The ratings of Spandana Sphoorty Financial Ltd’s (SSFL) Bank facilities and debt instruments aggregating ₹2,300 crore have been downgraded by CARE Ratings to A (Negative) from A+.
The agency also noted that the NBFC-MFI has breached certain financial covenants in respect of borrowings, resulting in these borrowings becoming repayable on demand subject to fulfilment of the terms of debenture trust deed.
The downgrade of ratings of the commercial paper (CP; amounting to ₹100 crore), non-convertible debentures (NCD; aggregating ₹700 crore) and bank term loans (₹1,500 crore) of SSFL factors in significant weakening of its earnings profile, with the Company reporting net losses of ₹601 crore in 9MFY25 amidst the ongoing microfinance stress, per the the rating agency’s rating rationale.
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CARE Ratings noted that SSFL’s performance in terms of profitability and asset quality has been impacted during 9M FY2025, on account of various issues including over-indebtedness of borrowers, dilution of credit discipline, elevation at field level attrition etc.
The agency expects the headwinds to continue and its profitability and asset quality to remain muted in the near term. Furthermore, SSFL has witnessed a contraction in its scale due to slowdown of disbursements, coupled with write off done by it during 9M FY2025. It reported a consolidated assets under management (AUM) of ₹ 8,936 crore as on December 31, 2024, down from ₹ 11,973 crore in March 2024
CARE Ratings said SSFL’s ratings remain constrained due to the inherent risks involved in the microfinance industry, including unsecured lending, marginal profile of borrowers, socio-political intervention risk, and regulatory uncertainty.
The agency noted that owing to significant slippages during 9M FY25, there has been an sharp uptick in credit costs (as a percentage of average total assets) of the company from 2.32% in FY24 to 16.08% (annualised) in 9M FY2025 and deterioration in its gross stage 3 (GS3) assets to 5.25% and net stage 3 (NS3) assets to 1.11% as on December 31, 2024, compared to GS3 of 1.68% and NS3 of 0.34% as on March 31, 2024.
Further, it also witnessed an increase in its employee expenses to focus on recoveries, reduce pressure on field staff given that sizable collections are door-knock based and maintain adequate staff strength to proactively counter for elevated field level attrition. This has negatively impacted the profitability of SSFL with decline in return on average total assets (RoTA) from 4.47% in FY24 to -6.98% in 9M FY2025, per the agency.
On the other hand, SSFL’s capitalisation profile remains comfortable with a capital adequacy ratio (CAR) of 36% and gearing of 2.47 times as on December 31, 2024. Further, the company has sought approval from its board of directors to raise confidence capital of up to ₹ 750 crore, however, the Company is yet to finalize investors and proposed timeline.
CARE Ratings observed that while SSFL’s growth is expected to remain moderate in the near term, the proposed capital raise will help in improving loss absorbing cushion for the entity. Further, the company continues to maintain a healthy liquidity and has a diversified funding profile, although it has seen slight moderation with reduction in share of bank funding to 49.4% in December 2024 from 55.7% in March 2024.
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Borrowing covenant breaches
The agency also noted that as on December 31, 2024, the company has breached certain financial covenants in respect of borrowings amounting to ₹640.70 crore (this comprises of ₹ 372.81 crore of non-convertible debentures (NCDs) and ₹ 267.89 crore of term loans outstanding), resulting in these borrowings becoming repayable on demand subject to fulfilment of the terms of debenture trust deed
It observed that till December 2024, holders of NCDs worth ₹ 198.32 crore have exercised early redemption, while it has received waivers from 2 lenders for all the term loans, however, no early redemption requests have been received for the breach of aforesaid borrowings amounting to ₹640.70 crore. These covenant breaches were reported by the company as a part of declaration of financial results for the quarter ended December 31, 2024.
CARE Ratings noted that lenders have not made any requests for sizeable recall or accelerated repayments so far, however, any deviation from the lender’s current stance will be a critical factor for ongoing monitoring.
Going forward, the agency anticipates a moderation in SSFL’s loan book growth considering the ongoing MFI stress. Additionally, with rising credit costs expected to exert further pressure on profitability, the Company’s ability to maintain its financial flexibility in the current environment will remain key rating monitorable.
The company provides micro loans with a tenure of 1-2 years to women borrowers from low-income households for income generation activities like agriculture, handlooms & handicrafts, cattle raring, cottage industries & micro entrepreneurial ventures like tailoring, grocery stores amongst others, education and healthcare.
