About SBFC FINANCE Limited

A systemically important, non-deposit taking non-banking finance company (“NBFC-ND-SI”) offering Secured MSME Loans and Loans against Gold, with a majority of our borrowers being entrepreneurs, small business owners, self-employed individuals, salaried and working-class individuals. It has achieved remarkable AUM growth at a CAGR of 40% from Fiscal 2019 to Fiscal 2022 (Source: CRISIL Report) and witnessed strong disbursement growth at a CAGR of 39% during the same period (Source: CRISIL Report). Despite approximately 14.52 million MSMEs registered on UDYAM as of February 28, 2023, there remains a substantial number of unregistered MSMEs in India without access to organized finance (Source: CRISIL Report).

Competitive Strengths:

• Diversified pan-India presence with an extensive network to cater to our target customer segment.
• 100% in-house sourcing, leading to superior business outcomes.
• Comprehensive credit assessment, underwriting and risk management framework.
• Extensive on-ground collections infrastructure leading to maintenance of robust asset quality.
• Healthy liability franchise with low cost of funds.
• Consistent financial performance backed by profitable growth.
• Experienced, cycle-tested, and professional management team with good corporate governance backed by marquee investors.

Business Operation: An NBFC-ND-SI, headquartered in Mumbai, India, offering Secured MSME Loans and Loans against Gold. Received registration from the RBI on September 24, 2008.

Branch Network: An extensive network of 137 branches, as of December 31, 2022, spread across 16 states and two union territories, and approximately 122 districts across India, with Karnataka, Uttar Pradesh, Maharashtra and Telangana being the key states.

Competitors: Compete with players in MSME finance such as Vistaar Finance, Veritas Finance, AU Small Finance Bank and the non-home segment of affordable housing finance companies. (Source: CRISIL Report), and Fedbank Financial Services, Manappuram Finance, Muthoot Fincorp and Muthoot Finance in the Loan against Gold segment. (Source: CRISIL Report)

Macroeconomic scenario

World economy fighting inflation surge post COVID-19 with Indian economy facing volatile commodity prices and tightening of liquidity: The global economy is witnessing tightening monetary conditions in most regions. According to IMF, a broad based and sharper than expected slowdown with high inflation is being faced across the globe. As per the IMF (World Economic Outlook Update –January 2023), global growth prospects are estimated to fall from 3.4% in 2022 to 2.9% in 2023 and then witness an increase in 2024 to 3.1%, the impact of which is expected to be witnessed in the Indian economy as well.  

Russia - Ukraine war slowed global recovery; but India expected to remain one of the fastest growing economies: The IMF too estimates India’s GDP to grow by 6.8% in calendar year 2022 due to its broad range of Fiscal, monetary and health responses. However, IMF projects the growth to slow down to 6.1% in 2023.

Indian economy to be a major part of world trade: Along with being one of the fastest growing economies in the world, India ranked sixth in the world in terms of nominal GDP in calendar year 2021. In terms of purchasing power parity (“PPP”), India is the third largest economy in the world, only after China and the United States.

Financial conditions begin to tighten with mounting inflation: RBI’s Monetary Policy Committee raised policy rates by 40 bps in May 2022. This was followed by 50 bps in June 2022, 50 bps in August 2022, 50 bps in September 2022, 35 bps in December 2022 and another hike of 25 bps in February 2023, thus bringing the repo rate to 6.5%, standing deposit facility (“SDF”) to 6.25% and marginal standing facility (“MSF”) to 6.75%. The hike in interest rate can be seen as a response to both domestic elevated inflation and spill-over risks arising out of aggressive monetary tightening by major central banks. The MPC expects CPI inflation to remain between the 2% - 6% tolerance range and above the medium-term target of 4%.

Key growth drivers

• India has world’s largest population
• Favorable demographics: As of 2020, India has one of the largest young populations in the world, with a median age of 28 years.
• Increasing per capita GDP: In Fiscal 2022, India’s per capita income expanded by 7.6%. As per IMF estimates, India’s per capita income (at constant prices) is expected to grow at 6% CAGR from Fiscals 2022 to Fiscal 2025.
• Rising Middle India population to help sustain growth.
• Financial Inclusion on a fast path in India: Overall literacy in India is at 77.7% as per the results of recent NSSO survey conducted from July 2017 to June 2018 which is still below the world literacy rate of 86.5%.
• Digitisation to support economic growth and financial services, Digital payments have witnessed substantial growth.
• Liquidity boost for NBFCs: The Indian government announced a ₹ 450 billion partial guarantee scheme (for NBFCs) and ₹ 300 billion special liquidity scheme for NBFCs, housing finance companies (“HFCs”) and MFIs, aimed at covering the concern of credit risk perception on mid and small size non-banks.
• ECLGS for MSMEs (₹ 4.5 trillion): Banks and NBFCs are directed to offer up to 20% of entire outstanding credit to MSMEs. MSMEs with up to ₹ 250 million outstanding credits and ₹ 1 billion turnover are eligible for these loans.
• Subordinated debt to MSMEs (₹ 200 billion): The Indian government is also facilitating the provision of ₹ 200 billion as subordinate debt for stressed assets of MSMEs. It will also provide ₹ 40 billion as partial credit guarantee support to banks for lending to MSMEs.
• Equity infusion in MSMEs (₹ 500 billion): The Government has committed to infuse ₹ 500 billion in equity of MSMEs having growth potential and viability. It will also encourage MSMEs to list on stock exchanges.
• Clearing MSME dues; guarantee scheme: The Government has requested central public sector enterprises to release all pending MSME payments within 45 days. It will boost transaction-based lending by fintech enterprises.
• Global tenders disallowed up to ₹ 2 billion: The Indian government will not allow foreign companies in government procurement tenders of value up to ₹ 2 billion. This is likely to ease the competition faced by the MSMEs against foreign companies.
• Loan interest subvention scheme (₹ 15 billon): Under this scheme, the Indian government has provided 2% interest subvention for loans given under Mudra Shishu scheme. These loans are up to the ticket size of ₹ 50,000 and are mostly given by NBFC-MFIs that benefit low-income groups customers.
• Special credit facility for street vendors (₹ 50 billon): The Government announced this scheme to facilitate easy access of credit to street vendors to offset the adverse effect of pandemic on their livelihoods.

RISK FACTORS FOR THE ISSUE:

• Risk of non-payment by borrowers, particularly self-employed individuals and MSMEs, which could adversely impact its business and financial condition. As of March 31, 81.33% of their total AUM of secured MSME loans comes from self-employed customers.
• Higher levels of non-performing assets may impact the quality of the company's portfolio and could adversely affect its business if it fails to adequately provide for these NPAs. As of end of FY23, the GNPA, NNPA and provision coverage ratio stood at 2.43%, 1.41% and 42.04%, respectively.
• The inability to recover full collateral or outstanding amounts from defaulted loans may adversely affect the company's business and financial condition.
• Collateral risks may lead to declining property values, inadequate documentation, and challenges in title verification, impacting loan recovery and incurring additional expenses.
• Gold collateral risks include potential loss exceeding collateral value, due to declining gold prices, challenges in realising assessed value, uncertainties in timely auction sales, and employee fraud in collateral appraisal, leading to bad debt.
• The business has significant capital requirements, and any disruption in their capital sources may adversely impact the financial condition and results of operations.
• Interest rate risk poses a significant vulnerability to business, with volatility affecting net interest income, net interest margin, and overall results of operations and cash flows. In FY23, 88.36% of total income originated from interest earned.
• Credit rating downgrade may raise borrowing costs, hinder financing access, and adversely impact the business.