ICICI Securities: Adequate Provisioning To Cushion Earnings Volatility Of Spandana Sphoorty; Capital Sufficiency To Help Tackle Current Cycle 

ICICI Securities Report

Spandana Sphoorty Financial Services Ltd. in Q1 FY20 continued its proactive approach in strengthening balance sheet by building additional Covid-19-related provisions at Rs 0.9 billion (approximately 130 basis points of assets under management) and taking cumulative contingency buffer to 320 basis points - highest within the micro finance institution space.

Notably, collection efficiency improved steadily - from lows of 2% in April, it improved to as high as 92% as on August 20, 2020 with customer activation remaining robust at approximately 87%.

Better-than industry collections were supported by

1) higher rural-based customers (approximately 95%),

2) bi-weekly collection model,

3) ability to extend emergency loans to needy borrowers and

4) effective communication with borrowers about cost of moratorium and benefits of maintaining good payment track record.

While approximately 13% inactive customer base poses near-term risk on asset quality, diversified operations with 95% of districts having less than 1% exposure per district, adequate provisioning buffer and comfortable capital position (capital adequacy ratio, 53%) would ensure it navigates through the current cycle relatively better than peers.

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