we continue to be among the top twenty five companies to work for in India and number one in the Microfinance sector in the Economic Times and Great Place to Work Institute survey.

Community and Customer Programs

Our Microfinance plus programs - social and community development programs are localized to foster strong connect with our customers and the communities in which they live.

The program follows a decentralized and participatory approach, empowering customers and staff to jointly decide on and undertake urgently needed community development projects. A wide range of projects has been undertaken over the years. Since children's education has been high on the priority list of our customers, in the early years we focused on upgrading the facilities of Anganwadis - government supported children's crèches.

For the last two years, we have focused on building toilets especially for the girl child in schools, in response to the Prime Ministers Swachh Bharat initiative.

In the sixth year of our self-sustained Social Development Program, we conducted 382 programs across regions targeting building of toilets in schools among other high impact projects with 3,22,000+ beneficiaries with an outlay of Rs. 1.78 crore in line with the requirement under the Companies Act 2013 .

We continue to make significant progress in our Financial Literacy Program - Diksha that we run in partnership with our sister Non Profit Parinaam. Diksha is a module based program to train customers on managing their savings and debt. Since inception of the program, 371 thousand customers were registered of which 83.5% were certified and of the 133 thousand customers requiring bank accounts, 88.4% were helped with opening of bank accounts. Diksha has facilitated 202 thousand cashless loans; 19 thousand graduations to IL, 1,226 higher education scholarships, 23 medical interventions. We extended the Financial Literacy Program to the children of Ujjivan customers this year and are also opening Savings Bank Account for the children. 29 thousand children have attended the Diksha program and of the 19 thousand children requiring bank accounts, 44% were helped with opening of bank accounts.

Sector Outlook

The sector reported significant growth in the last year with 65% growth in disbursements, 84% growth in portfolio and 44% growth in client base, reflecting all round growth and momentum in the sector.

The NBFC-MFI Guidelines released in April 2015 by RBI allowed increase in the permitted limit of indebtedness from Rs. 50 thousand to Rs. 100 thousand, relaxation in income generating assets norms from 70% to 50%. The RBI increased the maximum borrowing limit from MFIs to Rs. 60 thousand in the first disbursement cycle and Rs. 100 thousand in consecutive cycles (compared with Rs. 35 thousand and Rs. 50 thousand earlier). The RBI also increased the cap on the borrowers' maximum household income to Rs. 120 thousand in rural areas and Rs. 160 thousand in urban areas (vis-à-vis) Rs. 60 thousand and Rs. 120 thousand respectively, earlier).Further the RBI Notifications of Nov 2015 allowed increase in maximum loan amount for a tenor less than 24 months to Rs. 30 thousand from Rs. 15 thousand. The revised regulations will open up avenues for product innovation, expand customer base and keep demand for Microfinance loans high as lending rates reduce in line with reducing borrowing costs by MFIs.

Financial inclusion efforts received a big fillip with the launch of the PMJDY and Micro Units Development and Refinance Agency (MUDRA). The setting up of MUDRA has been a positive step for the MFIs. It is believed that, MUDRA will be able to provide funds at 100-300 basis points cheaper than bank funding. This will pull down MFIs' cost of funds depending on the extent of MUDRA funding. MFI borrowers will also benefit as a result.

RBI granted in-principle approval to 10 entities to set up small finance banks which included eight MFIs, one local area bank and one NBFC. The fact that eighty percent of the institutions receiving green signal for SFBs are MFIs outlines the significance of Microfinance for the Indian banking landscape. The progressive work achieved by the MFI sector has been acknowledged by the regulators and the lenders to the sector.

The eight MFIs cumulatively accounted for about 26% of assets managed by the industry as of 2014-15. As they exit the industry, after metamorphosing into SFBs along with Bandhan (which converted into a universal bank and accounted for 20% of March 2015 Gross Loan Book), the MFI industry size will halve.

Transitioning into an SFB will allow the MFIs to reduce their dependence on bank borrowings and provide them with access to a wider range of funds, including savings products and diversified base of customer deposits. The additional funding sources will enable SFBs to broaden their funding sources and access funds at a lower cost, thereby enabling them to offer loans at competitive rates. Multiple licenses granted to payment banks, SFBs and other universal banks may enhance the threat of competition. Transition will entail massive investment in branch up-gradation, branch infrastructure, technology and processes, hiring of people with expertise and up scaling the existing staff which will debrss the margins of the new SFBs in the short term. The biggest challenge will be quickly garnering a strong retail liability base and growing the loan book in the face of stiff competition from other SFBs and existing commercial banks.

Conclusion

Consolidating on the accelerated growth last year, FY 15-16 was a year of sustainable growth across verticals, all round improvement in productivity and profitability. We are currently on the brink of a massive transformation, converting to a Small Finance Bank. On the product side, we have done considerable research on the savings habits, likes and dislikes of the target market customers. The foundation of the transition has been laid with the domestic capital requirement already in place. The transformation work on the technology, channels and human resource is in full swing. A Small Finance Bank being a differentiated bank will help widen access to finance for the unbanked and under-banked. We are confident of building a Small Finance Bank by leveraging our wide outreach, infrastructure, robust risk management framework, and strong customer connect in the coming years.