spandana sphoorty financial ltd share price Management discussions

1. MACRO-ECONOMIC OVERVIEW Global Economy

The global economy is currently experiencing a period of slower growth as it gradually recovers from the substantial challenges posed by the Covid-19 pandemic and the Russia-Ukraine conflict. The energy and food markets, which were previously affected by the conflict, are now showing signs of stabilisation. Additionally, central banks across the world are implementing measures to tighten monetary policy in order to address inflation and bring it closer to target levels. According to the International Monetary Fund (IMF), global growth is projected to decelerate from 3.4% in CY2022 to 2.8% in CY2023. Inflation rates are expected to ease, albeit at a slower pace than initially anticipated, declining from 8.7% in CY2022 to 7.0% in CY2023, and further to 4.9% in CY2024.

Global Economic Growth (% change)

	Year-on-Year
	Estimate	Projections
	CY2022	CY2023	CY2024
World	3.4	2.8	3.0
Advanced Economies	2.7	1.3	1.4
Emerging Market and Developing Economies	4.0	3.9	4.2

Source: International Monetary Fund (IMF)

In the coming years, a widespread decrease in medium- term growth projections in the advanced economies is anticipated. The growth baton has been passed on to the BRIC nations from G7 countries. All the recent data indicates the same. Over the past decade, there has been a gradual decline in the five-year ahead growth estimates, dropping from 4.6% in CY2011 to 3.0% in CY2023. While part of this deceleration can be attributed to the natural convergence of previously rapidly growing economies, such as China and Korea, recent sluggishness is also influenced by concerning factors. These factors include the lingering effects of the pandemic, the slow pace of structural reforms, increasing trade tensions, declining direct investment, and slower adoption of innovation and technology in fragmented regions. It is important to note that a fragmented and polarised world is unlikely to foster overall progress or effectively address global challenges like climate change and pandemic preparedness.

Indian Economy

Indias economy has demonstrated remarkable resilience and achieved significant progress, despite facing challenges such as inflation, supply chain disruptions, and geopolitical tensions. A crucial factor behind Indias economic growth has been the sustained momentum in export expansion during the first half of FY23. This growth has resulted in an increased share of Indias merchandise exports in the global market. As export growth slowed down, a resurgence in domestic consumption gained momentum, further fuelling Indias economic growth. Consequently, domestic capacity utilisation has also risen. For FY23, Indias economy registered a growth rate of 7.2%. This growth was primarily propelled by a rebound in private consumption along with high capital spending on infrastructure by the Government.

In FY23, inflation in India went through three distinct phases. The first phase witnessed a rising trend, peaking at 7.8% in April 2022. This upward trend was primarily attributed to the Russia-Ukraine conflict and crop failures caused by excessive heat in certain regions of the country. The agricultural sector also faced challenges due to uneven rainfall and high temperatures during the summer, resulting in reduced supply and increased prices for key products. The second phase of inflation was characterised by a period of stability, with inflation hovering around 7.0% until August 2022. Finally, the third phase marked a decline in inflation, reaching approximately 5.7% by March 2023. The general trajectory of the inflation rate continues to be downward bound with May 2023 CPI reading coming in at 4.25%. However, RBI expects inflation to remain above their comfort zone for a prolonged period in the current financial year.

Starting from May of the previous year, the Reserve Bank of India (RBI) has implemented six consecutive increases in the repo rate, resulting in a cumulative hike of 250 basis points (bps). This has led to a significant shift in the repo rate from 4% to its highest level in four years, reaching 6.50%. The primary objectives behind these rate hikes are to curb high inflation and maintain sustainable economic growth. At the same time to ensure the smooth functioning of the financial system, RBI has taken various measures to address the overall liquidity in the system. Besides this RBI in conjunction with GoI has taken developmental steps to address issues faced by the financial sector and make the banking sector future ready.

The capital expenditure (capex) of the central government played a significant role in driving the Indian economy during FY23. Currently, India is on the verge of three-pronged growth drivers - increased Government capex especially on infrastructure, growth in private sector investments as they experience near full capacity utilisation and increased credit financing as the healthy balance sheets will allow banks to lend more. All this will auger well for the Micro, Small and Medium Enterprises. This growth is further supported by the extended Emergency Credit Linked Guarantee Scheme (ECLGS) implemented by the Union government.

Key high-frequency indicators for FY23 indicate a positive trajectory for India. The estimated foodgrain production for FY23 is projected to reach a recordbreaking 330.5 million tonnes, surpassing the previous years 315.6 million tonnes. After three consecutive years of decline, the domestic two-wheeler industry experienced year-on-year double-digit growth in FY23, with sales reaching 15.86 million units, a 17% increase compared to the previous fiscal years 13.57 million units. Industry estimates suggest that tractor sales in India, the worlds largest market for farm vehicles, reached a record high of 944,000 units in FY23, marking a 12% increase from the previous year.

Furthermore, there has been a notable revival in rural demand in India. Factors contributing to this revival include the subsiding of inflation from previous peaks, a decline in commodity prices such as crude oil, palm oil, wheat, and packaging materials, as well as improved crop yields that have resulted in higher farm incomes.

Going forward, Indias economy is on track to double its current annual GDP, which stands at approximately US$3.5 trillion, to reach a significant milestone of US$7 trillion by the year 2030. However, sustaining consistent high growth over a medium-term time frame will necessitate more than just relying on Indias twin strengths of demographics and consumption.

2. INDUSTRY OVERVIEW

The microfinance industry in India is a fast-growing sector that provides financial services to the unserved and underserved sections of society, especially in rural areas. Microfinance institutions (MFIs) in India provide small loans, savings, insurance, and other financial services to low-income individuals, microenterprises, and self-help groups. Here are some of the key roles played by MFIs in India:

Providing access to credit: MFIs provide small loans to low-income individuals, microenterprises, and selfhelp groups, who may not have access to traditional banking services. These loans help people start or grow small businesses, manage cash flow, and cope with emergencies.

Promoting financial inclusion: MFIs promote financial inclusion by providing access to basic financial services, such as savings accounts, insurance, and remittances. This helps people build financial resilience and plan for the future.

Empowering women: Many MFIs in India focus on lending to women, who are often excluded from traditional banking services. By providing loans to women, MFIs can help promote gender equality and womens empowerment.

Supporting rural development: Since many MFIs operate in rural areas, they play an important role in supporting rural development by providing access to credit and other financial services. This can help create jobs, stimulate economic growth, and reduce poverty.

Driving innovation: MFIs in India have been at the forefront of developing new business models, such as digital microfinance, that leverage technology to reach underserved communities more efficiently and effectively.

Overall, MFIs in India play a critical role in promoting financial inclusion and supporting economic development, especially in rural areas of India.

In FY23, the microfinance industry saw robust growth, with increased disbursements and customer additions benefiting from the tailwinds of the economic revival. The industry experienced year-on-year growth of 22%, resulting in a substantial loan portfolio of Rs 3.5 trillion as of March 31, 2023. This growth reflects the industrys ability to serve a significant number of individuals, with 130 million active loan accounts and 66 million unique borrowers as of March 31, 2023. 82

NBFC-MFIs are the largest providers of micro-credit, with an outstanding loan amount of Rs 1.4 trillion, accounting for 39.7% of the total industry portfolio. Thirteen banks hold the second-largest share of the portfolio in micro-credit, with a total outstanding loan of Rs 1.2 trillion, which is 34.2% of the total micro-credit universe.

Status of portfolio, unique borrowers and loan accounts

	March 31, 2022			March 31, 2023
Entity	Unique Borrowers (million)	Active loan accounts (million)	Portfolio O/s (billion)	Unique Borrowers (million)	Active loan accounts (million)	Portfolio O/s (billion)
NBFC-MFIs	27	42	1,004	29	51	1,383
Banks	29	43	1,141	32	47	1,191
SFBs	14	18	483	16	20	578
NBFCs	7	8	197	9	10	294
Others	1	2	30	1	2	36
Total	58	113	2,854	66	130	3,483

As of March 31, 2023, microfinance operations were present in 729 districts across 28 states and 8 union territories (UTs), including a very small portfolio in the UT of Ladakh and Lakshadweep. The top 10 states, based on universe data, constitute 83.9% of the Gross Loan Portfolio (GLP). The state of Bihar remains the largest state in terms of portfolio outstanding, followed by Tamil Nadu and Uttar Pradesh.

There has been a notable improvement in the overall health of the portfolio compared to the previous year. This improvement is evident in the Portfolio at Risk (PAR) >30, which stood at 10.5% as of March 31, 2023, a decrease from 13.1% recorded on the same date in 2022. Additionally, both PAR >90 and PAR >180 have demonstrated an overall improvement when compared to the previous quarter as well as the same quarter of the last fiscal year.

Since the implementation of the new harmonised MFI framework by the RBI starting from April 1,2022, nonbanking micro-finance companies have experienced a significant increase in market share. We expect this trend of non-banking micro-finance companies gaining market share to continue in FY24, driven by new borrower additions across India, higher loan amounts for individual borrowers and introductions of new products to cater to evolving customer need.

Transitioning from interest rate caps to risk-based pricing and redefining household income, along with the implementation of the 50% maximum financial- obligation-to-income ratio (FOIR), will support financial inclusion and limit borrower indebtedness. These measures will benefit the sector by improving yields, asset quality, and ultimately leading to higher profit margins.

Technology will play a crucial role in enabling efficiency within the microfinance sector. Although it is not expected to cause disruption, technology will streamline processes. Many microfinance companies are using technology to make customer journeys seamless while reducing the time taken to serve individual customers. Going forward, companies are looking at ways to implement AI/ML in their customer profiling and credit decisioning.

Looking ahead, the MFI sector is expected to sustain a stable growth pace, buoyed by robust demand within the industry, a rising level of economic activity, and a revival of consumer demand.

3. BUSINESS HIGHLIGHT AT SPANDANA (STANDALONE)

Expanding to new geographies

In FY23, Spandana strengthened its presence by expanding to 1,153 branches across 18 states, covering 314 districts. Our operations are well- diversified at the branch, district, and state levels, providing us with significant growth opportunities to expand our business further in these areas and explore new geographies. During the year under review, we increased our branch network by 9.9%, and our widespread presence across India allows us to reach out to more customers and offer our services to more communities. We added 112 new branches during the year.

Growing customer base

With a strong emphasis on customer acquisition- driven growth, we added approximately 0.82 million new borrowers over the course of the year. This has increased the total customer base we serve to 2.7 million (including customers loans written-off and sold to ARC) as of March 2023. Our strategic approach involves targeting customers in deep rural and semiurban areas, allowing us to solidify our presence in tier 3-5 geographies. This expansion strategy enables us to serve a broader segment of the population while diversifying our market reach.

Improvement in disbursement and collection Total disbursement for the year stood at Rs 76,242 million as compared to Rs 30,656 million in FY22. Over 50% of total loans disbursed in the year were to borrowers who were new to Spandana. There is a steady demand for microfinance and the tailwinds from economic growth are further fuelling the demand.

Disbursement trend

Improvement in asset quality We have witnessed a significant improvement in the quality of our portfolio over the quarters. By end of Q4FY23, our current book stood at 96.4%, a improvement from 68.4% reported end of Q4FY22. Our Gross Non-Performing Assets (GNPA) decreased to 2.07% compared to 18.7% end of Q4FY22, while our Net Non-Performing Assets (NNPA) reduced to 0.64% from 10.5% end of Q4FY22. Our efforts translated in to our 1 to 90 book improving significantly to 1.5% by March 2023 from 14.4% end of March 2022.

Our collection efficiency at the end of Q4FY23 was 102.3%. We continuously encourage customers to make timely repayments. This sustained increase in our collection efficiency is a result of our strong focus on staff training, reward for process adherence and asset quality, and regular client engagement activities.

Expanding team strength

At Spandana, we believe that our people are our biggest asset. Our organisation is driven by the experience, expertise, and enthusiasm of our team. We are focussed on attracting, retaining, and developing a talented workforce, which is essential for supporting our organisations progress.

We foster a diverse and inclusive culture that encourages collaboration, agility and innovation. We value and respect the differences in our employees and are committed to providing equal opportunities for everyone to grow and develop within our organisation.

As of FY23, we had a total of 9,674 employees, including our field staff. We have been actively enhancing our field staff base to facilitate our future expansion plans. During the year, our workforce expanded by 15.5%.

Strengthening our technology architecture

We have been revamping our IT infrastructure to enhance user experience, enable insights-driven operations, ensure platform stability and security, embrace digital transformation and automation, leverage advanced analytics for insights, and prioritise secure operations.

PORTFOLIO MIX

Managing portfolio risks forms a major part of a lending institutions operations. In order to mitigate concentration risks, we have diversified across ticket sizes and loan cycles. Our portfolio is well-balanced, with a higher share of advanced loan cycles, reflecting our ability to retain customers over the long term. Furthermore, we have robust asset quality across loan cycles, which is indicative of our sound credit risk management practices.

Loan outstanding

We reported the highest-ever Assets Under Management (AUM) which increased by 29% to 79,796 million at the end of FY23 from Rs 61,989 million at the end of FY22. Additionally, the average loan outstanding per borrower increased from 27,617 at the end of FY22 to 37,528 at the end of FY23.

Cycle-wise mix

We have a well-diversified loan portfolio that spans different loan cycles. Our loan products and processes are designed in a way that makes it convenient for our customers to borrow and make regular repayments. We work hard to ensure that our loan products continue to meet the requirements of our customers. About 58% of our borrowers are in the second cycle or beyond indicating that a large number of our borrowers continue to find value in our loan products and services. Our customer-centric approach has enabled us to establish sustainable relationships with our borrowers and build a solid foundation for new borrower relationships.

Rural focus

Rural India offers immense potential for microfinance lending with the Government laying more emphasis on rural development. Rural-centric infrastructure projects and efforts to uplift medium and small enterprises have shown great confidence in microfinance lending in these underserved sections. At Spandana, our loan exposure is 87% in rural and 13% in semi-urban areas, indicating our active focus in these regions. Our experience in dealing with rural clients has revealed that the rural loan portfolio exhibits a healthy asset quality in terms of timely repayment.

5. PRODUCT MIX

At Spandana, we are committed to empowering women from low-income rural backgrounds through our loan products. One of our flagship products is JLG (Joint Liability Group) based micro-loans, specifically designed to cater to Women Entrepreneurs. These small loans, provided exclusively to women borrowers through Joint Liability Groups, enable them to become financially independent since these loans are for income generating activities. Our loans not only provide the necessary financial support but also instill a sense of trust, empowering these women to start or expand their entrepreneurial ventures. We take great pride in being catalysts for positive change in the lives of millions of our customers.

Additionally, our Loan Against Property product makes it convenient for small entrepreneurs to access funds for their next big step. Whether its acquiring equipment, renovating or expanding office space, or for working capital purpose, our loan allows entrepreneurs to unlock the value of their property and fulfill their business needs.

During FY24, we also intend to add more products like affordable housing loans, home improvement loans and loans to nano enterprises.

6. GEOGRAPHICAL DIVERSIFICATION

Over the years, the microfinance industry has seen multiple extraneous events unfolding across various states resulting in brief periods of stress in the portfolio of the industry. The risks include customer concentration risk especially when the economic activity of customers is similar, natural disasters like cyclones and floods. The knowledge and market insights gained over the years have helped most large players become resilient to extraneous shocks by diversifying their presence across the country. At Spandana, we have also included portfolio caps across branch, district and state levels to protect the organisation from such high-impact events.

State level

Our loan portfolio is spread across 18 states. At the end of FY23, none of the states had an exposure of more than 20% of AUM at a consolidated level. To effectively manage concentration risk, we keep internal benchmarks and limits to monitor our portfolio. Madhya Pradesh had the highest disbursement in FY23 accounting for 15.7% of total disbursements

State	AUM (in mn)	% of AUM
Madhya Pradesh	13,442	15.8%
Andhra Pradesh	12,750	15.0%
Odisha	11,943	14.0%
Karnataka	8,381	9.8%
Maharashtra	7,767	9.1%
Bihar	6,617	7.8%
Jharkhand	5,291	6.2%
Chhattisgarh	4,225	5.0%
Gujarat	4,035	4.7%
Rajasthan	3,733	4.4%
Others	6,926	8.1%
Total	85,111	100%

District Level

Apart from limits on state-level risk concentration, we have internal caps in place at the district level within states to ensure that no single district accounts for more than 2% of the total AUM.

We are committed to maintaining a lean and efficient cost structure that allows us to serve our customers better and generate sustainable long-term value for our stakeholders.

7. CONSOLIDATED FINANCIAL PERFORMANCE (IND-AS)

In FY23, our total income was Rs 14,770 million (compared to Rs 14,800 million in FY22), with a Profit after Tax of 124 million (Rs 698 million in FY22). Our profitability was impacted due to impairment costs of Rs 4,443 million recorded during the year primarily due to higher SMA and NPA buckets at the beginning of the year. Our net interest income for the fiscal year was Rs 10,192 million (compared to Rs 9,399 million in FY22).

During the year, our total borrowings raised stood at Rs 47,753 million from a diversified base of lenders, including multiple new banks, NBFCs, other institutions. Despite operating in a disruptive environment, we ended the year with strong funding access and cash and cash equivalents of Rs 10,045 million. Our cost of borrowing during the year was 11.34%, marginally down from 11.5% in FY22.

Our operating expense ratio, i.e., opex to AUM ratio, stood at 7.3% in FY23.

Credit ratings

Rating Instrument	Rating Agency	Rating	Outlook	Year
Bank Facilities / NCDs / MLDs	ICRA	A-	Positive	March 2023
Bank Facilities / NCDs/ MLDs		A	Stable
CPs	India-Ra	A1	Stable	January 2023
Bank Facilities	CRISIL	A	Stable	September 2022

Fund sources

We have been actively working to diversify our borrowing sources and establish strong relationships with both existing and new lenders. To meet our current funding requirements, we have borrowed from various entities such as public and private banks, financial institutions, and capital markets. In FY23, we achieved a significant milestone by raising funds through External Commercial Borrowings (ECB) for the first time. Our total number of lenders at the end of the year was 48.

8. Key Ratio (consolidated basis)

a) Asset Under Management (AUM): Rs 85,111 million

b) Net Interest Income: Rs 10,192 million

c) Net Profit Margin: 0.84%

d) Cost to Income Ratio: 46.9%

e) Opex to AUM Ratio: 7.3%

f) Interest Coverage Ratio: 1.06 times

g) Debt Equity Ratio: 1.96 times

h) Pre - Provision Operating Profit (PPOP)

Margin: 38.1%

i) Pre - Provision Operating Profit (PPOP)/Average Total Assets: 6.8%

j) Return on Equity (ROE): 0.40%

9. HUMAN RESOURCE MANAGEMENT

Our people are our greatest asset. We are dedicated to empowering our people to make a positive difference and we do this by fostering an inclusive, prudent, progressive and performance-based organisation that encourages the best from each individual. We have plans afoot to sharpen the skillsets and mindsets of our people through a wide range of learning and development programmes so they can remain relevant, competitive and add value to their careers and to the organisation.

To sustain our growth strategy, we actively identify team members with leadership potential across the organisation to accelerate their professional progress and to support the building of their long-term careers with us. We also search externally for high-calibre and early-career talents to deepen our bench strength. The employee strength increased from 8,379 in the previous year to 9,674 as of March 31, 2023.

10. CORPORATE SOCIAL RESPONSIBILITY

As a responsible corporate entity, we are dedicated to creating economic and social value for our stakeholders. Our goal is to drive social transformation through targeted, consistent, and sustainable initiatives. To accomplish this, we have formulated a comprehensive strategy that adopts an integrated development approach for our community programs. We strongly believe that the key foundations for stability and growth within communities lie in areas such as skill development, livelihoods, health, education, water, the promotion of clean energy, as well as financial and digital literacy. Our efforts have already made a significant impact, with over ~0.14 million beneficiaries benefiting from our initiatives in FY23 alone, with a notable 71% of them being women.

11. Outlook for FY24 SWOT analysis

Key priorities for FY24

We have outlined our vision till 2025, where our goal is to scale up our business to an Assets Under Management (AUM) of Rs 180 billion. Team Spandana is working cohesively and diligently towards achieving the goals laid down in our Vision 2025.

Our growth will be customer acquisition led. The strategy involves focusing on customers in deep rural and semi-urban areas, thereby strengthening our presence in tier 3-5 geographies.

Branch network expansion is one of the priority areas for the company. After opening 112 branches during FY23, we have a target of 400 new branch openings by FY24, most of them being in the 7 focus states identified for expansion.

The 7 key states of Gujarat, Rajasthan, Haryana, Uttar Pradesh, Bihar, West Bengal, and Tamil Nadu are the ones where Spandana has a lower market share. We are focused on growing our presence by acquiring more customers and building a quality book in these states.

Another priority is on delivering operational efficiencies. Our focus lies in enhancing key performance indicators such as AUM per Branch, AUM per Loan Officer, Borrowers per Branch, and Borrowers per Loan Officer. By optimising these metrics, we aim to increase productivity and effectiveness in serving our customers while maximising overall operational performance.

12. RISK AND MITIGATION

Risks are an inherent and unavoidable part of any business. Appropriate risk management is crucial in order to protect stakeholder interests, ensure adherence to regulatory requirements, and maintain the long-term sustainability of the business. Risk Management at Spandana is integral and core of the business model, focusing on mitigating the adverse impact of risks on the business objectives and enabling us to leverage market opportunities effectively. We leverage market knowledge gathered over more than two decades to strengthen the viability and improve growth prospects. As a financial institution, we are exposed to risks that are particular to the lending that we do and the environment in which we operate. We continuously identify and implement comprehensive policies and procedures to assess, monitor and manage risk. Our risk management process consists of three components: business risk assessment, operational controls assessment, and compliance -processes. The Risk Management Committee reviews our risk management policy.

The key risks being monitored are:

1. Concentration risk

2. Political risk

3. Operational risk

4. Credit risk

5. Liquidity risk

6. Market risk

7. Interest rate risk

For each of the risks, there are corresponding mitigation plans which are reviewed and refined from time to time.

13. INTERNAL CONTROL SYSTEMS

Effective internal control is crucial for reducing the risk of financial loss. It helps ensure accuracy, completeness and reliability in financial statements. At Spandana, our internal control measures are designed to protect our assets, adhere to applicable laws and compliances and prevent fraud and malpractices. The Company takes a holistic approach to information security. It enables the Company to maintain the confidentiality, integrity, and availability of consumer data and the Companys information assets.

The internal control system is supplemented by concurrent internal audits and regular reviews by the management. The internal audit department is responsible for authorising, documenting, monitoring as well as maintaining a process compliance check across all branches, while also identifying potential financial misappropriations. Further, with regard to financial statements and operations, the Company has effective internal controls in place.

We have a strong team of more than 150 auditors who are based out of branches and closely monitor the portfolio. Apart from general branch audits, other audits are meticulously carried out depending on internal triggers, which assist us in recognising any potential branch shortcomings.

Cautionary Statement

Statements in this report on Management Discussion and Analysis relating to the Companys objectives, projections, estimates, expectations, or predictions may be forward-looking within the meaning of applicable securities laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results might differ materially from those expressed or implied depending upon factors such as climatic conditions, global and domestic demand-supply conditions, raw materials cost, availability and prices of finished goods, foreign exchange market movements, changes in Government regulations, tax structure, economic and political developments within India and other factors such as litigation and industrial relations. The Company has obtained all market data and other information from sources believed to be reliable or its internal estimates, although its accuracy or completeness cannot be guaranteed. The Company assumes no responsibility in respect of forward-looking statements herein which may undergo changes in the future based on subsequent developments, information or events.