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

Ladies and gentlemen, good evening, and welcome to Spandana Sphoorty Financial Limited Q4 and FY '25 Earnings Conference Call. This conference call may contain certain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions]. I now hand the conference over to Mr. Ashish Damani, Interim CEO, President and CFO. Thank you, and over to you, sir.

Thank you, Sander. Good evening, everyone, and thank you for taking time out to join on this call. Our sincere apologies for the delay. I believe most of you have got some chance to go through the Q4 FY '25 results and even the full year results, which have been uploaded on stock exchange some time back. Before discussing the results, I would like to clarify on 3 issues. First of all, just want to explain that every NBFC-MFI will undergo routine audit by the RBI every year. And in the process, they do suggest areas of improvement as their observations. As always, we have been complying with all the suggestions made. The company also conduct review in our routine course of business. So that is something that we've been doing. I would like to reiterate that there has been no forensic audit on the company whatsoever. MFI customers tend to make their repayments through cash only. Therefore, this industry is susceptible to operational risk of misappropriation, theft and robbery. Every prudent lender, including Spandana has control mechanisms in place to control, manage such risks in the business. However, in the recent past, industry has seen higher stress and attrition, which has led to increase in such incidents across -- the during the second, third quarter of the financial year. However, we are continuously working to reinforce control mechanisms through measures such as increased headcount on branch quality managers, increasing internal audit frequencies and coverage, et cetera. We have seen improvements in this in terms of reduction in the overall challenges in past couple of quarters. While Spandana adopted credit rules confirming to the guardrail 2 and even going beyond in January of 2025, the deferment of guardrail 2 implementation by SRO to 1st of April 2025 prompted us to rationalize our disbursements in Q4. During the period, company was focused on improving its collections and its processes by way of increasing engagement with the customers on the ground. Now I move on to one more important update. Our equity raise plans are pretty much on track. We have received the shareholder approval for capital raise during March for up to INR 750 crores. Board committee has been formed to oversee this capital raise, including a possible rights issue in Q2 FY '26. This rights issue will be done with the promoter participation. We will make all the necessary announcements in due course once all approvals are in place. Like we have been reiterating on the fact that FY '25 has been the most challenging period for the microfinance industry in the recent times. Multiple external and structural headwinds in increasing borrower leverage, weakening of JLG model, deterioration in borrower discipline and sociopolitical influences had adverse impact on the microfinance industry. Our short- and long-term response to these industry headwinds have been bucketed into 3 broad domains: operations, credit underwriting, and liquidity and capital position. During the year, we remained agile and introduced few changes in the way we operate. Among many, let me highlight a few important ones. Introduction of control and quality check layer at the branches, which we call branch quality managers. The core function of this role is to be a checker at the branches and ensure that all due processes and quality checks are diligently followed. We have increased the number of loan officers during the year at the branches to manage the workload as they had to make multiple rounds of borrowers and house visits for collections. The increased stress resulted in elevated attrition at the field level and taking cognizance of these issues, we have increased the bench strength, which had impacted the efficiencies in the interim. We have put in place a dedicated team of collections -- loan officers for the buckets which are 90-plus. DPD borrowers. This team is focused on following up with the borrowers in the 90-plus and the write-off pools for the recoveries. We currently have about 700 in this team, 700 loan officers in this team, and we plan to intensify efforts in recoveries during the FY '26. Increasing engagement with the field staff through various initiatives is something that we have been taking up so that the attrition levels can get controlled, telecalling the borrowers to encourage them to make timely payments of installments, explaining them about the new guardrails and encouraging them to follow the discipline of making timely payments. As a team, we keep looking for means to make our processes more efficient and improving our operations. We have always maintained that as an organization, we continue to believe in core microfinance that is short tenure, low ticket sizes and geographical diversification. Supplementing this, we introduced credit checks in January 2025, which go beyond guardrails. Our credit rules are more conservative as we have set a DPD threshold of 30 days for the existing borrowers, and we have gone down to 1 day for any new borrower that we will onboard. In addition, we also are checking the DPD status of the household to ensure that the household is not in any kind of financial stress. To increase the robustness of our KYC checks, we have entered into an agreement with NPCI for Aadhar-based eKYC. With these initiatives in place, we believe that we can now restart the new to credit borrowers gradually. This is something that we have taken as a conscious call to stop onboarding the new to credit in July last year. To manage our liabilities better in such testing times, we have been maintaining sufficient liquidity on balance sheet. This liquidity provides us sufficient headroom to be able to meet all short- and medium-term requirements. Our liquidity position at the end of March 2025 were over INR 2,000 crores, which is about 24% of our assets on our balance sheet. Spandana had witnessed improvement in key lead indicators in March and our X-bucket collection efficiency at the end of March 2025 improved to 98.9%, if I exclude Karnataka out of it. Including Karnataka, it would be 98% -- 98.6%, sorry. And December was 98% when we look at the same metric. We have been consistently seeing an improving trend in the lender overlap as well. About 23% of our borrowers had exposure to 4 or more lenders, including Spandana in February 2025, which has now reduced to about 20%. Similarly, intense field efforts have also translated into higher recoveries from the GNPA or 90-plus buckets, including write-off pool, which stood at about INR 52 crores in fourth quarter of FY '25 versus INR 44 crores, which we would have recovered across the 3 quarters in the financial year. Overall, we were able to recover INR 96 crores during the FY '25. As a management team, we had set ourselves few priorities. While we made progress on all of these, the challenges in FY '25 have resulted in altered time lines. Let me enumerate our way forward on each of these priorities. Customer acquisition-led growth. We have always communicated that our growth will be fueled by customer acquisition, and we will be very careful in terms of onboarding the new customers that we get. Our stricter credit rules are a step in that direction. Well-distributed geography spread. I'm sure you would have noticed that our geography trends, geography exposures have been well distributed. We have improved our geography spread over the past 3 years. North India now contributes about 22% of the AUM as against 13% in FY '22. We continue to maintain our spread going forward. Weekly model. We have rolled out many branches under the weekly only model and over the last 2 years. And these branches today give us the X-bucket collection efficiencies of 99.3% in March compared to the overall 98.9% across the business. So our belief in this weekly business is reinforced, and we will continue to see how we improve on the overall contribution from the weekly branches. Growing our AUM. Our long-term goal of AUM growth remains intact, albeit with the altered time lines. We will be cautious in lending and growing in new markets. Improving efficiencies. Our target in current financial year will be to improve borrowers to LO -- loan LO count to about 340 borrowers from the current 228 number. We are working very hard to turn around things at the earliest and deliver on a quality growth that we desire for. To deliver on quality growth, we are reimagining our customer journeys by integrating multiple layers of technology, enabled checks, checks and balances, including using tools like geo fencing, face match, liveliness checks, digital questionaries, et cetera. While some of these initiatives have already been rolled out, many others will be integrated during the course of the year. All these, we believe, will help us improve our credit underwriting and filter in quality customers. We have also been closely looking at our borrower base and identifying the borrowers that we would like to prioritize in terms of servicing. Of our existing borrower base at the end of March 2025, about 51% of the borrowers qualify for new loan under the stricter credit rules that we have adopted internally. About 20% of the borrowers have 30-plus DPD with some other lenders, 10% have 3 or more lender relationships and about 4% have over INR 2 lakh loan amount outstanding in the MFI or unsecured retail or some other form of negative CD track record. However, 96% of these borrowers, which is all the put together 34% are current with Spandana. We believe that these 2 cohorts, 51% and the 34% together would provide us with sufficiently large pool of customers to focus our efforts during the course of the year. We also have a large pool of dormant borrowers who qualify for loans as per our internal guidelines, and we would reach out to these borrowers as well. We will run a regular analytics on our borrower data to identify early volume while also look for opportunities to deepen our relationship with good borrowers without compromising on quality. As I mentioned some while back, we have been working on improving efficiencies, which have touched upon on our presentation in Slide 13. Based on our portfolio behavior, we have identified a set of states where we would like to grow but cautiously. We have also identified key states where we would maintain our position and few states where we would prefer to scale back operations. We would conduct graded reassessments of our branches in terms of portfolio quality and growth opportunities. We would like to increase productivity and efficiencies at branches and expect to improve our loan officer productivity to about INR 1.1 crores per loan officer by end of FY '26 from the current INR 0.6 crores at end of FY '25. We continue to believe that loan officer productivity of about INR 1.3 crores to INR 1.5 crores is pretty appropriate. Let me now just move to the results and business updates, regular business updates. The key business drivers. During the year, company adopted a cautious approach to lending and implemented guardrails into our credit rule engine. Hence, our disbursements were calibrated for the year and were muted at INR 5,605 crores on a year-on-year basis, a decline of about 48%. AUM at the end of the year was at INR 6,819 crores, registering a decline of 43% year-on-year. The AUM was the outcome of a lower disbursement. However, we are confident that we will be able to take it back in the direction of growth during the current financial year. Our LAP and Nano loans business under the subsidiary, Criss Financial Limited, is growing steadily. The AUM under these products crossed INR 200 crores for the first time, and we closed the financial year with INR 233 crores AUM under these product lines. The product quality under both these products continue to be strong with a net collection efficiency of 99.6% under the LAP till March 2025. We continue to believe in this strong market and potential for these products. Portfolio quality. We continue to maintain provisioning at 80% PCR. The stand-alone GNPA at the end of FY '25 was 4.85%, an increase of 3.4% over the FY '24. Stand-alone NNPA was at 0.96%, an increase of 0.7% over the FY '24 including borrowing mix. During the year, we borrowed INR 4,482 crores. The borrowings were calibrated keeping in view the disbursement and the organization's liquidity requirements. Our managerial cost -- marginal cost of borrowings for the quarter was at 11.9% Q4 of FY '24 and about 20 bps higher than Q3 FY '25. Likewise, I look at the borrowing mix, we now have more healthy mix with banks contributing to our total borrowings at 57% at the end of Q4 FY '25. FY '25 financial performance, I'll quickly take you through that. The net interest income for the year was at INR 1,228 crores over INR 1,289 crores reported for FY '24. NII was lower by 5% PPOP for the year was at INR 608 crores, down 35% year-on-year. Declining PPOP was largely on account of shrinking loan book, higher operating expenses and reversals on interest income due to flows in GNPA. Yield on the portfolio was down by 1.7% year-on-year to 22.5%. Yield declined by 41 bps over the previous quarter. NIM for the year was at 12.8%, down by 1.3% year-on-year. NIM declined as a result of decline in the yield and increase in cost of borrowings, marginal. We are consistently working towards improving our cost of borrowings. The higher -- the company reported a net loss of INR 1,035 crores for the year on account of higher provisions. Given the challenges, we will continue to maintain cautious stand. We are optimistic that the situation should normalize by the second quarter of this financial year. All our efforts are directed towards identifying opportunities for improvements and implement corrective steps where necessary. We're also closely monitoring outcomes thereof. We continue to be prudent in our approach to lending, ensuring that our portfolio is well diversified while staying conservative on ticket sizes and customer indebtedness. We are comfortably placed in terms of capital adequacy at 37% and close to INR 2,000 crores in liquidity. Our gearing at 2.1x is also accommodative of future growth. Despite the rapid global policy shifts, India remains largely positive growth story. The early arrival of monsoon and expected of above normal monsoon bodes well for the microfinance industry, where most of our borrowers are rural -- placed in rural India and are dependent on agriculture as a primary source of income. This, we believe, will be a factor that will drive the revival of the sector along with the SRO guardrails that have been put in place. Thank you once again for taking time off to join us on this call. The entire management team of Spandana is thankful for consistent feedback that we have been receiving from all of you. We look forward to your continued support. And now I can ask the moderator to open the floor for questions.

[Operator Instructions] Our first question comes from the line of Mahrukh Adajania from Nuvama Wealth.

Sir, I have a couple of questions. Firstly, on Slide 17, you've given some projections for FY '26. And it seems to be reverting back to FY '24, whereas FY '25 is a big blip. So how do you plan to cover so much ground? What gives you the confidence, especially because most MFIs are seeing that better part of the recovery, including growth will come in the second half. So what gives you that confidence of covering so much ground? That's my first question. And secondly, just in terms of credit cost, forward flows and slippages, you have given some data till April. How does early May look like? And where do you think will you see a meaningful -- or when do you think you will see a meaningful decline in credit cost and some rollbacks as well? So that's my second question. And my third question is any size of the equity issue? So these are my questions.

Mahrukh, this is Ashish. So I believe you're talking about Slide 12, where we have given the disbursement trends, which we had in FY '23 and '24.

I'm talking about the projections, right? You've given projections and in terms of loans for LO disbursals for -- you've given projections for March '26. That's what I'm talking about.

Okay. So these projections are for productivity metrics at a loan officer level, which will be a combination of increasing the customer base, doing the disbursement as well as there is attrition that is likely to happen in the branches wherever we would have taken a higher number of loan officers. So idea is to keep looking at that productivity of 340 by the end of this financial year in terms of number of customers per loan officer. So this -- I'm not sure if that has answered your question, but that is what we are trying to explain here on this slide. If I can move to your second question in terms of how the current trends are shaping up, how is May looking like and when there will be a meaningful decline. So yes, March was pretty solid at 99% in terms of collection efficiency. However, April and May, there has been a slight blip. We are presently trending at about 97% and thereabouts on the current collection -- current bucket, our X-bucket. Last question was about the size of the transaction. I think we have taken approval from the shareholders at about INR 750 crores. However, we are looking at presently doing maybe a rights issue or it will obviously be a lower number, but we will have to calibrate the number in due course.

Our next question comes from the line of Shreepal Doshi from Equirus.

I think your earlier commentary was very meaningful to understand a lot of aspects. But just had a question on our business model per se. So are we looking to say, decouple the sourcing and let's say, operations and the credit in the ground level, which would also be a learning in this cycle per se? Or are we continuing to just go ahead with weekly as a model and continue to have the LO or the loan officer managing both the functions at the ground level?

No. So weekly will continue in the branches where we have the weekly model. We have about 14% of our business in weekly branches. And we would obviously like to grow that portfolio given the portfolio quality is definitely better than what we see in monthly branches. On the monthly branches side, I don't think so we are making any changes. It's only about increasing the engagement with the customers by the loan officers.

So sir, are we looking at, let's say, having a credit officer at branch level who will look at, let's say, underwriting and -- or shifting towards a model which -- wherein we will be underwriting individual customers while maintaining the JLG model from the operations point of view?

Definitely, there will have to be a little bit more credit appraisal that needs to be done at a borrower level over and above the joint liability that you have on the ground. We are having a branch quality manager, like I have said earlier at the branches, who is doing further checks in terms of understanding the borrowers which are getting onboarded. We have used -- like I've mentioned earlier, we are using technology to improve our understanding of the borrower at the ground by doing geo fencing, by doing liveliness check, making sure that the KYC that we are getting is more robust and more foolproof. This is what we are doing in terms of additional checks.

Got it. Sir, second question was pertaining to something that you also alluded in your earlier commentary, which is on Aadhar-based -- limiting Aadhar of the customer for the new customer onboarding. So I think there was a lot of duplication of accounts at system level. And so how are we -- so have we got approval from the RBI to use Aadhar as a medium to onboard the customer and to do even credit bureau check accordingly?

So Shreepal, we are presently following this eKYC process where eSign is the format that we use, where Aadhar becomes the aspect that you use through OTP-based verification. So there is -- we still don't have the license in terms of AUA and [ KUA ] but we are using this. The next stage we will move to is we are working with the NPCI and others for the [ ESI 2 ] piece, where we will be able to do this much more smoothly. It will be Aadhar-based customer identification, where there will be -- other than the OTP, there will also be a face recognition that we'll use.

[Operator Instructions] Our next question comes from the line of Viral Shah from IIFL Capital.

Ashish. Two questions. One is you mentioned that the current X-bucket collection efficiency trends are trending closer to 97%. This is excluding Karnataka? Or this is at an overall level basis?

This is overall. If you exclude Karnataka, it would be about 97.5%, 97.8%.

Okay. And another question I have is, if you look at, say, the deferred tax asset that we have recognized in this year and also this quarter, do you think that there is an aggressive estimate given if you look at another peer of yours who has also suffered a couple of quarters of losses -- heavy losses, they have chosen not to say, recognize that as a deferred tax asset, at least as of now, until there is a visibility or one delivers profits. Do you think that was an aggressive practice that you took in this quarter?

Viral, I can talk for ourselves. I think what we look at in the deferred tax recognition is how our business plan will shape up in the next 5 years. In fact, the authorities allow you to look at the next 8 years, and we were sufficiently covered.

Our next question comes from the line of Parth Kotak from Plus91 -- sorry, our next question comes from the line of Rajiv Mehta from Yes Securities.

Ashish, just on this borrowing side, this fund raise in the quarter of INR 473 crores, can you tell us from which sources was this raised? And what percentage of lenders or bank loans would be under covenant breaches? And how does the covenant breaches go away? And then besides capital, can there be profitability constraints or high liquidity constrains for funding the growth that we are planning to have?

Sorry, Rajiv, your last question, can you repeat?

No, I'm talking about covenant breaches if you are having any for the borrowings that we have? And when does it go away? And whether -- besides the capital that we are planning to raise, can profitability also act as a constraint for the covenants to remain in place?

Sure. Sure. So the covenant breaches, yes, there have been certain covenant breaches due to both the portfolio quality numbers as well as profitability. The numbers stacks up presently at INR 438 crores in total, where INR 260 crores is from the capital markets and about INR 178 crores from the term lending side. I see this number to start going down in near future. We have got the necessary waivers and comfort from the lenders, they continue to support us. And we don't see this acting as any kind of a constraint on future growth plans.

And just on this disbursement activity being low at this point in time. And now when you also follow the guardrails of your own sales, which are tighter than the industry and then you've also given us the cut of your customer base and that 51% of the borrower base currently is only eligible for incremental disbursement as per the current rules that you are following. When does it really change, the run rate change for us? Because I think you're trying to tell us that like a normal year first half will be slightly weakish and second half we can pick up. But when you look at the eligible customer pool currently at the start of the year, that seems low. So how would -- I mean, if you can just quantify -- I mean, would there be any way you can quantify what kind of growth? Or how do you see the year playing out for yourself in terms of the book by the end of the year?

So I think the industry is slated to grow, let's say, between 10% to 15% with the kind of customer base we have and the numbers that we have kind of put up on the slide, both in terms of existing borrowers and the number of borrowers that we would want to bring on board. I think we can look at about 20% kind of growth from the current base. That's the number that will work out.

Our next question comes from the line of Ashlesh Sonje from Kotak Securities.

Sir, first question is on the employee base. Firstly, do you think you're adequately staffed right now? And secondly, you indicated a few employee-related issues in the beginning, can you broadly quantify what is the amount of money which is currently outstanding from your employees? Or any magnitude, which you can share of the employee-related issue?

Ashlesh, so there is nothing outstanding from the employees or anything which has not been disclosed or which has not been accounted for. Yes, there have been attritions, many -- I mean in the percentage terms, it was very high for the previous financial year, 56%. And what we have done is we have let go. I mean, we have not backfilled some of the geographies, wherever the borrower to loan officer count was much lower than the national average. To let it adjust on a normal course, the productivity metrics. And that is something that we'll continue to do as we go forward.

Okay. And in terms of geographies, where do you see higher collection efficiencies and lower collection efficiencies?

So our challenging markets have been -- in the recent times, have been -- Andhra Pradesh, Karnataka have been the challenging geographies for us. Rest of the states, I think while April was a bit lower, May, things are picking up, and we are confident that June will be even better given the monsoon is setting in.

And just one last clarification. If I go to Slide #9 on your PPT, where you have shared the lender level overlap. This is as a proportion of borrowers or as a proportion of the loan book?