Padmaja Reddy, founder and former chief executive officer of microfinance firm Spandana Sphoorty, has begun her second stint in the small loan segment by launching a gold loan business, where money is advanced against gold articles as collateral, from scratch.
The business is presently under a trust but will soon be merged with a non-banking finance company (NBFC) Reddy plans to acquire, Reddy said in an exclusive chat with Moneycontrol on January 18.
In early November, Reddy had quit the firm saying she was not stepping down by choice but because the board didn't extend her contract. Reddy also said that she opposed the selling of the microlender to Axis Bank at a valuation which, according to Reddy, is one-third that of peer companies.
The gold loan business will mark Reddy’s return to the business of small loans.
A fresh start
Reddy is operating her new gold loan business under Spandana Mutual Benefit Trust, a cooperative body of shareholders, teaming up with some of her former colleagues in the microlending business. Started in October 2021, the new business has built an outstanding loan book of Rs 125 crore thus far.
The gold loan business is currently operating through 46 branches in Andhra Pradesh and will soon expand to two locations in Telangana and a total of 76 branches in Andhra Pradesh in the near future, Reddy said.
“There is a notion that gold loans are only for emergencies. There is a lot of potential for the gold loan business as most of the household (gold) is lying idle. This can be leveraged for useful economic activities. That is where we find an opportunity,” said Reddy.
Reddy and her team have already disbursed Rs 275 crore worth of gold loans since the start of the business in October and plans to expand aggressively to other states.
New NBFC on the cards
While the new gold loan business has started under the Spandana Trust, the eventual plan is to migrate this business to an NBFC which will acquire this business, said Reddy. She added that she has identified an NBFC to acquire and is the process of getting the necessary approvals.
Reddy had initially planned to launch a new NBFC but later decided to acquire an existing NBFC and merge the existing business to speed up the overall process, she said. “We have identified an NBFC to acquire which is into the gold loan business. We have applied for the necessary approvals,” said Reddy. She didn’t reveal details of the target company.
Once the acquisition is complete, the NBFC will acquire the gold loan business under Spandana Mutual Benefit Trust, Reddy added.
Differences with Kedaara
Reddy exited Spandana, a firm she founded in 1998, following a major spat with Kedaara Capital, the biggest investor in the firm.
In an earlier interview with Moneycontrol, Reddy had said she was forced to quit after differences on the valuation at which the majority investor wanted to sell the firm to Axis Bank.
Reddy also made it clear that she didn’t have any plan to return to the company. “I have absolutely no intention of coming back to Spandana. Not at all. I’ve never had any hope. Everything is over. I left and I resigned, I got relieved by the board. And I'm looking at other options outside Spandana,” had said Reddy.
Private equity fund Kedaara Capital-backed Kangchenjunga Ltd is the biggest shareholder in the microfinance institution with a stake of 45.5 percent at the end of September.
Spandana Sphoorty’s total assets under management stood at around Rs 7,390 crore as of June end.
Besides, Reddy also highlighted the appointment of multiple consultants by the new management and questioned the accuracy of the collection efficiency figures, intensifying an ongoing battle between her and the board.
“Collection Efficiency for Q2 of FY22 and Sep 21 month has been reported as 97 per cent and 99 percent respectively excluding pre-payments. Collections include overdue collections (which was majorly funded by new loan disbursements), but, however, demand includes neither overdue demand nor the demand of 22.6% of loans that were restructured,” Reddy said in an email sent to various stakeholders in the firm.
“These numbers are false as the Actual Collection efficiency excluding overdue collections (funded by new loan disbursements) even after not considering the demand of 22.6% of the loans restructured stands at 92.5% and 92.4% for the full quarter (Q2) and for the full month of Sep. If the demand of restructured loans is considered, CE for the quarter was 75.7%,” Reddy added.
Reddy also pointed to the long list of consultants employed by the new management. “It is evident from the last twenty days that the worst thing that can happen to a Micro Finance Company is the Private Equity Fund managing the business. While they don’t want to dirty their hands, more than 10 Consultants are engaged in twenty days’ time to help them in doing everything,” Reddy said in the email.
A booming market
The gold loan business is a fast growing segment in India, dominated by banks, NBFCs and Nidhi companies (groups where members borrow and lend money among themselves) catering to various customer segments. According to a recent KPMG report, between FY14-15 and FY18-19, the gold loan assets under management of the top three listed gold loan NBFCs increased at a compound annual growth rate (CAGR) of 7.7 percent while the NCD (non-convertible debentures) outstanding of the companies registered a CAGR of 3.5 percent over the same period.
According to the consultancy, the gold loan market is expected to reach Rs4.62 lakh crore by 2022 at a five-year CAGR (FY18 to FY22) of 13.4 percent.
“Gold loan NBFCs will continue to be frontrunners in this journey equipped with quicker decision-making and faster adoption and capturing new markets will give them a natural advantage compared to banks. KPMG in India, however, sees banks tackling this by operating gold loan-specific branches and channels to give the NBFCs a strong fight,” the report said.
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