Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Spandana Sphoorty Financial Ltd (SSFL) to ‘Stable’ from ‘Positive’ while reaffirming the rating at 'CRISIL A'.

 

The revision in outlook reflects a change in CRISIL Ratings’ expectation regarding the trajectory of asset quality and overall profitability of the company over the medium term. This is attributed to a higher than anticipated moderation in asset quality observed over Q2 2025 due to issues like over-indebtedness of borrowers, long drawn impact of elections, intense heat waves and high attrition which are plaguing the sector. Driven by these, the gross and net non-performing assets (GNPA and NNPA, respectively) increased to 4.86% (7.48% including write offs during the quarter) and 0.99% as on September 30, 2024, from 2.60% and 0.53% a quarter earlier and even lower at 1.50% and 0.30% as on March 31, 2024.

 

This led the company to make incremental provisioning of Rs 516 crore for the quarter which marks a spike in annualised credit cost for the quarter to 16.4% from 3.0% for full fiscal 2024. Resultantly, the company reported a loss of Rs 216 crore for Q2 2025 as against a profit of Rs 56 crore for the previous quarter and a profit of Rs 125 crore and Rs 119 crore for the corresponding quarters of the previous fiscal. Return on managed assets (RoMA), after having remained above 4% for many quarters now – declined to 1.9% (annualised) for Q1 fiscal 2025 and further to -6.9% for Q2 fiscal 2025. In light of these developments and the expectation that the ground level challenges may continue over most part of H2 fiscal 2025, the company’s asset quality and profitability are expected to remain vulnerable over the near to medium term.

 

In the aftermath of this, the company has expanded its field presence and operational infrastructure to strengthen recovery efforts at the ground, as well as contain attrition at various levels. Further, it has calibrated its growth strategy and adapted a cautious disbursement approach. Disbursements for Q2 FY2025 were lower at Rs 1,514 crore as against Rs 2,512 crore in the corresponding quarter last year. This has led to reduction in overall assets under management (AUM) to Rs 10,537 crore as on September 30, 2024 (Rs 11,973 crore as on March 31, 2024; Rs 8,511 crore as on March 31, 2023; and Rs 6,583 crore as on March 31, 2022).

 

Nonetheless, the rating continues to reflect the company’s established track record in the microfinance sector along with regional diversity in asset base, its adequate risk management policies and healthy capitalisation. These strengths are partially offset by average resource profile, susceptibility to socio-political issues and modest credit risk profiles of borrowers.

 

Overall capitalisation remains comfortable, supported by steady internal accruals generated in the past and demonstrated ability to raise capital from strategic investors. In the near future, the pace and magnitude at which asset quality and overall profitability restores to normalcy, will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the credit risk profiles of SSFL and its subsidiaries, Criss Financial Ltd (CFL) and Caspian Financial Services Ltd (Caspian). SSFL holds 100% stake in Caspian and 99.90% stake in CFL.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and track record with regionally diversified presence: Incorporated in 2003, the company has a long track record of operating across business cycles and navigating through landmark challenges such as the Andhra Pradesh crisis in 2010, demonetisation and the Covid-19 pandemic. As on September 30, 2024, the company had AUM of Rs 10,537 crore (Rs 11,973 crore as on March 31, 2024, and Rs 8,511 crore as on March 31, 2023) which was diversified across 19 states and 1 union territory through a network of 1700+ branches. As on September 30, 2024, on a standalone basis, the highest exposure of microfinance portfolio to a single state was 13.4%, against the company’s internal limit of 20% per state. Furthermore, on the same date, exposure to the top three states reduced to 38.5% (Odisha, Madhya Pradesh and Bihar) of the overall AUM from 41.6% as on September 30, 2023.

 

• Comfortable capitalisation metrics: Capital position remained comfortable, as reflected in a reported networth of Rs 3,507 crore and on-book gearing of 2.2 times as on September 30, 2024 (Rs 3,645 crore and 2.6 times, respectively, as on March 31, 2024). On the same date, overall capital adequacy ratio (CAR) was healthy at 36%. During the decade through fiscal 2020, the company had raised about Rs 665 crore as fresh equity (including its initial public offer [IPO]) and Rs 791 crore (excluding premium/discount) through debt conversion during corporate debt restructuring (CDR). Incrementally, Rs 354 crore (excluding premium/discount) was raised as fresh cumulative convertible preference shares (CCPS), which were eventually converted into equity. Moreover, the company generated cumulative profit of Rs 1,975 crore over fiscals 2014-2024, which offset accumulated losses of Rs 1,185 crore as on March 31, 2013. In March 2022, the company raised another round of Rs 215 crore as equity share capital and Rs 85 crore as warrants, which was subsequently converted into equity.

 

On a steady-state basis, the company’s capital position will remain healthy backed by its philosophy of maintaining gearing below 5 times and CAR above 25%. To accomplish this, the company is also expected to receive the requisite funding support of high pedigree investors.

 

Weaknesses:

• Moderation in asset quality and profitability owing to high susceptibility to local socio-political issues in the microfinance sector and inherently modest credit profiles of borrowers: The microfinance sector has witnessed three major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010, second was demonetisation in 2016, followed by the pandemic in March 2020. In addition, the sector has faced issues of varying intensity in several geographies. Promulgation of the ordinance on microfinance institutions (MFIs) by the government of Andhra Pradesh in 2010 demonstrated their vulnerability to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency.

 

SSFL’s asset quality, after remaining stable for a while now, has been impacted on account of recent ground level disruptions like over-leveraging of borrowers, prolonged impact of heat waves and elections and heightened attrition at field level. This has led to higher than anticipated slippages into deeper delinquency buckets – depicted by adjusted 90+ dpd increasing to 7.48% (including write-offs) as on September 30, 2024, from 2.22% as on March 31, 2024. Reported GNPA and NNPA increased to 4.86% and 0.99% as of September 30, 2024 from 2.6% and 0.53% on June 2024 and 1.50% and 0.3% a quarter prior. Collection efficiency dipped to 90% for Q2 2025 after remaining above 95% for the preceding 4-5 quarters.

 

To address this issue, the company has calibrated its growth strategy and paused onboarding new-to-credit borrowers and is exercising higher focus on restoring asset quality. Further, the company has also decided to not extend loans to borrowers new to the company, who have more than two active loans. Further, the company has also deployed additional manpower on the field to strengthen its recovery efforts and eventually minimize credit costs.

 

Further, the company has also put a halt on the addition of new centres in some branches so that the existing field team of these branches can focus solely on ensuring timely collection of dues and meeting the existing customers’ disbursement requirements. Nonetheless, as an immediate impact of this moderation in asset quality, the company’s credit costs have surged from sub 3% in fiscal 2024, to 7.0% in Q1 of fiscal 2025 and further to 16.4% for Q2 FY25. Correspondingly, RoMA – having remained above 4% consecutive quarters from March 2023 to March 2024 – declined to 1.9% for Q1 of fiscal 2025 and further to -6.9% for Q2 of fiscal 2025. The company reported a loss of Rs 216 crore in the quarter ended September 30, 2024 as against a profit of Rs 125 crore for the corresponding quarter of the previous fiscal. For H1 2025, the company reported a loss of  Rs 161 crore (Provision of Rs 728 crore) as against a profit of Rs 245 crore (Provision of Rs 119 crore) for the corresponding period of last fiscal.

 

As the business involves lending to the poor and downtrodden sections of society, MFIs will remain exposed to socially sensitive factors, including charging high interest rates, and consequently, tighter regulations and legislation. Furthermore, SSFL’s portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shops, provision stores and small fabrication units. The income flow of these households could be volatile and dependent on the local economy. With slowdown in economic activity, there could be potential pressure on such borrowers’ cash flows at household level, restricting their repayment capability. 

 

While the sector has navigated many disruptions in the past, it is not without credit losses. It remains inherently vulnerable to local elections, natural calamities, and borrower protests, which may increase delinquencies for an extended period of time.

 

• Average resource profile: Average cost of borrowing has remained relatively high at ~12.0% for the first half of fiscal 2025 as compared to 11.9% and 9.2% in fiscal 2024 and fiscal 2023 respectively. In the first and second quarters of fiscal 2025, the company raised around Rs 3,138 crore at incremental cost of funds ~11.4%, as against ~12% during the corresponding period of the last fiscal. SSFL was able to raise DA/PTCs at 10.18% during the first half of fiscal 2024. The share of assignments (17.6%) and securitization (27.0%) during the first half of fiscal 2025 remained high at 44.6% of the incremental borrowings, with the composition of term loans and NCDs being 31.7% and 23.7%, respectively. Nonetheless, the funding cost remained higher than similar sized/rated players. As the company scales up, its ability to source low-cost funds from diverse avenues will remain a key rating sensitivity factor.

Outlook: Stable

CRISIL Ratings believes SSFL will maintain its comfortable capitalisation and its market position will continue to benefit from its established track record in the microfinance sector.

Rating sensitivity factors

Upward factors

• Substantial improvement in the resource profile with reduction in cost of borrowing
• Sustenance of sound asset quality depicted by 90+ dpd remaining below 1% (especially in light of transition in collection model)
• Significant scale up and geographical diversification in operations, with RoMA consistently remaining above 3%

 

Downward factors

• Continued weakening in asset quality leading to lower profitability, with RoMA remaining below 2.5% over a prolonged period
• Moderation in capitalisation, with adjusted gearing remaining above 5 times commensurate to a decline in tier I CAR to below 18%

About the Company

SSFL is a public limited company incorporated under the provisions of the Companies Act, 1956, on March 10, 2003. It was registered as a non-deposit accepting NBFC with the Reserve Bank of India and was classified as an NBFC-MFI effective April 13, 2015. The shares of SSFL were listed on the stock exchanges in India in August 2019 pursuant to the IPO of equity shares. SSFL, along with its subsidiaries, is engaged in lending, providing small-value unsecured loans to low-income customers in semi-urban and rural areas. The tenure of these loans is generally 1-2 years. While SSFL extends microfinance loans, its subsidiaries extend other services such as loans against property, business loans and personal loans.

Key Financial Indicators

Particulars	Unit	Sept-24/ H1 fiscal 2025*	Mar-24	Mar-23	Mar-22	Mar-21
Total managed assets	Rs crore	12952	14342	11037	7,568	10,077
Total income	Rs crore	1444	2534	1476	1,480	1396
Profit after tax	Rs crore	-161	501	12	70	145
Gross NPAs (90+ dpd; excluding legacy Andhra Pradesh portfolio)	%	4.9	1.5	2.1	17.2	5.6
Gearing	Times	2.2	2.6	2.0	1.2	2.0
Return on managed assets**	%	-2.3%	4.0	0.1	0.8	1.6

*unaudited

**Annualised

Any other information: Not Applicable