Abstract

This case is about the crisis faced by Spandana Microfinance after a new government policy affected its business activities. In October 2010, the government of the state of Andhra Pradesh passed an ordinance after the microfinance industry faced a lot of allegations regarding the business practices followed by it. The ordinance made it almost impossible for Spandana and other microfinance institutions (MFIs) to collect dues from their borrowers. Banks and other financial institutions too stopped lending money to the MFIs as they feared that they might not be able to recover the loans. The management of Spandana under the leadership of its Managing Director, Padmaja Reddy, implemented a number of strategies to deal with the crisis. The management first cut down on its costs by closing down some branches, merging smaller branches with the bigger ones, and removing some employees. Spandanathen started to expand into other financing areas like loans to farmers and housing loans to diversify its revenue streams. Responding to the crisis faced by the Microfinance sector, the country’s central bank, the RBI, released new guidelines for the sector. These guidelines enabled MFIs like Spandana to access funds from banks again for the first time after the crisis. Spandana planned to enter new states as well as expand more aggressively in the states where it already had operations by utilizing the new funds raised. Meanwhile, Spandana along with the entire Microfinance industry was awaiting the passage of the Microfinance Institutions (Development and Regulation) Bill (MIB) in the Indian parliament. The bill would override other state legislations and make the RBI the sole regulator of MFIs in India. Spandana hoped that the new Bill would help it to get back to the growth path again.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the issues and challenges that are faced by businesses in the face of unfavorable policy decisions taken by the government.
• Analyze the strategies that should be followed by companies when faced with harsh government policies which stifle their growth prospects.
• Appreciate the importance of macro environmental factors like political and legal environments that can impact business.
• Discuss and debate whether the strategies followed by Spandana in the face of the crisis were good enough to rescue the company.
• Discuss the pros and cons of Spandana expanding into other unrelated areas of finance like loans to farmers (Karshak) and housing loans.

Keywords

Microfinance, Cash flow Management, Corporate debt restructuring, Securitization deals, Qualified Institutional Placement, Indian Microfinance industry, Business environment, Regulatory environment, Unfavorable government policies, Macroenvironment, PESTEL, Key drivers of change, SWOT, Diversification, Turnaround