Spandana Sphoorty Financial Limited (SPANDANA.NS) Earnings Call Transcript & Summary

Good morning, and I welcome you all to the quarter 2 of financial year '21, financial and business update call of Spandana. I'm glad to share that we got one more rating done in this quarter by India Ratings. They awarded A’/Stable, which is 1 notch higher than our current ICRA rating, which is A- Stable. SMERA has also done code of conduct assessment, and they awarded C1 grading, which is the highest grading that they give to microfinance institutions. Second quarter has been very encouraging as it gave a hope of revival with absolute value of collections increasing from INR 493 crore in Q1 to INR 1,566 crore in Q2 and loan disbursements increasing from just INR 49 crore in Q1 to INR 1,634 crores in Q2. While we were to deal with many administrative problems in Q1, in Q2, we could focus on meeting borrowers and regularize center meetings. Compared with Q1, though the demand reduced by INR 144 crores, however, collections increased by 218% in absolute value terms. We resumed the center meetings in this quarter, and we are able to complete collections within the scheduled time and our staff were able to spend time on loan disbursement, which was not possible in Q1. We disbursed INR 900 crores in September, which was all-time high in the last 3 years. We got back to pre-COVID monthly disbursement of INR 800 crore to INR 900 crore in September and October. This quarter, the portfolio grew by INR 519 crores, from INR 6,835 crore to INR 7,354 crore. Having -- however, having not disbursed loans in Q1, we have many borrowers who close a loan, and we're waiting for the next loan. We disbursed loans only to the existing borrowers who closed their loans. We have 90 new branches opened 6 months prior to lockdown. And these branches are operating with very low volume of borrowers and portfolio. These branches started acquiring new clients. And in this quarter, these branches added 45,000 new clients. We raised INR 2,548 crore since lockdown until October. Of this, INR 350 crores is raised through capital market instruments. We also added 4 new banking relationships in this quarter, including Indian Bank and Federal Bank. Cash balance in the quarter end was INR 462 crore. So we have another INR 2,000 crores worth of sanctions in pipeline. Collection efficiency increased to 124% and 129% in September and October, respectively. This includes, of course, the pre-closures and overdue collections, that is why the collection efficiency number is over 100%. While the demand was INR 519 crore and INR 501 crore in September and October, collections were INR 646 crores and INR 649 crore in September and October, respectively. Collection efficiency without pre-closure was 103% and 110% from September and October, respectively. This quarter also for the third consecutive quarter, including March and also June and for September, so we made INR 114 crore provision only in this quarter and making the total COVID provision to INR 332 crore. This is 6.1% up on balance sheet portfolio as on 30th September 2020, and this is equal to 4.5% of the overall AUM. So till October, we collected INR 2,707 crore as against the total demand of INR 3,911 crore, which is equal to 69% collection efficiency. The cumulative collection efficiency increased from 55% in Q1 to 69% by September. So this is equal to 40% of the opening portfolio, which was there on 1st April, that is INR 6,829 crore. So which means whatever the portfolio that was there on 1st April, so 40% of that portfolio has already been collected. Against a total borrowers of 25.8 lakh, so 24.2 lakh borrowers, they paid either on installments or some of the installments still August, and we still have 1.6 lakh borrowers, either they have not paid -- they paid less than one full installment, like they paid partial amount or like they have not paid at all. These borrowers constitute 6% of the total borrowers. Of these 1.6 lakh borrowers, 1 lakh borrowers are from Orissa, Maharashtra and M.P., these 3 states, and they constitute 48% of the total portfolio. South and central part of India is doing great with almost every branch within 98% collection efficiency. Orissa and Bihar have improved a lot, particularly Berhampur and Ganjam, so the borrowers' spouses like they have gone back to their workplaces like Hyderabad, Ahmedabad, whatever the reverse migration that took place in April, May, like they again went back to their workplaces. And in the last month, like some of the places we have seen substantial improvement in the collection efficiency. So like Bihar and Orissa, we have seen 15% improvement in the collection efficiency. But however, like certain zones like the Jajpur and Bhadrak, so still the collection efficiency is lower at 75% to 85%. So -- however, so like Chhattisgarh, Kerala and Orissa, like these 3 states, they are still below 85% collection efficiency, and we expect them to improve by December. So despite a few states troubling us, we recorded strong growth in the AUM. The AUM grew by 36% Y-o-Y from INR 5,407 crores to INR 7,354 crore. State-level, district-level diversification is very much intact. 3 largest states constitute 47% of the total portfolio. And however, we want to bring it down to 45% in the next 6 months with the each state falling below 15%. Out of total 282 districts, only 12 districts have more than 1% and no district is more than 2% of the total portfolio. As far the operational efficiency, so those branches, like having more than 3,500 borrowers. We splitted some of the existing branches. As such, we opened 60 new branches in the last quarter. So we continue to service all the lenders during moratorium and post-moratorium as well. So we are slowly getting traction for the off-balance sheet transactions. We already did 1 PTC transaction with Federal Bank and 3 other transactions are in pipeline. So operating costs continued this quarter also at 3.1%, and this is the lowest in the industry. So -- and the consumer loans that earlier we were doing, earlier, they were funded by Abhiram, now we got that [ IT ] application built on Spandana, and these loans like from 1st April are funded by Spandana, and Abhiram's role is now limited only to sourcing these products and distributing them across branches. Cost-to-income has been marginally increased from 20.3% to 20.9%. Gross NPA and net NPAs to debt, 0.54% and 0.11%. So cost of borrowing declined by 170 basis points from 12.3% in -- this is Y-o-Y to 10.6%. Cost of funds on AUM reduced from 8.3% to 6.8% Y-o-Y. And this is more because of multiple delayed transactions that we have done in the last 1 year. Net interest margin decreased by 130 basis points from 16.7% to 15.4% despite the cost of fund reducing since the yield has come down, the net interest margin has reduced. Net interest income for the quarter grew by 38% Y-o-Y to INR 282 crore from INR 205 crore. Operating profit before provisions and before tax for the quarter has been INR 214 crore as against INR 213 crore a year ago for quarter 2 FY '20. Pre-provision PBT for the quarter increased by 7.4% Y-o-Y to INR 205 crore from INR 191.5 crore. Pre-provision PAT has been INR 181 crore as against INR 156 crore for quarter 2 FY '20, which is of 15.7% crore. Capital adequacy reduced from 51% to 45% Y-o-Y, this is because of on-balance sheet portfolio increasing from INR 4,948 crore to INR 5,915 crore. So the DA portfolio, as I mentioned in the last quarter, so post-April, so the banks have not resumed our balance sheet transactions. The DA portfolio has reduced from INR 1,887 crore to INR 1,439 crore, so as a percentage of balance sheet portfolio has reduced and on-balance sheet portfolio has increased by almost INR 1,000 crores, as such, the capital adequacy has reduced approximate 51% to 45%. So with this brief overview, now I open the floor for questions and answers.

[Operator Instructions] The first question is from the line of SivaKumar, K. from Unifi Capital.

First of all, congrats for a great set of numbers. Ma'am, just one question on the provision side. You are now maintaining the highest provision in the listed space in the MFI sector. So can you briefly allude to the reason why you have increased the provisions? And do you think these are adequate? And what is your own sense of the final credit costs in FY '21?

The cumulative provisions that we made is like other than the standard provision that we have made, so that's about INR 330 crores. This is equal to 6.1% of on-balance sheet portfolio and 4.5% of the total portfolio. So as I mentioned, that we still have 6% of the borrowers who have not started recovery. So while we thought that we should be able to bring it down, this number. But again, like these borrowers are really taking time. And particularly, as I mentioned, like Ganjam and also Bhadrak, some of the zones, so it is becoming a little tough in terms of persuading and motivating these borrowers. And again, Satish said, so there was a lockdown in September. So again, like Ambikapur like there are some issues, so sectoral issues. So I think like as long as like we have the 6% borrowers are still not really starting repayment, so we thought that like it is prudent to make the higher provisions instead of showing profits at this point in time. So we thought that like whatever the provisions that we made till the second quarter would be sufficient. But again, like when we were looking at September, so we were not very, very sure in terms of -- so we decided to make further provision. So things are changing, like from time to time. So be it in terms of borrowers' behavior, be it in terms of the ground-level situation. So for example, like first quarter, Orissa was really, really troubling. So I never thought that like Orissa would really improve this fast. So last month, like the collection efficiency improved by 15%. But again, like initially, like first quarter, Chhattisgarh was doing much better. So -- but again, like some regulator issues, some political interference. And then again, like the intermittent lockdown in Chhattisgarh started creating problems. And again, Maharashtra, so the Shiv Sena party, like the local leaders, like they started creating some troubles. So with all this, and again, Spandana has that possibility in terms of like high profitability. We thought that like when things are precarious like when there is uncertainty, better like we make adequate provisions instead of just showing profit. And that is the reason like we made higher provision. So it is very, very high, like 6% on-balance sheet is really high. But at this point in time, whether it is really adequate, whether we don't want to make further provisions -- so at this point in time, yes, this is adequate. But again, things might really change. We never know. So because every state like it is changing its colors from time to time.

Okay. And how was November, Ma'am, the initial 15 days?

November, like this time, particularly South is doing extremely well, like because Karnataka, UP, Karnataka, Kerala all these states, absolutely, like there is no political interference. So these states are doing extremely well. So in terms of political interference, like it's only Chhattisgarh and also Maharashtra, these states like -- and not entire states, that too, like Vidarbha, there is absolutely no problem. So it's only South Maharashtra like which is troubling us. And then also Chhattisgarh, that Ambikapur, so that particular area, like where some political leader, like he ended up like taking loans from so many borrowers, so that has created a problem for every microfinance company operating out there. So borrowers started taking advantage out of that situation. But again, like it is very, very small compared to overall portfolio in Chhattisgarh. But again, so looking at the problem at this point in time, like we adequately made provision. I don't think that like going forward, like we have to make further provisions unless and until like if something comes up very seriously in the coming days.

The next question is from the line of Ajay Sharma from Flowering Tree.

Can you just give me trends on your PAR 0 and PAR 30 last few months?

So like it's considering moratorium, basically, like we are not classifying any borrower till August as overdue. So the easing is not calculated like till August. So September -- from September onwards, like we started doing the aging. So we have -- and again, like we -- so like we have 6% of the borrowers who have not paid at all till date. So in terms of portfolio, like that's about the 5.6%.

I see. And would you want to comment on PAR 0, PAR 30 or that's something you don't want to disclose right now?

Yes. This is Feroz here. So PAR 0, PAR 30 would not be -- make big difference because, till August, there was a moratorium given, and they're hardly [indiscernible] loans. So yes. That is why we have not -- there are no numbers to be shared further.

The next question is from the line of Shreepal Doshi from Equirus Securities.

Ma'am, my question was with regards to, say, as you highlighted, that 6% of the customers are not paying. So I mean the collection efficiency that we have given of, say, 110% for the month of October. But what would be the collection that we would have got for the billing of INR 501 crore? So again, that billing, what would -- what percentage of collections we have received?

As I mentioned, like the collection efficiency, which is over 100%, that includes pre-closures and also overdue collections. So -- and again, I have also given collection efficiency, like which is minus pre-closures. But which includes like overdue. When the borrowers have closed, they don't like -- they cleared the path to overdues also, like the April, May, overdues, like which they have not paid in April, that overdues also they cleared. As such, like those 6% of the borrowers, they have not paid their current installment. Since like these borrowers, they cleared the overdues and also they pre-closed their loans, as such, the collection efficiency is over 100%. But however, like if we look at collection efficiency, only minus overdues, minus pre-closures, like that is 98 -- of course, like, overall, like it is 93%.

Okay. Okay. Got it. For the month of October, right?

Yes.

Okay. And what would that number be, say, for August and for July?

It was 88%, August. Yes.

Yes. Okay. And Ma'am, my second question was with -- so we have seen loan officers and your employee number falling vis-à-vis what it was during -- at the end of March and -- whereas what we are seeing amongst the industry players is that they have hired more number of loan officers for the purpose of improving the collection efficiency. So what is the reason we are seeing a substantial decline there?

No. In fact, like this quarter, the focus is in terms of hiring loan officers only. So I think during lockdown, like some of the loan officers like they did not report. So we are contacting all of them back. So some like they felt that like it is not safe to really walk like during that point in time. And particularly like M.P., some of the staff like who belong to M.P., but who are working in Rajasthan. So that point in time, cross borders, like it was an issue. Those who did not report on time, like we did not permit them to report like later. But now like we are contacting them back and we are encouraging rejoining. So this month alone like the so far in November, so like we are doing a kind of like rejoining Mela. So far, like this month, like 220 loan officers have already joined. So having realized that like and now like we are in a transition. So earlier, like the collections were done on biweekly basis and now like the collections are done on a monthly basis, and most of the branches, like they have biweekly collections and monthly collections as well. So in the process, like the requirement of loan officers has increased significantly because the same village like we are going biweekly, we are also going monthly. And we are dividing loan officers like who have to go for biweekly collections and who need to go only monthly collections as such the requirement has gone tremendously. And having seen that like some of the loan officers, they have not reported. So we are contacting them back, and we have sent SMS to all of them saying that like now they can report back. So we are in the process in terms of hiring and also allowing rejoining for some of the staff who did not report like post-lockdown -- during lockdown period.

Okay. Okay. Sure, Ma'am. And Ma'am, you highlighted that we have seen some of the states facing political interference, which is leading to collection efficiency getting hampered. So are we seeing any other challenge that has come as a new hindrance for -- other than political interference?

Actually, during demonetization, so whenever like some massive crisis happens like political interference always happens. So compared to previous crisis, I think like this is a time like we have seen least political interference, maybe because like people are -- everybody is busy with like their own kind of issues. Other than Maharashtra, back to like South Maharashtra because there are like several times like there politicians interfered. And again, like whatever that we are seeing in South Maharashtra, like they tried intervening in Vidarbha. But again, like people having already seen -- saying that like loans will be waived off, but again, like this never happens. So now people are not listening out there, like they could not influence borrowers in Vidarbha. But again, like they are able to influence like around Kolhapur, Solapur and . So -- but again, at least, I'm so happy that like we are seeing this only in certain parts of Maharashtra. For example, like during demonetization. So UP, for example, it was a massive blow like the entire state. And again, like the certain districts of the Karnataka and even M.P. So almost like 30% of M.P. And again, like if you have district of -- broader districts of Jharkhand. So we were to deal with like multiple stages. So I think like this is the time like where political interference is least that I can say. I think that that's because of like RBI upfront like proactively announcing moratorium, I think like whatever -- and the media also, the time like they have not misinterpreted, like RBI's action in terms of saying that like it's a waiving all. So this is the time that I could see least political interference. It's only certain parts of Maharashtra. Otherwise, like there is absolutely no political interference. And then again, Orissa is, for example, like the borrowers, when their approached to the bureaucrats in terms of whether loans could be waived off, and then again, Orissa, like this is something like -- which none of us anticipated, and then again, that is because of like over penetration only. Today, for example, like Ganjam, Ganjam had like a 30%, 40% recovery in May, June. And today, like Ganjam and Berhampur, like since the borrowers have since like, they got back to Hyderabad, Ahmedabad, [indiscernible], they started sending payments, and like borrowers started paying and like the recovery has hit 95%. But whereas in Bhadrak and Jajpur, like still, we are struggling to get back to 80% and 90% recovery, that's because of over penetration there in Bhadrak. Because almost like every borrower has multiple loans, like Bhadrak has almost like a 25 to 30 MFIs operating. So Orissa borrowers like approaching bureaucrat, saying that like whether loans can be waived off on like because of COVID like their livelihood got impacted, but even bureaucrats, like the way that they acted is very, very positive. So they clearly told them that like loans cannot be waived off, like they have to pay back, they should find a way, like they have to get back with the work. And at the most, like they can approach MFIs for an extended loan payment period. So I think that this time like either bureaucrats or politicians, they behaved quite well. The interference is least compared to any other crisis that I have seen in the last 20 years.

[Operator Instructions] The next question is from the line of Sarvesh Gupta from Maximal Capital.

Congratulations on a very good set of numbers. So first question is, I didn't get the November equivalent collection efficiency without prepayments, which was 110% for October?

So that's about 117% without pre-closures, including ODs.

Okay. So the 110% has moved to 117%?

Yes.

Okay. And you said 69% is your cumulative collection efficiency. So last quarter, I think there was a INR 1,470 crore sort of a shortfall. And now the correct number would stand at...

55% was the cumulative collection efficiency for June -- for this August, sorry.

Yes. So now the shortfall is around INR 1,200-odd crores?

The total demand is like INR 3,000 crore. INR 1,200 crores.

Sorry?

INR 1,200 crores.

INR 1,200-odd crores. Yes. Understood. And so 6% of your borrowers are still -- have still haven't paid. And how many have paid fully? I mean -- so there will be 3 buckets: one who haven't paid at all, which is 5.6%; then there would be a bucket where some payments would have come; and the third bucket would be completely regular. So do you have a split of the second and third bucket?

We have 88% borrowers like who are fully paid.

Okay, understood. And last time, I think somewhere you had mentioned maybe in the AGM, that 3% to 4% is the credit cost that you have -- you were assuming at that point of time because of the COVID impact. Now against that 3% to 4%, we have already provided 4.5%. So does that mean that more or less, we are done with the COVID provisioning, and next quarter onwards, we should have only regular numbers flowing into the quarterly P&L?

So that's what like we got to know like when we had a meeting with all our state heads. When we asked for them in terms of what could be the credit losses, like this is the estimated member that I got from all of them. But again, when I looked at the data, so we still have, whatever, 5.6% or 6% of the borrowers who have not paid even one full installment. So that gives me a kind of feel that like it will be higher than 3% to 4% at this point in time. So of course, like they are confident that like going forward, like in the next 2 to 3 months, so with reverse migration like the borrowers' spouses, like everybody after checked this festival, like going back, the recovery will further improve in Orissa, Chhattisgarh and Jharkhand. So they're more confident. But however, to be on a safer side, since like 6% of the borrowers are not paying. So we thought like it is prudent to make at least 6% provision. That is the idea behind the making, behind increasing provision to 6% of the on-balance sheet. So but again, if there are no new events that take place in the next quarter, I think we are good with the 6% on-balance sheet portfolio provision or the next quarter provisions -- in the next quarter.

Yes. And this bucket of 6% who haven't paid and the 6% that we have right now who have paid partially, now that since August, we have seen 3 cycles of collection, September, October and November. So currently, we stand at 6%, 6% on this post-November. But where were we, let's say, in September and October for these 2 buckets?

So like we -- I think like in June, like -- so in terms of number, like this is about 1.56 lakhs, this 6%. Number of borrowers who have not paid, like this is 1.56 lakh. So in June, like it was 9 lakh, 9 lakh borrowers who have not paid. So that number, like we gradually brought it down to 1.56 lakh.

So last 3 months, how has this bucket...

August like it was 3 lakhs.

So I mean every month, maybe you are seeing a 20%, 25% reduction on this number is what is...

But again, the same kind of reduction may not happen with the same pace. Because like going forward, like you will have more sticky borrowers who are left, right? So...

Understood, Madam. And one more thing which I noticed since FY '19, our ticket size has gone up a lot almost by 40 -- I mean from INR 17,000, INR 18,000 to INR 27,000, INR 28,000 now. And while the number of borrowers have more or less remained constant. So all AUM growth has been driven by ticket size increase. So what is happening there? Because, of course, on the ground level, our borrowers are not becoming so much more affluent to be able to afford this higher ticket size much better than previously. So what's the thinking around this point?

No. I'm looking at like previous quarter and this quarter. For example, like last quarter, it was INR 26,611. And this quarter, like it is INR 28,523. The increase in average loan outstanding per borrower is like 7%. So -- and again, from March to November, we have 780,000 borrowers -- 720,000 borrowers, who closed their loans, and we disbursed 640,000 loans. So which means like most of the loans that we disbursed are to the existing borrowers. And for example, like second-cycle borrower has taken their second loans, and the third-cycle borrower has taken fourth cycle loans. So from cycle to cycle, for example, like the second cycle, the maximums loan is INR 40,000. When she graduates to third cycle like the maximum loan that she is eligible is INR 50,000, so it is like in proportion to the same. 7% like in a quarter, like when the borrowers are moving from one cycle to other cycles, like 7% is reasonable. And that too like, when you have more first cycle borrowers joining, proportionately, like your average loan outstanding will reduce. Since like there are no first cycle borrowers like in the last 6 months because we have not acquired new clients plans. As such, like the average has not happened. So the average loan outstanding increased by 7%. And I'm also comparing with the competition. For example, Spandana is INR 26,000. And the largest MFI like because their average loan outstanding per borrower is INR 33,000. And again, so the other MFI, like they are at INR 25,000. So we are not higher in terms of like our peers. So we are like -- I think like compared to the largest MFI, so they are at INR 33,600, we are at INR 26,000. So which means like we are lower by 20%. But however, if you compare us like with the 2017, 2018, like we will deliberately increase the loan price. That point in time, our average loan size was much lower because we were in CDR before that, we didn't have funding, and we disbursed very, very small loan size due to funding constraints. And subsequently, to become ourselves relevant and to give like proper loan sizes to our borrowers, we have deliberately increased the loan sizes.

The next question is from the line of Jainis Chheda from Dimensional Securities.

I just wanted to understand why is there a dip in the disbursements for the month of October, despite being a festive season?

Actually, like September, we disbursed INR 900 crore. In October, we disbursed INR 863 crore. So basically, October like last 3 days, we did not do disbursements, like we stopped disbursements. What happened was like when we were looking at the reports in October, so from last 3 days, we decided to hold the disbursement. We have taken a call. So on 20th, when I look at the report like we -- I found out that there are about 150,000 borrowers like who paid installments partially. So while the monthly installment was, like say, for example, INR 2,000, like they paid INR 200 less like INR 100 less, whatever INR 150 less. So like -- and then again, like the salary structure, the incentive structure was designed in such a way that like if a borrower pays like partial amount, the credit assistant branch managers, like because they don't get any incentive on that. So instead like we ask all our staff to focus last 3 days in terms of collecting the shortfall amount from the borrowers and explain them saying that like now the moratorium is behind them. And again, like even if they pay INR 100 less INR 200 less, we have to classify their loans as overdue. So it's no more that like we can classify them as standard. And like we wanted everybody to go and meet like these borrowers who paid amounts partially and make the installment as full. So last 3, 4 days late, we did not do disbursement. We wanted everybody to focus on these partial paid loans. Otherwise, like we would have disbursed INR 900 crore.

Okay. And second, my second question is that in Q2 FY '21, although your collection efficiency has moved up quite well, the COVID provisions have also gone up on a Q-o-Q basis. So any reason for higher provision in Q2 specifically compared to Q1?

Basically, like, as I mentioned earlier that like we still have 6% of the borrowers who have not started repayment are like who have paid less than one installment till day. So this is bothering us so while like the number of non-startups have drastically come down from June to August. And again, like in the last 2 months, like that number is not coming down at the same pace. So like we realized like these borrowers are more sticky. And then again, like we also realized that like places like Bhadrak and Jajpur and Orissa and, again, like a few parts of Maharashtra, for example, Barshi. And then again, like Ambikapur of Chhattisgarh, I think like our staff are literally struggling in terms of persuading these borrowers to start repayment. And like we realized that like these borrowers are like really, really sticky, and we are taking more time. So we thought that like we will bring down this 1.5 lakh borrowers to 50,000 borrowers by last month itself. But we were not able to achieve that. As such, we decided to make 6% provision as we still have 6% of the borrowers who have not started repayment. That is the reason like we made INR 112 crore provision in this quarter, which is almost like 1/3 of total revenue for the quarter.

The next question is from the line of Shruti Mone from Aditya Birla Capital.

So you mentioned that there are some new branches where new customers are being added. I just wanted to know either quarter-on-quarter or month-on-month, what has been the new customer addition? And how much of the disbursements have come from the new customers?

It's only 45,000 new customers that we added. So there are a few branches that we opened just before lockdown. So these branches in terms of borrowers and portfolio, like they are very, very small. They have 100% recovery. So -- but again, like they don't have caseload to deal with, and they don't have portfolio to service also. So these branches be allowed to acquire new clients, 45,000, just 45,000 in the last quarter new clients added.

Okay. And how about October and November, this number includes that?

No, no, no. 45,000, like it's only June, July, September.

Okay. And October, November would be how much approximately?

I think maybe like 1 lakh new clients. We have more branches doing new group formation on this quarter.

Okay. So this is expected to reach -- like new customer acquisition is expected to reach pre-COVID levels by December month-on-month?

No. No, it may take some more time. I think maybe January, February, March, like we will reach to pre-COVID but not December.