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It is with great pleasure and a measure of pride that I present to you this landmark 25th Annual Report for the year ended March 31, 2017. In keeping with the spirit of this silver jubilee year, our Company has posted sterling results. We have reported our highest ever annual net profit, our consolidated AUM has grown by 20% and along the way, we have elevated our credit rating by one notch. Importantly, all this was achieved despite the headwinds we faced ir the second half of the fiscal year, following demonetization.
Financial Year 2016-17 was an eventful year with some unexpected developments like the Brexit referendum, Donald Trump''s victory in the US Presidential elections, and the demonetization of high value Indian currency notes. Consequently, the global economic recovery remained weak with a slowdown in international trade, increasing protectionism, and heightened levels of uncertainty, following Brexit and the unexpected outcome of the US election. However, the Indian economy has shown resilience, despite the impact of demonetization. The overall macroeconomic parameters of the country have registered improvement with policy support, aiding structural strength and efficiency. The Indian economy also emerged as a preferred destination for foreign investment with foreign direct investment (FDI) picking up well.
The Government has demonstrated a welcome commitment to the reforms agenda, and signaled its intent to stick to fiscal consolidation. Continuing policy and structural reforms, larger than expected benefits from GST, a conducive economic environment with reasonably low international energy and commodity prices, will aid the growth momentum. At the same time, the fact that the private investment cycle is yet to pick up remains a cause for concern.
In addition, the strained balance sheet of the banking system could curtail the pace of monetary transmission and lower credit growth may have an adverse impact on economic development. At the global level, the gradual pace of normalization of the US interest rate has been well discounted by the market, while economic challenges of the US, Europe and China should have a limited impact on India due to relatively lower trade leverage. Of course, any unexpected geopolitical development can cause turbulence in global financial market, which can impact India too.
OUTLOOK FOR NONBANKING FINANCIAL COMPANIES (NBFCs)
NBFCs are a key component for achieving India''s financial inclusion. In terms of financial assets, NBFCs have recorded robust growth with a CAGR of 19% over the preceding few years. Retail NBFC portfolio growth is expected to slow down to around 16-18% in 2016-17, compared to 19.5% growth recorded in 2015-16. The slowdown in retail credit growth was primarily due to a decline in disbursements during the demonetization affected third quarter of 2016-17 and a subdued recovery in the fourth quarter.
Going forward, the outlook for the NBFC is expected to improve gradually with waning impact of demonetization and stronger economic growth. The demand for credit will improve especially from the agriculture sector with the expectation of another year of normal monsoon. As for the risks, growth in 2017-18 can be impacted by the increasing competitive pressure from banks and the slowdown in some key asset classes, including loan against property (LAP) and microfinance. Overall, retail credit growth for NBFCs is expected to remain in the range of 16-18% for 2017-18.
OUTLOOK FOR GOLD AND GOLD LOAN NBFCs
On earlier occasions, I have usually talked at length about the outlook for gold prices since it is assumed to have an important bearing on the gold loan business. However, these days our fortunes are largely delinked from gold prices, after we shifted our entire gold loans portfolio to short-term loans of three months duration (as against the earlier standard tenure of one year). We believe that falling gold prices are no more likely to erode profitability in any significant way even as a trend of increasing gold price will help in growing the business. As for the outlook for gold price, after the boost to price last year from totally unexpected events like Brexit and Trump''s triumph, we are inclined to believe that gold prices will be relatively stable and predictable over the coming year.
GOLD LOAN NBFCs
A series of rather sudden regulatory changes between FY 2011 and FY 2014 — such as withdrawing priority sector benefits for gold loans given by NBFCs, capping LTV ratio initially at 60% and later revised to 75%, tightening rules for placement of privately placed debentures by NBFCs, and prescribing stringent norms for conducting gold auctions — all had the effect of applying the brakes on the growth of gold loan NBFCs, who then lost considerable ground to banks and the unorganised sector. The market share of specialized gold loan NBFCs came down to 31% in FY 13 from a high of 36.5% in FY 12; and it declined further to 28.6% in FY 14. Since then, there has been a recovery with subdued growth in the three years through fiscal 2015, and a smart pick-up since then. As a result, gold loan NBFCs have managed to regain a good part of the lost ground and their market share had bounced back to 31% by FY 2016.
Now that gold loan NBFCs have recovered fully from the turbulence, and with the wisdom of hindsight, it must be admitted that the regulatory changes have brought about the much-needed clarity and transparency to the business; and helped to increase the confidence of regulators, lenders and other stakeholders. This will be a huge positive for the segment, going forward. As for the near-term prospects, the general expectation now is that growth in AUM will stabilize at around 15% over the next couple of years even as gold loan NBFCs may face increasing competition from Small Finance Banks (SFBs) now coming into the picture.
PERFORMANCE OF NEW BUSINESSES
Back in FY 2015, we took a decision to diversify our business by leveraging our vast customer base developed through our mainstay Gold Loans business over the years. We had a large net worth and access to debt capital on competitive terms. The objective of this diversification was to build (over a period of time) 40-50% of total assets under management (AUM) from sources other than gold loans to mitigate the risk of being a single-product NBFC and eventually meet the eligibility conditions to apply for a universal banking license, especially PSL norms. As I saw it then, our diversification strategy offered two potential advantages. First, it would address the perceived vulnerability to concentration risk. Second, it would enable the Company to cater to existing and new customers with new products and services.
Accordingly, we focused on three main areas, affordable housing finance, commercial vehicle loans and microfinance. With home and commercial vehicle loans, we sought to reach out to the upwardly mobile customers. To cater to the people at the bottom of the pyramid, we decided to take the microfinance route using the collateral-free, joint liability model. The Chennai based SIRVA Microfinance was acquired by us in February 2015 pursuant to this strategy.
Over the last two years (i.e. FY 2016 and FY 2017), the new business verticals have been successful in rapidly scaling up their operations by leveraging the parent''s customer base, branch network and the goodwill of the Manipuri Brand. During this period, we have been able to stabilize the business processes, scale up the operations (including network), enhance the manpower strength of each vertical and foster synergistic lead generation connections with the Company''s network. Today, the important achievement is that having begun from scratch in FY 2015, our non-gold new businesses now contribute nearly a fifth of our total AUM.
As I mentioned in the beginning, we reported our highest ever annual net profit at Rs, 755.85 crore during FY 2016-17. In fact, net profit for the year has more than doubled, compared to the Rs, 353.37 crore that we reported in FY 2015-16. We have also recorded good growth in consolidated AUM which, at Rs, 13,652 crores, is an increase of nearly 20% over the year before. Along with the higher profits and AUM, we have delivered exceptional returns to our investors with RoA of 5.1% and RoE of 24.4%. Our Net worth stands at Rs, 33,618 million and our standalone capital adequacy is at a healthy 25.9%. Putting it all together, the picture is one of growth and profitability, founded on a solid footing of low gearing.
Looking back at our performance over the last fiscal year, we feel there is much to cheer about, especially because it was achieved despite the significant headwinds we faced in the third and fourth quarters.
The momentum of growth in AUM seen in the first two quarters could not be maintained in the second half of the year. There are two macro-economic factors that affected us in the second half of the year.
The first of these was demonetization in November, which appears to have disrupted the working capital cycle of the businesses in the unorganized sector. Our observation is that this sector is still getting back on its feet and it may take another quarter or so before things really get back to normal. The second factor is the drought-like situation and water scarcity faced by the southern states, particularly Karnataka, Tamil Nadu and Kerala. Going forward, Indian Meteorological Department has predicted near normal rains this year. Also, we observe that gold loan disbursements are now getting back to normal and the impact of this should be visible in the coming quarters.
TECHNOLOGY FOCUS TO MEET THE CASHLESS CHALLENGE
While we are optimistic about our future prospects, I must also address that one area which is shaping up as something of a challenge. This is the part about the role of cash in our business, given the environment where the role of cash is being systematically downgraded. We recognize that the future is increasingly cashless or less cash, and therefore we have to think of ways to ease the transition for our customers by offering them a choice of convenient alternatives to cash.
We had launched our Online Gold Loan (OGL) product in October 2015 and today OGL, which is totally cashless at our end and accounts for 12% of our total gold loan portfolio. Our focus now is to increase this figure to more significant levels.
In April 2017, we launched a co-branded prepaid money card. The card can be pre-loaded up to a maximum amount of Rs, 50,000 and be used to withdraw money from all ATMs. We are planning to issue the prepaid card to our customer base and link their existing gold loan accounts to the card. Along with the prepaid card, we have also launched our branded eWallet under the name, MaKash which we hope to scale up in the coming months. We expect that the prepaid card and the eWallet will eventually help in making our Online Gold Loans a more compelling proposition for our customers.
We are also working on an SGL, or SMS based gold loan product, for customers who find it difficult to access the internet. And we are continuing with our long-term work to develop a high-tech IoT (internet of things) based network enabled keyless gold storage technologies that will significantly address the security aspect at the branch. Going forward, we recognize that technology will be a key differentiator in this business and we are determined to lead the way.
I am grateful to all our shareholders and the entire stakeholder fraternity for the support extended to the Company through all these years. We are grateful to the Reserve Bank of India for having done much to bring about transparency and improve risk governance in the industry that is now beginning to bear fruit for all industry players. I seek your continued support, so that we can sustain and improve upon our performance; and at the same time fulfil our vision to become a dynamic, multi-product NBFC, meeting the financial requirements of primarily the disadvantaged sections of society.
Even as we have achieved a lot, I believe there is a lot more we can still do, together.
With best wishes,
MD 8 CEO