CRISIL has downgraded its ratings on the debt instruments and bank facilities of Spandana Sphoorty Financial Ltd (Spandana) to ‘BBB/P3+’ from ‘A-/P1’; the ratings continue to be on ‘Rating watch with Negative implications’.

The rating downgrade reflects significant deterioration in Spandana’s business and financial risk profiles because of restricted access to bank funding and considerable decline in collection from Andhra Pradesh (AP) following the promulgation of ordinance on microfinance institutions (MFIs) by the Government of Andhra Pradesh (GoAP). However, Spandana’s near-term liquidity is manageable, given its substantial cash-in-hand and expected collection recoveries from states other than AP.

CRISIL, in its release dated November 22, 2010, had placed its outstanding ratings on the debt instruments of 12 microfinance institutions (MFIs), including Spandana, on ‘Rating Watch with Negative Implications’ (refer to release, CRISIL places ratings of MFIs on ‘Rating Watch with Negative Implications’). This rating action followed CRISIL’s belief that the implementation of the GoAP ordinance has triggered a chain of events that can permanently damage the business models of MFIs, by impairing their growth, asset quality, profitability, and capital-raising ability. Furthermore, the flow of funding to the entire sector from the banking system has been severely constrained. Consequently, liquidity and growth prospects of MFIs have been adversely affected. Structurally, the regulatory jurisdiction and framework for MFIs remains unclear. CRISIL had highlighted in its rating release that it will continue to actively monitor developments in the MFI sector and take appropriate rating actions. The impact on the creditworthiness of individual MFIs could differ depending on their exposure to AP, their liquidity, and their ability to raise capital from alternative sources.

Spandana has a substantial exposure of about 55 per cent of its loan portfolio (as on September 30, 2010) in AP; consequently, the impact of the aforementioned developments on Spandana’s business and financial risk profiles is expected to be much more adverse compared to that on MFIs with lower exposure to AP. There has been no improvement in collection from AP for Spandana; collection level is very low, at around 7 per cent, compared to nearly 99 per cent prior to the GoAP ordinance. The steep fall in collection rates is likely to severely impact the asset quality, profitability, and capitalisation of Spandana over the medium term because of a significant increase in non-performing loans level and, consequently, in credit costs.

Furthermore, Spandana’s access to bank financing continues to be constrained. Therefore, Spandana has significantly scaled down its disbursements outside of AP to around 30 per cent of its total collections to meet its near-term debt repayments. CRISIL believes that could lead to Spandana significantly scaling down its operations much lower than CRISIL’s earlier expectation. CRISIL also believes a significant slowdown in disbursements made outside of AP could also result in a gradual drop in collections from those states, thereby leading to a further weakening in the company’s asset quality and profitability.

CRISIL believes Spandana will be able to meet its debt obligations in the near-term, given its current cash balances (over Rs.4.0 billion) and expected collections from outside of AP. However, Spandana might need to raise external debt funds to meet all of its liquidity requirements beyond the near term.

CRISIL will continue to monitor the regulatory developments in AP and Spandana’s ability to raise funds in the near term. Further rating actions may be taken in the absence of any positive development on the regulatory front or if there is no improvement in Spandana’s collections, liquidity, or access to funding. A further decline in collections, resulting in increased pressure on asset quality and profitability, will also have a bearing on the rating.

About the Company
Spandana was incorporated as Spandana Sphoorty Innovative Financial Services Ltd (SSIFSL) in 2003. The non-banking financial company (NBFC) took over the microfinance operations of Spandana, a non-governmental organisation. Spandana’s name was changed to the current one in 2007-08 (refers to financial year, April 1 to March 31). Spandana 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.

For 2009-10, Spandana reported a profit after tax (PAT) of Rs.2.03 billion on a total income of Rs.7.24 billion, against a PAT of Rs.903.10 million on a total income of Rs.3.57 billion for the previous year.