Spandana Microfinance: Surviving the Crisis
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Case Details:
Case Code : FINC087
Case Length : 12 pages
Period : 2010-2013
Pub. Date : 2013
Teaching Note : Not Available
Organization :Spandana Microfinance
Industry : Microfinance
Countries : India
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"Five years from now, instead of MFIs, we may call ourselves rural-focused organizations that are into diversified activities and businesses across geographies."
-G. Padmaja Reddy, Founder and Managing Director, Spandana Microfinance, in October 2011.
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The flourishing Microfinance industry in India was thrown into disarray when the government of Andhra Pradesh, a Southern Indian state, passed a new ordinance in October 2010 curbing the activities of microfinance institutions (MFIs) operating in the state. The ordinance was issued in response to allegations that the harsh recovery measures employed by the MFIs had led to several of their borrowers committing suicide.
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The ordinance placed severe restrictions on the business activities of MFIs operating in the state and affected all these institutions. As a result of the ordinance, many borrowers have stopped repaying their loans. Spandana, the second largest MFI in the country in 2010, too suffered massive losses due to the non-recovery of its loans. It had to shelve its plans to raise more funds through an initial public offering (IPO) as it had to make more provisions for non-recoveries.
Spandana moved quickly in a bid to survive the crisis. To cut costs, it closed down some of its branches and merged smaller branches with bigger ones. It also retrenched many of its staff members, mostly from the state of Andhra Pradesh. Responding to the crisis, the country’s central bank, the Reserve Bank of India (RBI) issued a new set of guidelines for the Microfinance sector in December 2011, which paved the way for MFIs to raise funds again —the first time they were allowed to do so since the crisis.
Spandana utilized the opportunity and raised funds from banks through corporate debt restructuring (CDR) deals. The CDR deals made more money available to Spandana for expanding into other states and for meeting its working capital requirements. Spandana also started to diversify into other financing areas in order to increase its revenue streams. It started to lend more money under its Karshak scheme which advanced money to farmers for buying tractors and other farm equipment. Due to the continuing policy uncertainty, Spandana's management even began contemplating the possibility of converting itself into a financial organization focused on rural areas, with interests in a diversified range of business activities. Meanwhile, the MFI sector was awaiting the passage of a new bill in the Indian parliament which would make the RBI the sole regulator of the sector and nullify any other state legislation on the sector.
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