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Spandana Sphoorty Financial Ltd The reaffirmation of the rating of the commercial paper (CP), no...

Posted: 29 Dec 2024

Spandana Sphoorty Financial Ltd The reaffirmation of the rating of the commercial paper (CP), non-convertible debentures (NCD) and bank term loans of Spandana Sphoorty Financial Limited (SSFL) is based on the company’s healthy liquidity profile, comfortable capitalisation position with low gearing levels as compared to peers, diversified resource profile with increasing share of bank borrowings, though slightly moderated in H1FY25 and geographically diversified AUM as on September 30, 2024. However, CARE Ratings Limited (CARE Ratings) has revised its outlook on the long-term bank facilities and NCD of SSFL to ‘Negative’ from ‘Stable’ owing to weakening of profitability and asset quality metrics in H1FY25 and expectation of further rise in delinquencies and consequent uptick in the credit costs and overall weak profitability of the company in near term. Rating constraints also factors in inherent risks involved in the microfinance industry, including unsecured lending, marginal profile of borrowers, socio-political intervention risk, and regulatory uncertainty. The assets under management (AUM) of SSFL (on a consolidated basis) have shrinked from Rs. 11,973 crore in FY24 to Rs. 10,537 crore in H1FY25 owing to muted disbursements in H1FY25. CARE Ratings notes that the microfinance industry is currently experiencing significant stress, primarily due to increasing borrower indebtedness, as larger ticket sizes and multiple loans taken by low-income individuals have led to over-leverage and difficulties in repayment. Compounding this issue is the dilution of the joint liability group (JLG) model, with declining centre attendance, high attrition rates among field staff and natural calamities that has significantly affected the collection efficiency of the microfinance institutions (MFIs). SSFL is currently dealing with significant attrition and operational difficulties amidst its plan to shift to a weekly collection model. However, the company has decelerated this transition in light of the challenges faced within the sector. Further, the company has stopped acquiring new-to-credit customers and also stopped new customer acquisition in 46% of the branches amidst stress in MFI sector. Owing to rise in delinquencies in H1FY25, there has been an sharp uptick in the annualized credit costs (as a percentage of average total assets) of the company from 2.32% in FY24 to 11.76% in H1FY25 and deterioration in its Gross Stage III assets to 5.31% and Net Stage III assets to 1.13% (consolidated GNPA% of 4.86%) as on September 30, 2024 (compared to Gross Stage III assets of 1.68% and Net Stage III assets of 0.34% as on March 31, 2024). This has negatively impacted the profitability of SSFL with decline in annualized Return on Total Assets (RoTA) from 4.47% in FY24 to -2.62% in H1FY25. CARE Ratings also note that as on September’24, the company has breached certain financial covenants in respect of borrowings amounting to ? 867.74 crore (this comprises of ? 732.88 crore of non-convertible debentures (NCDs) and ? 134.86 crore of term loans outstanding), resulting in these borrowings becoming repayable on demand subject to fulfilment of the terms of debenture trust deed. Till date, debenture holders of NCDs worth ? 198.32 crore have exercised early redemption, while it has received waivers from 2 lenders for all the term loans. These covenant breaches were reported by the company as a part of declaration of financial results for the quarter ended September 30, 2024. Going Forward, CARE Ratings expects continued lender support and does not anticipate requests for sizeable recall or accelerated repayments. Any deviation from the lender's current stance will be a critical factor for ongoing monitoring. Going forward, CARE Ratings anticipates a moderation in loan book growth considering the ongoing MFI stress. Additionally, with rising credit costs expected to exert further pressure on profitability, Company’s ability to maintain its financial flexibility in the current environment will remain key rating monitorable.