In conversation with Shalabh Saxena, Managing Director and CEO, Spandana Sphoorty Financial Limited
I would say we are just getting started on a multi-year growth journey where our focus will be on quality growth, affirms Shalabh Saxena, Managing Director and CEO, Spandana Sphoorty Financial Limited
What is your outlook on the Indian NBFC-MFI sector? What are the emerging trends and opportunities you are witnessing in the post-pandemic world?
India’s aspiring population across the urban and rural landscape are constantly seeking opportunities that would give flight to their entrepreneurial dreams. Microfinance, a formal channel of finance, provides last-mile delivery and is the right-suited model to meet this credit requirement, more so in the Indian context where we have a 70 per cent credit-eligible population unserved or underserved. This is further accentuated in rural India where we have more than 65 per cent population residing however its share in credit outstanding is under 10 per cent.
Various research reports, business analysis and our estimation of the market have projected the microfinance industry to grow at 15 per cent CAGR until the end of this decade which is effectively projecting a 3-fold increase in the industry from the current level of 3 lakh crore. NBFC MFI given the specialist role being played by them is best suited to cater to this requirement. Being a 2-decade-old industry, the operating environment has sufficiently matured to ensure balanced growth, more so in the rural geographies which are the focus areas of various govt and institutional bodies.
Asides, recent changes in the regulatory landscape have given a level playing field to the MFIs apart from formalising the credit evaluation of the customer, their household level income and liabilities which will bring more stability to the industry. These developments put us in an enviable position to push the growth agenda across markets. Yes, the industry has witnessed cyclical disruptions and challenges over the years (most recently covid), however, it also has demonstrated resilience. Overall, the opportunity that the sector provides leaves us quite excited about the future. Growth in the economy along with a young demography will spur credit demand. The bottom of the pyramid segment being a key initiator of economic activities will play a pivotal role and it is here that pan-India players in the NBFC-MFI space like us will have an advantage (from the credit, risk, control, cyclical movement perspective).
For Q2FY23, Spandana Sphoorty reported a consolidated net profit of Rs 55.2 crore against a loss of Rs 60 crore in the year-ago period. Which factors have contributed the most to helping you chart a stellar turnaround?
While comparing the performance, we should be cognizant that during Q2 of last FY the country (and our portfolio) was still reeling under the wave-2 of covid. While restrictions were coming off and people at the bottom of the pyramid were still trying hard to normalise their economic cycles. Across the microfinance industry, delinquencies were high and most players were building-up provisions in their books for the existing and possible future delinquencies. One has to look at the performance of Spandana in that light. One should also look at the accelerated clean-up of the book we undertook in Q1 FY23 when we wrote off Rs 702 crore from the portfolio.
On the whole, I would say we are just getting started on a multi-year growth journey where our focus will be on quality growth. This quarter (and the following 3-4 quarters) are part of the journey where we are building a strong foundation for the organisation. We are pretty confident that the best is yet to come!
The company’s AUM rose by about 5 per cent in Q2FY23 on a sequential basis to Rs 5,782 crore. What is the AUM growth that you are targeting for H2FY23 and FY24?
Our priorities for the current financial year have been to stabilise the operations of the company while still pursuing the growth agenda that we have set ourselves until FY 25. We expect to close the year with an AUM upwards of Rs 8000 crore which will be a 30 per cent growth over last year thus setting a strong momentum for the growth which will follow in the subsequent 2 years.
By the end of the current financial year, we expect to close all key managerial positions, strengthen governance, audit, and controls and refine processes. Apart from this launch, many technology-led customer initiatives are in the offing which will be more aligned with the current market trends and customer requirements. Our focus is customers, we are targeting a customer base of 2.8 million by year-end. We are targeting incremental business that will come out of 70-90 new branches that we plan to open this FY apart from adding 1500 more people in branches. Growth in manpower across branches in conjunction with optimising efficiencies and targeting a 20 per cent-25 per cent productivity increase will be the key focus areas for us to drive growth.
Can you highlight the key growth triggers for the company over the next 3-5 years?
Beginning of the year we laid out a Vision 2025 for Spandana wherein we charted an aspiration to grow our microfinance portfolio to about Rs 5,000 crore and our non-microfinance business (Secured + MSME) by an additional Rs 3,000 crore by FY 25. Given our wide distribution network, a well-experienced team and the large opportunity that the market offers we are best positioned to deliver this growth story.
The growth areas would broadly be:
a) Customer Acquisition: from 2.3 million currently to 4 million
b) Branch Expansion: from 1100 to 1500
c) Productivity: 25 per cent increase in the efficiencies
d) Geographical distribution: Focus on 7 states identified wherein market share needs to be scaled up to 5 per cent
e) Technology enhancements leading to a paperless environment resulting in cost and service benefits
f) Borrowing costs to be optimised through a prudent mix of banks and capital markets
g) Retention and talent management leading to quality people being part of the organization
h) Diversified product propositions fulfilling the life cycle needs of the customer thus resulting in higher customer retention
This growth would be supported by tighter controls, risk concentration norms, strict supervision and standardised execution of processes which would lead to enhanced credit quality standards. The focus of our organisation would be quality growth driven by a motivated team of committed professionals who would balance the interests of all the key stakeholders, ie customers, shareholders and the employee.
At the moment, what are your top 3 strategic priorities?
Given the rapid pace of changes in the environment and the Vision 2025 we have carved out for ourselves, there are multiple priorities we are pursuing.
Of the many tasks identified, we have 5 key strategic priorities:
1. Reinforcing senior and middle management teams
2. Strengthening governance, risk and control with added focus on refining processes
3. Focus on customer acquisition-led business growth while ensuring retention of existing customers
4. Technology scale-up to deliver an end-to-end paperless process for customers
5. Customer-focused initiatives with emphasis on product and service.
These strategic priorities are being driven within the company to align with the larger goals spelt out in our Vision 2025.
What is your earnings outlook for the next few quarters?
We are in this for the long term and hence refrain from getting into quarterly projections. Directionally we have articulated our end goal through Vision 2025 and with that as a goal, we will take incremental steps towards our destination.
The increase in distribution, focus on customer acquisition led growth, diversified geographical distribution with strict concentration norms, enhanced customer product and proposition led by technological enhancements, focus on people, productivity and efficiency in conjunction with lower borrowing cost will lead to increased profitability matrix. All of these steps once fructified should translate to a ROA upwards of 4 per cent and an ROE of 11 per cent-13 per cent by end of FY 25. Our teams are aligned in our collective mission to achieve the objectives carved out and clearly defined.