Spandana Sphoorty Financial Ltd Management Discussions.


1. Operational Growth:

Closely monitored expansion


1.1 Geographical Expansion

We expanded our operations to 2 new states and 42 new districts in FY19 marking our presence in a total of 17 states and 264 districts. There has been a 33% increase in the number of branches as compared to the previous year.


1.2 Customer Acquisition

We have added a total of 0.9 Million customers in FY19, an increase of 55% in the customer base compared to previous year. We disbursed 1.9 Million loans in FY19 displaying a growth of 12% compared to FY18. In terms of value, disbursement increased by 29% on a year-on-year basis.


1.3 Staff wise growth

Spandana has a total of 6,656 employees. During the year, the employee base increased by 65%, which led to an increase in the staff per branch ratio from 5.8 in 2018 to 7.2 in 2019. Despite this, we have the least number of employees per branch among major MFIs indicating high levels of automation and efficiency. The field staff base has already been strengthened to support future growth.


2. Portfolio Mix:

Containing risks at State, District and Branch level

Spandana has been consistently maintaining a good portfolio mix across – ticket sizes, loan cycles and rural/ urban portfolio mix. These are presented in the below graphs. Vintage of business has helped us maintain a higher share of portfolio in advanced loan cycles showing seasoned business. A higher rural penetration gives us better asset quality.


2.1 Ticket Size

While continuing our product simplicity, we have been successful in maintaining a diverse mix of ticket sizes. We have been able to meet customers needs and at the same time, limit the lending within overall caps set for customers, depending on local demographics. Average ticket size has increased by 15% to Rs. 26,279 during FY19 from Rs. 22,826 during FY18.


2.2 Cycle-wise Mix

We have a much diversified portfolio across loan cycles. Rolling on the path of growth, we had 51% of our customers having first cycle loan portraying our ease of access to the under-served customers. Also, more than 34% of our customers are in 3rd cycle and above, showing our continual bond with customers year after year and a seasoned portfolio. Our customer-focused service has allowed us to retain customers and at the same time acquire new customers.


2.3 Rural-Urban Mix

In the changing market dynamics, understanding the fact that the rural market has immense potential and exhibits better asset quality, we, at Spandana are focussing on the rural outreach. Working in urban areas has always been easy provided the connectivity and infrastructure but targeting the rural regions as our area of operations, gives us a good competitive advantage. Currently our exposure is divided as 95% Rural and 5% Urban. Also we have observed that rural customers are more disciplined about managing their finances and using their money judiciously.


3. Portfolio Diversification:

Containing risks at State, District and Branch level

We have been very conscious of the risks associated with geographical concentration of portfolio. We have been making efforts to diversify our exposures at every level possible while leveraging on the knowledge gained in each territory wherever we have entered. Our geographical diversification penetrates deep down starting from State level to as precise as Branch level. Additionally, our major focus has always been on increasing rural exposure.


3.1 State-level

Our journey to diversify portfolio began as we started growing the portfolio gradually across the years – By 2012, most of the impact of AP-microfinance crisis on portfolio was provided for. AP now comprised of 7% of performing portfolio while 40% was in the state of Karnataka. Top-7 states now included AP & Telangana(7%), Karnataka (40%), Madhya Pradesh (19%), Maharashtra (15%), Odisha (13%) and Chattis-garh (2%). States other than the top 7 comprised of 5% of portfolio. By 2019, portfolio diversification improved further with none of the states comprising more than 20% of the total portfolio, an internal benchmark used to contain portfolio concentration risk.

As can be seen the previous chart, we have been consistently diversifying ourselves geographically. At each State level, besides capping our exposure at 20% of AUM, we also cap it at the level of our total Net worth Most significantly, the portfolio outside the Top-7 states now is 16% of the total portfolio compared to 12% in 2018 and 4% earlier in 2012

State-wise Disbursements are also within the limit of 25%. Highest disbursement in FY19 was in Orissa at 21% of total disbursements followed by Madhya Pradesh (19%), Karnataka (13%) and Maharashtra (11%)


3.2 District-level

Besides state level concentration risk caps, we also have the caps operating at District level within the states. None of the Districts comprised of more than 2% of the total AUM.

94% of our districts contribute to less than 1% of the total AUM showing lesser concentration risk. Exposure to the top-10 districts is only 14% of the total AUM for Spandana, while it is much higher for other large MFIs/ SFBs.

SN State FY19* AUM(INR Mn) % of Total AUM FY18 AUM (INR Mn) % of Total AUM FY17 AUM (INR Mn) % of Total AUM
1 Orissa 8,866.0 20.0% 5,938.3 18.8% 2,896.4 22.3%
2 Madhya Pradesh 8,878.9 20.0% 6,967.4 22.0% 2,724.9 20.9% Total AUM of top 4 states grew by 17%
3 Karnataka 5,980.9 13.5% 7,070.8 22.3% 2,381.6 18.3%
4 Maharastra 4,777.4 10.8% 4,367.1 13.8% 1,741.4 13.4%
5 Chattisgarh 3,860.9 8.7% 2,352.5 7.4% 1,206.4 9.3%
6 Jharkhand 1,958.0 4.4% 1,157.2 3.7% 499.0 3.8% Next 5 states AUM
7 Andhra Pradesh 2,984.2 6.7% 1,145.3 3.6% 436.9 3.4% grew by 86% YOY
8 Kerala 2,008.4 4.5% 1,003.7 3.2% 451.6 3.5%
9 Gujarat 1,405.4 3.2% 927.2 2.9% 365.1 2.8%
10 Uttar Pradesh 274.9 0.6% 75.8% 0.2% 59.5 0.5%
11 Goa 399.5 0.9% 209.2 0.7% 100.2 0.8%
12 Bihar 1,143.9 2.6% 124.1 0.4% 1.4 0.0% New states grew at an exceptional rate of
13 West Bengal 519.2 1.2% 273.8 0.9% 130.0 1.0%
14 Rajasthan 979.4 2.2% 6.6 0.0% - 0.0% 410% and they are expected to fu rther
15 Telangana 294.5 0.7% 48.9 0.2% 21.1 0.2%
grow signifi cantly
16 Pondicherry 27.0 0.1% - -
17 Tamil Nadu 14.3 0.0% - -
Total 44,372.8 100% 31,663.5 100% 12970.7 100%


SN State FY19 Valu e of Loan Dis bursed % of Total Loan Dis bursements FY18 Value of Loan Dis bursed % of Total Loan Dis bursements FY17 Valu e of Loan Dis bursed % of Total Loan Disbursements
(INR Mn) (INR Mn) (INR Mn)
1 Orissa 10,238.0 20.6% 7,210.7 18.7% 4,747.1 23.1%
2 Madhya Pradesh 9,381.3 18.9% 8,332.3 21.6% 4,314.2 21.0% Total disbursements of top 4 states grew by 8% YOY
3 Karnataka 6,382.4 12.8% 8,520.8 22.1% 3,640.4 17.7%
4 Maharastra 5,281.8 10.6% 4,952.8 12.8% 2,428.0 11.8%
5 Chattisgarh 4,373.8 88% 2,867.3 7.4% 1,899.8 9.2%
6 Andhra Pradesh 3,734.3 75% 2,297.3 6.0% 1,021.7 5.0%
7 Jharkhand 2,732.3 55% 1,687.8 4.4% 1,053.0 5.1% Next 5 states grew by 60% YOY
8 Kerala 1,954.6 39% 1,086.8 2.8% 634.5 3.1%
9 Gujarat 1,597.8 32% 1,035.0 2.7% 597.9 2.9%
10 Bihar 1,448.2 2.9% 154.3 0.4% 1.4 0.0%
11 Rajasthan 1,112.5 2.2% 6.6 0.0% - -
12 Goa 421.1 0.8% 227.9 0.6% 125.1 0.6%
13 Telangana 275.2 0.6% 75.6 0.2% - - New states grew at an exceptional rate of 586% and looking at the potential in these states, presence is expected to improve further
14 Uttar Pradesh 358.0 0.7% 97.4 0.3% 128.6 0.6%
15 West Bengal 348.9 0.7% 23.7 0.1% - -
16 Pondicherry 37.9 0.1% - 0.0% - -
17 Tamil Nadu 14.9 0.0% - 0.0% - -
Total 49,692.8 100% 38,576.7 100% 20,591.7 100%


3.3 Branch-level

Within Districts, at each branch level too, exposure risk cap applies with no branch to exceed 0.40% of the total AUM


4. Productivity Metrics:

Customer satisfaction resulting in efficient operations

We have been very conscious of the risks associated with geographical concentration of portfolio. We have been making efforts to diversify our exposures at every level possible while leveraging on the knowledge gained in each territory wherever we have entered. Our geographical diversification penetrates deep down starting from State level to as precise as Branch level. Additionally, our major focus has always been on increasing rural exposure.

In order to leverage our branch network, we strengthened our feet on the street – loan officer base. As this sales force starts to operate at an optimum level, the efficiency will further improve. Also, due to lack of funds during CDR and disciplined approach post CDR exit, the AUM per customer is lower compared to the industry. As we improve this metric, opex ratio will further come down.


5. Process Developments

Continuous focus on improving the service


5.1 Cashless Disbursements

A common problem for our customers was commission to ring leaders and pipelining of loans. Prior to this, branch staff used to withdraw cash from banks or use recovery amount and disburse loans in cash at the branches. Since cash is given to each individual customer, it was easy for the ring leaders to take cash from them. Almost every delinquent loan had this problem and we decided to improve our process to eliminate this issue for our customers by doing cashless loan disbursements across all branches. After trying other modes of disbursements like Aadhaar-enables Payment System, NEFT, we started using IMPS for loan disbursements directly into our customers bank accounts.

Month No of loans disbursed in Cash (%) Value of loan disbursed in Cash (%) No of loans disbursed cashless (%) Value of loans disbursed thro ugh cashless (%)
Nov-18 100% 100% 0% 0%
Dec-18 73% 72% 27% 28%
Jan-19 31% 22% 69% 78%
Feb-19 14% 11% 86% 89%
Mar-19 1% 1% 99% 99%

We shifted to cashless disbursements in December 2018 and by March 2019, we were able to disburse 99% of the total loans cashless.


5.2 FinS – Mobile Application for Customer On-boarding

Other MFIs are using Tabs, which involve capital investment, maintenance and handover, when the field staff leaves. An android application, FinS, has been developed in-house to onboard and to update collections from customers. It has been developed in such a way that it can be used on any smart phone. Loan officers can access the app on their mobile and credit bureau check can be done instantly in two minutes. This has significantly reduced TAT for loan disbursement. We are piloting this in the states of Kerala and Rajasthan.


6. New Products

Deep customer understanding leading to new products


6.1 Business Loan

In order to cater to the segment of customers graduating to a level above microfinance and therefore needing a higher ticket size loan, we introduced Business Loans across our operating geographies. For these loans, the appraisal is based on the customers business in terms of cash flow. The loans are used for meeting their working capital requirements, purchase of machineries, livestock, etc.


6.2 Loan against Property (LAP)

LAP is offered to business, self-employed and salaried people with regular income and owned mortgage-free house. We started offering LAP at 15 branches in A.P, Telangana and Tamil Nadu and are planning to expand further.

Type Loan Size (INR) Colateral Security Disbursement mode Tenure Repayment frequency Portfolio as on 31 -Mar-19
(INR Mililon)
Loan against Property 1,00,000 - 30,00,000 Registered Mortgage of residential house/commercial property IMPS/NEFT 1-7 Years Monthly 444.7
Business Loan 30,000 – 2,00,000 10 Post Dated Cheques IMPS/NEFT 1-3 Years Monthly 39.4


7. Internal Audit

Combination of system-based and manual control over operations Internal Audit departments objective is to keep a check across all the branches in terms of process compliance and at the same time, identify any possible financial misappropriations. Over the last few quarters, the strength of the Internal Audit (IA) team has increased gradually with more hiring and deployments. Addition to IA team has been higher than the growth in the number of branches. Branches grew by 33% while IA headcount grew by 121%.

Quart er No of Branches No of Audits No of Branches audit ed
Q1 764 615 615
Q2 816 838 700
Q3 913 851 666
Q4 925 889 688

Intensity of IA is increasing with increase in headcount – we have 1 internal Auditor for every 5 branches compared to more than 8, a year ago. We are targeting to have an IA intensity of 4 branches per IA and continue hiring, training and deploying

Apart from general branch audits, other audits are diligently done based on internal triggers which helps us in identifying any possible mishaps at branch level


8. Comparison with Industry:

Spandana has set many industry benchmarks over the last two decades Spandana has 6% market share among all NBFC-MFIs (in terms of AUM). Also, 8% of the total customers (not unique) belong to Spandana. Spandanas share amongst NBFC-MFIs across various parameters is presented below:

On all parameters, Spandanas market share has grown in FY19 as compared to FY18 as below.

During FY19, Spandana focussed on improving its footprint and feet on the street which can be leveraged in the future. Also, due to its cautious disbursements in the states where elections happened, i.e. Madhya Pradesh, Karnataka, Chhattisgarh and Rajasthan, the growth in disbursements and AUM was moderate as compared to the industry.


9. Consolidated Financial Performance (IndAS):

Spandana has the best metrics across the industry

During FY19, Spandana crossed the INR 10 Bn Revenue mark for the first time in its history. Also, Spandana recorded its highest Profit before Tax of INR 4,735 Mn during FY19. Across all the financial metrics, Spandana has shown an improvement. Below graphs compare the FY17 and FY18 position with the current FY19 position on various financial parameters.

During FY19, we raised fresh capital of Rs. 1,382 Mn from a few of our existing shareholders to augment the growth of Spandana. Along with the profits generated during FY19, our equity base became stronger at 18,894 Mn as of March 31, 2019.

During FY19, we further diversified our borrowing base wherein we added multiple new banks, NBFCs and other institutions. As of March 31, 2019 we had a relationship with 28 institutions (10 banks, 12 NBFCs, 2 Mutual Funds, 2 Foreign Portfolio Investors and 2 other institutions). Our aggregate borrowings increased from INR 23,314 Mn in March 2018 to INR 29,677 Mn in March 2019. We also completed multiple securitization transactions and one assignment transaction during FY19, where the cost of borrowing was lower. Despite increased borrowings, the debt-to-equity ratio remained very comfortable at 1.57 times with a Capital Adequacy Ratio of 39.61%.

Our credit rating was upgraded twice during FY19 – from BBB (Positive) to BBB+ (Stable) in May 18 and further to A- (Stable) in March 2019 by ICRA. This resulted in reduced marginal cost of borrowing and also enabled us to approach more Public-Sector Banks.

Optimal utilization of our existing infrastructure has been the major reason behind our operational excellence. We have always been known to maintain the lowest Opex ratio in the Indusry and we have been successful in further bringing down our operating expense ratio down to 4.5% in FY19 from 4.9% in FY18 which further adds to our increased profitability. Also, we have been able to further bring down our Cost to Income ratio from 30.5% to 24.9%.

As a result of our focused growth and optimal operations, we have been able to generate industry leading return ratios. Our return on average AUM during FY19 was 8.2% and return on average equity was 19.0%. During FY19, there was no tax outflow in the form of cash but deferred tax was charged which is a notional accounting entry. The return ratios mentioned here are calculated using PAT without excluding such notional impact. During FY17, the return on average AUM was 35.21% and return on average equity was 79.77% due to recognition of deferred tax asset, which is an extraordinary item. With increase in financial leverage going forward, we expect the return on equity to improve further going forward.


Brief Biographies of Directors

• Deepak Calian Vaidya,

Non-Executive Chairman and Independent Director

Mr Deepak Calian Vaidya also serves as a director on the board of directors of Apollo Gleneagles Hospital Limited, Apollo Hospitals Enterprise Limited, Bombay Oxygen Corporation Limited, Indraprastha Medical Corporation Limited, Marudhar Hotels Private Limited, PPN Power Generating Company Private Limited, Stelis Biopharma Private Limited, Sterling Pharma Solution Limited, Strides Shasun Limited, Solara Active Pharma Sciences Limited, Suntec Business Solutions Private Limited and UTI Capital Private Limited. He has been a Director on our Board since June 6, 2018. He has served as a director on the board of the directors of Capricorn Securities India Private Limited, Arc Advisory Services Private Limited and Chaityadeep Investments Private Limited. He is a fellow of the Institute of Chartered Accountants in England and Wales since 1979.


• Padmaja Gangireddy,

Founder and Managing Director

Mrs. Padmaja Reddy is the founder of Spandana Rural and Urban Development Organisation (SRUDO) which started operations in 1998. She later promoted Spandana Sphoorty Innovative Financial Services Limited (SSIFSL) in 2003 which is renamed as Spandana Sphoorty Financial Limited (SSFL). She has been leading it as a Managing Director since inception. She has also been a founder promoter of our group companies – viz. Abhiram Marketing and Criss Financial Services. She also serves as a director on the Caspian Financial Services Board. She has also served on the Board of MFIN-Microfinance Institutions Network.

Before starting SRUDO, she worked at ASSIST (a non-government organisation) for 7 years and her last held title was deputy director. She holds bachelors degree in science and another bachelors degree in communication and journalism. She attended course on credit and micro enterprise development at the Durham University, UK; microfinance training program from Naropa University, US; HBS-Accion program on strategic leadership for microfinance from Harvard Business School and an executive education programme from Indian School of Business, Hyderabad. She has earned many awards as a Woman Business Leader.


• Jagadish Capoor,

Independent Director

Mr. Jagadish Capoor previously worked as the Deputy Governor of the Reserve Bank of India for more than four years. He has served on various Boards of large financial institutions like HDFC Bank (where he was the Chairman), HDFC Securities, Manappuram Finance Limited, besides group businesses of LIC like the LIC Housing Finance Limited, LIC Pension Fund Limited, LIC HFL Trustee Company Private Limited. He also serves as a director on the board of directors of AGS Transact Technologies Limited, Assets Care and Reconstruction Enterprise Limited, India Transact Services Limited, Nitesh Estates Limited, Quantum Trustee Company Private Limited and Secure Value India Limited. He has been a Director on our Board since June 6, 2018.


Bharat Dhirajlal Shah,

Independent Director

Mr. Bharat Dhirajlal Shah is the chairman of HDFC Securities Limited and a co-founder of HDFC Bank Limited. He joined HDFC Bank Limited as an executive director in 1994 and has held the positions of head – custody and depository, retail, human resources, private banking, infrastructure and merchant services for a period of 12 years. He continues to be associated with HDFC Bank Limited as an advisor. He holds a certificate from the University of Bombay in financial management and a national diploma in applied chemistry from Borough Polytechnic, London. He also serves as director on the board of directors of 3M India Limited, Apollo Munich Health Insurance Co. Limited, Digikredit Finance Private Limited, Exide Industries Limited, HDFC Securities Limited, Hexaware Technologies Limited, Mahindra Lifespace Developers Limited, Salisbury Investments Private Limited, Sterling Pharma Solutions Limited, Stride Shasun Limited and Tata Sky Limited. He has been a Director on our Board since April 13, 2018.


Abanti Mitra,

Independent Director

Ms. Abanti Mitra runs a management consulting business as director of Development Equities Private Limited, Positron Consulting Services Private Limited and Positron Advisory Services Private Limited. She has served as a Director on our Board previously from 2012 to 2016. She has been a Director on our Board since May 4, 2017. She holds a post graduate diploma in rural management from Institute of Rural Management, Anand. She has previously worked at Astra Marine Private Limited, Micro-Credit Ratings International Limited and at ICICI Bank Limited where she headed the Microfinance Product vertical.


• Ramachandra Kasargod Kamath,

Nominee Director of Kedaara Capital I Limited

Mr. Ramachandra Kasargod Kamath earlier worked as chairman and Managing Director with Punjab National Bank for five years. He was an executive director at Bank of India for five years and also the chairman and managing director at Allahabad Bank for five years. He held the post of chairman of the Indian Banks Association for two years. He has previously worked with Corporation Bank for 28 years, where his last held position was general manager. He also serves as a director on the board of directors of Aavas Financiers Limited, BQ Padmavathy Finance Academy Private Limited, Centrum Capital Limited, Manipal Technologies Limited and New Opportunity Consultancy Private Limited.

He has a proprietory concern named KR Kamath for management advisory services rendered by him. He has been a Director on our Board since May 4, 2017. He holds a bachelorsdegree in Commerce from University of Mysore. He is an honorary fellow of the Indian Institute of Banking & Finance since 2009. He was certified as an associate of the Indian Institute of Bankers in 1994.


• Amit Sobti,

Nominee Director of Kedaara Capital I Limited

Mr. Amit Sobti is currently a senior principal at Ontario Teachers Pension Plan (Asia) Limited in India.He has been in this role since 2016.He has over 15 years of experience in private equity, including over two years with Unitas Capital Private Limited, nine years with Warburg Pincus LLC, and two years with Rhone Group LLC.He has been a Director on our Board since May 29, 2017. He holds a bachelors degree in Arts (Business Economics and Computer Science) from Brown University.


• Kartikeya Dhruv Kaji,

Nominee Director of Kedaara Capital I Limited

Mr. Kartikeya Dhruv Kaji currently serves as a Principal at Kedaara Capital Advisors LLP. He has previously worked with Perella Weinberg Partners and Merrill Lynch in New York, and with Temasek Holdings Advisors India Private Limited. He has been a Director on our Board since March 31, 2017. He holds a bachelors degree in arts (economics) from the Dartmouth College, New Hampshire and a masters degree in business administration (finance and entrepreneurial management) from the Wharton School of the University of Pennsylvania.


• Darius Dinshaw Pandole,

Nominee Director of JM Financial Products Limited

Mr. Darius Dinshaw Pandole is the managing director and chief executive officer – PE and Equity AIFs at JM Financial Limited. Prior to this, he was a partner at New Silk Route Advisors, a private equity advisory firm primarily focussed on India. He was also an executive director at IDFC Asset Management Company Limited, which managed the India Development Fund, an infrastructure focused private equity fund. He serves as a director on the board of directors of JM Financial Asset Management Limited, Credibility Financial Services Private Limited, Fairchem Speciality Limited, and Mahindra Logistics Limited. He has been a Director on our Board since July 18, 2017. He holds a bachelors degree in Arts from Harvard University and a masters degree in Business Administration from the University of Chica-go.


• Sunish Sharma,

Nominee Director of Kedaara Capital I Limited

Mr. Sunish Sharma is the managing partner and co-founder of Kedaara Capital Advisors LLP. He has extensive private equity investment experience in business services and technology, healthcare, financial services and consumer sectors. He is also a co-founder of the Ashoka University and the Young India Fellowship, an initiative that was launched in collaboration with the University of Pennsylvanias School of Engineering and Applied Sciences. He also serves as a director on the board of directors of Mahindra Logistic Limited, Manjushree Technopack Limited and Vedant Fashions Private Limited. He has been a Director on our Board since March 31, 2017.

He holds a masters in business administration from IIM, Calcutta and is a qualified Cost Accountant. He has previously worked with McKinsey & Co. as engagement manager, at General Atlantic as managing director. He was featured on the list of "Asias 25 most influential people in private equity" by the Asian Investor magazine published in the year 2013, and also on the list of "Hottest Young Executives" in the Business Today magazine published in the year 2011.