Rationale

 The rating action factors in the improvement in Spandana Sphoorty Financial Limited’s (SSFL) profitability and asset quality in FY2024. The net profitability (return on average managed assets; RoMA) increased to 4.1% (consolidated) in FY2024 (0.1% in FY2023 and 0.8% in FY2022), supported by lower credit costs (credit and other provision costs stood at 2.1% in FY2024 compared to 5.5% in FY2023 and 5.3% in FY2022) and higher portfolio yields. SSFL’s gross stage 3 assets (consolidated) improved to 1.7% as of March 2024 from 2.2% as of March 2023. The company witnessed some uptick in delinquencies from the levels seen in September 2023, partly attributable to operational changes, including the transition to the weekly collection model from the existing monthly model. While these changes are expected to strengthen borrower connect and loan collections in the long run, the collection process, and consequently the asset quality,shall witness some near-term headwinds until the changes are streamlined. ICRA, nevertheless, expects the overall asset quality to stay healthy, with credit costs remaining under control. Further, SSFL’s risk profile is supported by its comfortable capitalisation profile with a capital adequacy ratio of 32.0% and a standalone managed gearing of 2.7x as of March 2024 (consolidated managed gearing of 2.8x). The ratings also consider the risks associated with the marginal borrower profile, unsecured lending business, political risks and the high pace of growth. SSFL’s consolidated assets under management (AUM) stood at Rs. 11,973 crore as of March 2024, catering to 33.2 lakh active borrowers through a network of 1,687 branches (including 45 co-located branches) spread across 20 states and union territories. Its portfolio remains diversified with no state accounting for more than 15% of the same. SSFL’s ability to manage such risks while expanding to new geographies would be crucial. ICRA takes note of various initiatives for risk management, technology and operational improvements, which shall partly offset the impact of the above risks. The Stable outlook reflects ICRA’s opinion that SSFL would continue to maintain healthy profitability and asset quality along with a comfortable capital structure as it scales up its AUM. ICRA has upgraded the ratings for the Rs. 100.00-crore non-convertible debenture (NCD) programme and the Rs. 20.00-crore market linked debenture (MLD) programme and revised the outlook to Stable from Positive while simultaneously withdrawing the ratings as the instruments have been fully redeemed with no amount outstanding against the same. The ratings have been withdrawn as per ICRA’s policy on the withdrawal of credit ratings as confirmed by the client.