Microfinance

Spandana Spoorthy Financial Rating upgraded to positive by CRISIL

CRISIL has revised its rating outlook on Spandana Sphoorty Financial Ltd’s (SSFL’s) long-term debt programme and bank facilities to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘A-‘; the rating on the company’s short-term debt programme has also been reaffirmed at ‘P1’. The outlook revision factors in SSFL’s strong market position demonstrated by steady growth in its portfolio outstanding, while maintaining its sound asset quality and consistently good profitability.

In addition, the company’s capitalisation levels remain adequate despite the expected equity infusion of around Rs.1.75 billion from Temasek Holdings (Pvt) Ltd not materialising because of differences in valuations between the two companies. SSFL’s strong internal accretions have supported the company’s growth plans and capitalisation level. The outlook revision reflects CRISIL expectations that SSFL’s internal accruals will continue to remain strong, though external equity infusion will be important to support the company’s future business plans.spandana spoorthy financial
The ratings continue to reflect SSFL’s strong track record, sound asset quality, healthy earnings profile, and adequate capitalisation. These strengths are partially offset by the company’s significant dependence on its promoter, geographical concentration of operations, high reliance on institutional borrowings, and exposure to risks inherent in the microfinance industry.

SSFL has a strong track record; it is the second-largest microfinance institution (MFI) in India, and among the top ten MFIs globally, in terms of outstanding loan portfolio. SSFL disbursed Rs.60.27 billion during 2009-10 (refers to financial year, April 1 to March 31), as against Rs.30.65 billion during the previous year. It had a loan outstanding of Rs.35.41 billion (assets under management) as on March 31, 2010, against Rs.18.68 billion a year earlier. CRISIL believes that the company will register a healthy compound annual growth rate of around 40 per cent over two to three years, which will result in SSFL’s loan outstanding to be well comparable with larger non-banking financial institutions (NBFCs) in the asset financing business.

spandana Crisil rating

SSFL’s asset quality continues to remain sound, supported by a robust collection mechanism that ensures low overall delinquencies, and adequate provisioning for weak assets. Its portfolio-at-risk (PAR) greater than 90 days remained comfortable at 0.16 per cent (including assigned portfolio) as on March 31, 2010, compared with 0.52 per cent as on March 31, 2009.

CRISIL believes that SSFL will maintain its sound asset quality with a PAR greater than 90 days of less than 1 per cent over the medium term. Furthermore, SSFL has a healthy earnings profile; the company’s net profitability margin (after credit loss) for 2009-10 was 4.4 per cent. SSFL’s adequate capitalisation levels are supported by its strong internal accruals (40 per cent of net worth as on March 31, 2010). Furthermore, the company is expected to continue evaluating capital raising opportunities. CRISIL believes that SSFL will maintain adequate capitalisation, of around 15 to 17 per cent, over the medium term.

CRISIL believes that SSFL’s ability to create management depth will be critical for its targeted growth. While the promoter’s direct involvement in operations demonstrates a strong sense of ownership, CRISIL believes that the current organisational structure will constrain the company’s growth aspirations over the medium term.

However, CRISIL understands that the company is making efforts to broad-base its management depth and is evaluating people for filling some senior management positions. In addition, SSFL’s operations remain concentrated despite expanding its reach to 12 states; as on March 31, 2010, Andhra Pradesh accounted for 56 per cent of SSFL’s outstanding loans. CRISIL believes that high dependency on one state exposes SSFL to geographical and political risks.

Furthermore, SSFL’s reliance on institutional borrowings continues. While the company has tie-ups with multiple lending agencies, its top five lenders accounted for over 50 per cent of its overall borrowings as on March 31, 2010. Given SSFL’s high reliance on wholesale funding, CRISIL believes that the company’s cost of borrowing will remain susceptible to volatility in interest rate movements, over the medium term. SSFL is, however, attempting to diversify its resource profile by tapping the debt capital market. Moreover, the company has been regularly securitising its portfolio through direct assignment to banks. These assignments are classified as priority sector advances.

In addition, the microfinance industry is fraught with risks of non-repayment, as most rural borrowers are highly dependent on income from agriculture, which is vulnerable to uneven rainfall, among other environmental factors. While MFIs have been able to maintain sound asset quality despite this challenge, by having a large part of their operating teams close to the borrowers, their ability to manage asset quality in newer geographies remains to be seen. Furthermore, the industry continues to be exposed to regulatory uncertainties with respect to the impact of guidelines pertaining to securitisation/direct assignments.

Outlook: Positive
CRISIL believes that SSFL will maintain its strong market position within the Indian MFI industry as well as its sound asset quality, healthy earnings profile, and adequate capitalisation levels over the medium term. The rating may be upgraded if SSFL is able to broad-base its management depth, and successfully augment its capital to support its growth plans over the medium term, while maintaining its asset quality as it expands into new regions. Conversely, the outlook may be revised to ‘Stable’ in case of deterioration in its earnings profile, asset quality, and operating environment.

About the Company
SSFL was incorporated as Spandana Sphoorty Innovative Financial Services Ltd (SSIFSL) in 2003. The NBFC took over the microfinance operations of Spandana, a non-governmental organisation. The name was changed in 2007-08. SSFL lends predominantly to women and follows the hybrid group approach, which has the characteristics of both the self-help group and the Grameen Bank (Bangladesh) lending models. During 2009-10, the company’s loan disbursements grew by more than 90 per cent over the previous year, to Rs.58.09 billion.

For 2009-10, SSFL reported a profit after tax (PAT) of Rs.2.03 billion on a total income of Rs.7.24 billion, as against Rs.903.1 million and Rs.3.57 billion, respectively, for the previous year.

Abhay N

Author : 

Abhay is the founder and managing editor of India Microfinance. He is passionate about microfinance, financial inclusion and social entrepreneurship in India.

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1 Comment

1 Comment

  1. pitabas paltasingh

    July 20, 2010 at 1:55 pm

    I sri pitabas paltasingh.Iam intersted working spandana.

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