Adequate provisioning to cushion earnings volatility; capital sufficiency to help tackle current cycle

Spandana Sphoorty Financial (Spandana) in Q1FY20 continued its proactive approach in strengthening balance sheet by building additional Covid-19-related provisions at Rs0.9bn (~130bps of AuM) and taking cumulative contingency buffer to 320bps - highest within the MFI space. Notably, collection efficiency improved steadily - from lows of 2% in April, it improved to as high as 92% as on 30th August’20 with customer activation remaining robust at ~87%. Better-thanindustry collections were supported by A) higher rural-based customers (~95%), B) bi-weekly collection model, C) ability to extend emergency loans to needy borrowers and D) effective communication with borrowers about cost of moratorium & benefits of maintaining good payment track record. While ~13% inactive customer base poses near-term risk on asset quality, diversified operations with 95% of districts having <1% exposure per district, adequate provisioning buffer and comfortable capital position (CAR 53%) would ensure it navigates through the current cycle relatively better than peers. Maintain BUY.

* Additionally created Rs0.9bn Covid-19 related contingency buffer; total provision cushion now stands at ~320bps. Spandana continued to strengthen balance sheet by proactively building additional Rs0.9bn Covid-19-related contingency buffer and taking cumulative provisioning buffer to ~320bps as on June’20 - highest within the MFI space. We believe building higher contingency buffer is correct approach in the current scenario given tail-end risk is yet to unfold. However, strong PPoP margin at average 14% over the past five quarters and adequate contingency buffer would ensure Spandana navigates through the current challenging cycle relatively better than peers.

* Collection efficiency touching 92% as on 30th August’20 shows business resilience. Nearly 95% Spandana borrowers are in rural areas (which are relatively less impacted during lockdown), and ~57% are engaged in essential service activities. This borrower profile coupled with effective communication about cost of moratorium and significance of credit score to avail next loan helped it improve collections to as high as ~92% as on 30th August’20 from mere 2% in April’20. Secondly, customer activation also remains robust at 87%. Currently, all its branches are operational and all employees have resumed work. However, ~13% borrowers, mostly in urban / semi-urban areas, are inactive currently – which poses risk to asset quality going ahead.

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