India Ratings and Research stated that the downgrade and 'negative' outlook reflect the continued stress on Spandana's asset quality during FY25, leading to pressure on its consolidated profitability, largely on account of elevated credit costs and operating expenses.
Furthermore, the infusion of the confidence equity capital, as guided by the management during Q4 FY25, is yet to be completed. India Ratings notes that, as per the management's estimates, the capital infusion will be completed by Q2 FY26.
Spandana is one of the companies that have been most impacted by the microfinance crisis, and the rating action reflects the significant losses reported by the company during FY25, higher than the India Ratings' estimates for the period, post the declaration of H1 FY25 financial performance and in line with the agency's revised estimates.
The agency expects the operating and financial performance to remain under pressure in the near term. The company witnessed a significant uptick in portfolio delinquencies in FY25, largely on account of increasing levels of borrower indebtedness, high field staff attrition, and operational challenges due to the transition to weekly collections mode from a monthly mode in select geographies (the transition has been paused at present due to headwinds in the sector), leading to weakening of the asset quality.
The internal challenges were further exacerbated by external factors such as the impact of general elections in Q1 FY25, political movements in certain geographies, and adverse weather conditions.
The ratings are supported by Spandana's geographically diversified loan portfolio and a healthy capitalisation profile, supported by the demonstrated track record of regular equity infusions. However, Spandana's overall cost of borrowings remains higher than that of its peers.
The company also witnessed an uptick in the marginal cost of borrowing between Q1 FY25 and Q4 FY25. Thus, Spandana's ability to further diversify its funding profile and raise debt at improved rates compared to its peers would be a key rating monitorable.
The ratings remain vulnerable to the risks associated with the microfinance business, including its modest borrower profile. This, however, is mitigated to some extent by the geographical diversification in Spandana's portfolio as well as the revised regulatory guidelines for the microfinance segment in FY22, which enable risk-based pricing for the industry.
Spandana Sphoorty Financial is primarily engaged in the business of microfinance, providing small-value unsecured loans to low-income customers in semi-urban and rural areas.
The scrip fell 1.32% to currently trade at Rs 280.05 on the BSE.
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