‘Microfinance entails managing risks, not assets’

Shalabh Saxena, MD and CEO, Spandana Sphoorty Financial Services, is content with the progress the company made post pandemic. While it may no longer be the second largest microfinance institution lender, that doesn’t worry Saxena as long as risk management tools are in place. Edited excerpts from an interview:

It’s two years since you took charge. How have things changed?

When we started our journey, at a portfolio level we were at about Rs 5,500 crore and there were issues around the quality of the portfolio. We did all we could to ensure that we did the right things to sustain the organisation and build it for the future. We said that we would exit FY24 with Rs 12,000 crore AUM [asset under management] and touch Rs 15,000 crore AUM in FY25; guided that the portfolio loss would be south of 2 per cent. We promised to deliver ROA [return on assets] of 4.5 per cent and above. In Q2 we delivered 5.9 per cent ROA. Lastly, we said we would be comfortable at 25–30 per cent growth rate. I think there’s a lot of room for us to grow at these rates. One thing I am very clear about is that microfinance is not an asset management business. It is a risk management business.

It’s different from the notion that MFI is an asset compounding business…

This is a credit-hungry segment where we provide the last-mile delivery. This is also an aspirational segment. There are ways to grow the loan book — like increasing the ticket size or adding more customers. For us, the growth will come from customer acquisition. Also, instead of monitoring ticket size, one should monitor the indebtedness at a customer level; it’s very critical. Secondly, at present, the top three states account for 40 per cent of the total book. In our last quarter, the share of the top two states — Madhya Pradesh and Orissa — was around 15%. By FY25, we will ensure that no state [share] will be more than 12%. We are doing away with sub-optimal branches. We are focusing on seven states, which will give a good balance to the portfolio geographically.

Does it gel with your growth outlook?

In FY23, we acquired 8.8 lakh customers. In the first half of FY24, we’ve done 6.3 lakh and end the year with a billion customers. At all the new branches, we have shifted to weekly (collections) model. In any crisis, we have observed that the weekly model is the first to get out of it. We have also started 12- and 18-month loans; the company earlier had 36-month tenure loans.

Incremental borrowing in Q2 was higher than disbursements?

When we started our journey our tilt was towards the capital market and then banks and NBFCs. We’ve now started reaching out to public sector enterprises such as SIDBI, NABARD and State Bank of India to join our growth story, and all the three came on board towards the end of the quarter. It was more a coincidence. Our policy is to have at least four months of operating expenses and two months of liabilities, which is about Rs 1,000 crore of cash.

The RBI recently said that pricing needs to be more rational in the MFI space. When do you see the rates easing?

We are waiting for things to stabilise. For the last 2–3 quarters, the repo rate has been stable. We’re just waiting for another 1–2 quarters to see how the rates hold up. If there is any financial movement downwards we will surely pass it on to the customer.

The league table in the MFI sector has changed with the recent M&A deal. You’ve ceded your No 2 position. How do you want to see yourself in the space?

What is very critical is that you have to grow and be a national player. It is critical that we should be of reasonable size and do business keeping the risk elements in mind. We believe in critical mass for sure; there is no doubt about it. We believe in growing profitably; it’s very important. Just adding denominator does not help if your stakeholders are not benefited. In MFI there are three stakeholders: customers, employees and shareholders. All three have to benefit from my growth story. Should the league table be AUM-based, profit-based or productivity-based? It’s all very debatable, though AUM is the popular way to measure it. For us, it’s just an outcome.