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Spandana Sphoorty Financial Limited: Rating reaffirmed; Outlook revised to Negative The revision...

Posted: 06 Dec 2024

Spandana Sphoorty Financial Limited: Rating reaffirmed; Outlook revised to Negative The revision in the outlook to Negative considers the deterioration in Spandana Sphoorty Financial Limited’s (SSFL) asset quality and profitability in H1 FY2025 and the expected weak overall performance in the near term. ICRA notes that the microfinance industry is experiencing a significant rise in delinquencies due to multiple factors such as overleveraging of borrowers, political movements such as Karza Mukti Abhiyan, adverse climatic conditions, high staff attrition, etc. SSFL is especially facing high attrition and other operational challenges on account of its intention to transition to a weekly collection model. The company has slowed down this transition on account of the headwinds in the sector. SSFL’s collections were significantly impacted, resulting in a deterioration in its consolidated gross stage 3 to 5.3% as of September 2024 from 1.7% as of March 2024, while its 30+ days past due (dpd) delinquencies weakened to 10.8% from 3.0% during this period (on AUM basis). As a result, credit costs (as a percentage of average managed assets) increased to 10.5% (annualised) in H1 FY2025 from 2.1% in FY2024, resulting in a deterioration in the net profitability (return on average managed assets; RoMA) to -2.3% in H1 FY2025 from 4.1% in FY2024 (0.1% in FY2023) on a consolidated basis. Moreover, SSFL’s asset quality performance is likely to face near-term headwinds in view of the stress in the microfinance segment and the tightening of the lending norms as guided by the MFI-SRO. Consequently, disbursements are expected to remain muted, given the focus on bringing the asset quality under control. ICRA also notes that the company had breached some of the financial covenants related to the asset quality and profitability in respect of Rs. 698.6 crore of non-convertible debentures (NCDs) and Rs. 124.7 crore of term loans outstanding as of October 2024. Of this, as on date, the company has received early redemption request for Rs. 196.3 crore of NCDs from debenture holders, while it has asked for covenant waivers for the other cases. In the near term, SSFL’s ability to obtain the requisite waivers for these cases and restrict significant early redemptions would be a key monitorable. Nevertheless, ICRA notes that the company is maintaining adequate liquidity (on-balance sheet (on-b/s) of Rs. 1,331.5 crore as on September 30, 2024), sufficient to cover approximately two months of debt repayment obligations without considering the inflows from loan collections. The rating continues to factor in the comfortable capitalisation profile and the diversified geographical presence. SSFL’s capital adequacy ratio stood at 35.8% as of September 2024 on consolidated basis, remaining well above the regulatory requirements. On a consolidated basis, the managed gearing was comfortable at 2.4x as of September 2024 (2.8x as of March 2024), providing adequate buffer in view of the elevated credit losses and muted earnings expected in the near term. www.icra .in Page |2 Key rating drivers and their description Credit strengths Diversified geographical presence – SSFL’s consolidated assets under management (AUM) stood at Rs. 10,537.1 crore as of September 2024, catering to 33.0 lakh active borrowers through a network of 1,723 branches spread across 20 states and Union Territories. Its portfolio remains fairly diversified with no state accounting for more than 14% of the portfolio (on a standalone basis). The concentration of the top 5 states in the portfolio (standalone basis) was 58.6% as on September 30, 2024 (59.6% as on March 31, 2024). As on September 30, 2024, its largest state, Odisha, accounted for 13.4% of the standalone portfolio, followed by Madhya Pradesh (13.0%), Bihar (12.2%), Andhra Pradesh (10.1%) and Karnataka (10.1%). However, the top 5 most impacted states (standalone basis) in terms of the recent asset quality performance, which constituted 42.5% of the loan portfolio, contributed 61.4% to the total stage 3 assets. ICRA notes that the company has recently started initiatives such as risk-based classification of branches, which would restrict member/centre additions in geographies perceived to be high risk. Going forward, SSFL’s incremental growth trends in such high-risk geographies and its performance in these areas would be monitorable. Comfortable capitalisation profile – SSFL’s capital adequacy ratio stood at 35.8% as of September 2024, well above the regulatory requirement of 15%. On a consolidated basis, the managed gearing was comfortable at 2.4x as of September 2024, reducing from 2.8x as of March 2024 due to the decline in the AUM in H1 FY2025. Disbursements are expected be muted in FY2025, thus impacting the AUM. However, it is expected to improve in subsequent years as the asset quality performance normalises. ICRA expects SSFL to maintain its consolidated managed gearing well below 4.5x over the next two years. Credit challenges Pressure on asset quality; risks associated with microfinance business – SSFL’s collections have been significantly impacted in YTD FY2025 on account of multiple factors, including high employee attrition, climatic factors, overleveraging of borrowers, external factors such as Karza Mukti Abhiyan, and its transition to the weekly collection model from the existing monthly model. The monthly collection efficiency 1 dropped to 88.3% as of September 2024 from 96.7% as of March 2024. Consequently, the gross stage 3 assets (consolidated) deteriorated to 5.3% as of September 2024 from 1.7% as of March 2024 (2.9% as of June 2024). Similarly, the 0+ dpd deteriorated to 16.1% in H1 FY2025 from 4.3% in FY2024 (on AUM basis). Write-offs stood at 5.6% in H1 FY2025 (consolidated; annualised). As of October 2024, 26.7% of SSFL’s borrowers had availed loans from more than three microfinance lenders2 . Headwinds for the asset quality could continue in the near term from such overleveraged borrowers, who are likely to face constraints in obtaining incremental microfinance loans, in line with the guardrails for microfinance lenders by Micro Finance Institutions Network (MFIN). The company is obligated to limit its engagement to borrowers with a maximum of three microfinance lenders (including SSFL) from January 2025. This is anticipated to lead to a further deterioration in the asset quality. As of September 2024, roughly 26.9% of the total borrowers will be classified as SSFL+3 and SSFL +>4, thereby exceeding the parameters set by the guardrail. As such, the stress is expected to continue in Q4 FY2025 as well. Over the last few months, the company has taken some measures to stabilise its asset quality. These include the acquisition of new-to-credit customers (addressing issues arising from multiple identity proof and other gaps in bureau information), addition of new centres in 15% of its branches, and pausing of acquisition of new members in 46% of its branches. Further, SSFL is strengthening its collections/recovery teams. However, considering the marginal borrower profile, the unsecured nature of lending, and other regulatory and political risks, the company’s ability to bring its asset quality performance under control over the next few months remains to be seen.