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Innovative financial solutions for low-income households and the informal market Annual Report 2007 - 2008 Managing efficiently in a challenging environment

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Page 1: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Innovative financial solutions for low-income households and the informal market

A n n u a l R e p o r t 2 0 0 7 - 2 0 0 8

Managing efficiently in a challenging environment

Page 2: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08

CONTENTS

03

Preface

The Context

About Spandana

*

*

Client Case Studies

Managing Director's Report

The Human Resources Development Report

Financial Status

Board Profile

Mission 5

Vision 5

Values 6

Principles 6

What is Micro finance? 07

The Indian Micro finance market – quantum and nature of demand 07

Why don't banks cater to this segment? 07

What are the consequences? 08

How MFI's bridge this gap 08

The Micro finance industry today 08

How do financial services help the poor? 08

Can financial services for the poor be sustainable? 09

The role of interest rates 09

Spandana at a glance 11

Urban/Rural Mix as of March 31, 2008 11

State-wise Presence as of March 31, 2008 11

Operational and financial highlights 12

Comparison with the industry 14

The Micro Finance Program 18

Social Focus 25

27

31

35

Notice 39

Director's Report 47

Auditor's Report 53

Balance Sheet and Profit and Loss Account 57

Cash Flow Statement 59

Schedules to the Accounts and Significant Accounting Policies 61

Disclosure on Prudential Norms as Per RBI Guidelines 77

Balance Sheet Abstract 81

83

Page 3: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08

CONTENTS

03

Preface

The Context

About Spandana

*

*

Client Case Studies

Managing Director's Report

The Human Resources Development Report

Financial Status

Board Profile

Mission 5

Vision 5

Values 6

Principles 6

What is Micro finance? 07

The Indian Micro finance market – quantum and nature of demand 07

Why don't banks cater to this segment? 07

What are the consequences? 08

How MFI's bridge this gap 08

The Micro finance industry today 08

How do financial services help the poor? 08

Can financial services for the poor be sustainable? 09

The role of interest rates 09

Spandana at a glance 11

Urban/Rural Mix as of March 31, 2008 11

State-wise Presence as of March 31, 2008 11

Operational and financial highlights 12

Comparison with the industry 14

The Micro Finance Program 18

Social Focus 25

27

31

35

Notice 39

Director's Report 47

Auditor's Report 53

Balance Sheet and Profit and Loss Account 57

Cash Flow Statement 59

Schedules to the Accounts and Significant Accounting Policies 61

Disclosure on Prudential Norms as Per RBI Guidelines 77

Balance Sheet Abstract 81

83

Page 4: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 05

PREFACE

Spandana is a financial service provider to low income households. Started in 1997, it has grown to become one

of the largest institutions of its kind in India. Spandana envisions itself as a financial service provider to markets

not optimally served. It focuses on poor and unbanked households in rural, semi-urban and urban areas.

The primary focus of Spandana has been economically active poor women. It provides subsidy-free loan

support for a variety of economic activities and emergencies. The former could range from vegetable vending to

running a tailoring shop. The latter may include expenses for trouble free childbirth, education expenses, or

funds required during times of bereavement.

Mainstream finance in India has attempted, with varying degrees of success, to reach the poor. State

involvement has focused priority on financial inclusion. However, considering the scale of poverty as well as the

scope of the informal markets in India, one may safely say that much needs to be done beyond the government

and the existing banking space.

Private initiatives so far have served the purpose of creating strong models for demonstration, with the implicit

expectation that the mainstream would emulate them at scale. Spandana is a unique combination – a strong

model, coupled in recent years with meaningful scale. Spandana arose as a personal response to a clearly

exploitative lending relationship. Through further work, the budding organization realized that it was not alone

in its pursuits. A whole sector was burgeoning with individuals and entities striving to make finance work for the

poor. This led to further learning about microfinance and the state of the practice across the subcontinent.

Spandana, in keeping with its “First Principles” approach, did not adopt any model in its entirety. Rather, it

listened to its clients to better understand their needs, studied and tested existing methodologies, and then

developed its own unique approach to reaching the poor in rural and urban areas. Spandana's operating

methodology has become a benchmark in the sector for efficiency, productivity and profitability, with many

upcoming organizations emulating its processes. Spandana continues to break new ground, set new standards,

overcome hurdles and break myths in the sector.

Presently, Spandana operates as a Non Banking Finance Company incorporated under the Companies Act, 1956

and licensed by the Reserve Bank of India under the Reserve Bank of India Act, 1934 to carry on the business of a

Non Banking Financial Institution. It operates in 75 districts of 8 states, with a total member base of 1,239,651 as

of March 31, 2008.

Spandana envisions itself as a financially self-sustainable Microfinance Institution with a wide base of

ownership. It is committed to strengthening the socio-economic status of low-income households, particularly

women, in rural and urban areas by providing financial services on a continual basis in order to improve

livelihoods, establish identity and enhance self-image. Spandana constantly endeavors to deliver efficient

services to its clients and remunerative returns to its investors by adopting cost-effective methods and by

creating a culture of competence and excellence. Spandana believes and aims to prove that microfinance is

more than charity or social work; it is not about giving handouts to needy women. Rather, Spandana envisions

microfinance as a viable, sustainable business proposition that provides women with the tools they can use

themselves to better their situation on a continual basis. Spandana seeks to be the leading microfinance

service provider, creating market driven & equitable solutions for segments not optimally served. This will

be achieved through a culture of client focus, innovation, efficiency, transparency and excellence for the

benefit of all stakeholders.

Spandana will be recognized as the market leader and preferred service provider in India with 3 million clients,

Rs. 3,000 crore outstanding, operating in 6 states of India.

MISSION

VISION 3:3:6:

Page 5: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 05

PREFACE

Spandana is a financial service provider to low income households. Started in 1997, it has grown to become one

of the largest institutions of its kind in India. Spandana envisions itself as a financial service provider to markets

not optimally served. It focuses on poor and unbanked households in rural, semi-urban and urban areas.

The primary focus of Spandana has been economically active poor women. It provides subsidy-free loan

support for a variety of economic activities and emergencies. The former could range from vegetable vending to

running a tailoring shop. The latter may include expenses for trouble free childbirth, education expenses, or

funds required during times of bereavement.

Mainstream finance in India has attempted, with varying degrees of success, to reach the poor. State

involvement has focused priority on financial inclusion. However, considering the scale of poverty as well as the

scope of the informal markets in India, one may safely say that much needs to be done beyond the government

and the existing banking space.

Private initiatives so far have served the purpose of creating strong models for demonstration, with the implicit

expectation that the mainstream would emulate them at scale. Spandana is a unique combination – a strong

model, coupled in recent years with meaningful scale. Spandana arose as a personal response to a clearly

exploitative lending relationship. Through further work, the budding organization realized that it was not alone

in its pursuits. A whole sector was burgeoning with individuals and entities striving to make finance work for the

poor. This led to further learning about microfinance and the state of the practice across the subcontinent.

Spandana, in keeping with its “First Principles” approach, did not adopt any model in its entirety. Rather, it

listened to its clients to better understand their needs, studied and tested existing methodologies, and then

developed its own unique approach to reaching the poor in rural and urban areas. Spandana's operating

methodology has become a benchmark in the sector for efficiency, productivity and profitability, with many

upcoming organizations emulating its processes. Spandana continues to break new ground, set new standards,

overcome hurdles and break myths in the sector.

Presently, Spandana operates as a Non Banking Finance Company incorporated under the Companies Act, 1956

and licensed by the Reserve Bank of India under the Reserve Bank of India Act, 1934 to carry on the business of a

Non Banking Financial Institution. It operates in 75 districts of 8 states, with a total member base of 1,239,651 as

of March 31, 2008.

Spandana envisions itself as a financially self-sustainable Microfinance Institution with a wide base of

ownership. It is committed to strengthening the socio-economic status of low-income households, particularly

women, in rural and urban areas by providing financial services on a continual basis in order to improve

livelihoods, establish identity and enhance self-image. Spandana constantly endeavors to deliver efficient

services to its clients and remunerative returns to its investors by adopting cost-effective methods and by

creating a culture of competence and excellence. Spandana believes and aims to prove that microfinance is

more than charity or social work; it is not about giving handouts to needy women. Rather, Spandana envisions

microfinance as a viable, sustainable business proposition that provides women with the tools they can use

themselves to better their situation on a continual basis. Spandana seeks to be the leading microfinance

service provider, creating market driven & equitable solutions for segments not optimally served. This will

be achieved through a culture of client focus, innovation, efficiency, transparency and excellence for the

benefit of all stakeholders.

Spandana will be recognized as the market leader and preferred service provider in India with 3 million clients,

Rs. 3,000 crore outstanding, operating in 6 states of India.

MISSION

VISION 3:3:6:

Page 6: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 07

* Acknowledgements to CGAP, The World Bank and Deutsche Bank

THE CONTEXT

What is Microfinance?

The Indian Microfinance Market – Quantum and Nature of Demand

Why Don't Banks Cater to this Segment?

Microfinance refers to the supply of loans and other basic financial services to the poor. Just like everyone else,

people living in poverty need a diverse range of financial instruments to run their businesses, build assets,

stabilize consumption and manage risk. Financial services needed by the poor include working capital loans,

consumer credit, savings, pensions, insurance and money transfer services.

Microfinance arose due to the reality that the poor rarely access services through the formal financial sector.

Rather, they address their need for financial services through a variety of financial relationships, mostly informal.

Credit is available from informal commercial money-lenders but usually at a very high interest rate. The

microfinance industry evolved as a solution to the erratic and insecure nature of the informal financial sector.

The modern microfinance movement originated during the 1970's in South Asia and Latin America. During this

time, experimental programs began to extend small, unsecured loans to groups of poor women to invest in

microenterprises. These early programs would lend money to women as members of a group with each group

member guaranteeing the repayment of all other members. This approach proved highly successful and the

programs challenged the prevailing conventional wisdom, proving that poor people without collateral could be

"creditworthy."

As the microfinance sector has evolved, the range of products has diversified in order to provide the poor with a

range of services to meet different needs. These products now include credit, savings, money transfers,

microinsurance and much more. In recent years, microfinance has attracted the attention of commercial banks,

mainstream investors and a host of new service providers.

According to World Bank data, over 25% of India's population of over one billion people lives in poverty. Their

access to financial services from banks and other formal institutions is low and the lack of adequate credit

facilities further limits the income generating potential of this group. The primary requirement for credit arises

from the disparity in the inflow and outflow of funds in most poor households. Money required for the repair of

houses and productive assets, health related expenses, education, marriage and rituals relating to life cycle

events like birth and death may not be readily available when the need arises.

Small loans offered by microfinance institutions provide an alternative source of funds and play an important

role in smoothing household cash-flows. The other important demand driver for microcredit in the region is the

intended enterprise of the client. She may require credit either to start a new venture or to expand an existing

one. Moreover, microfinance is sought to replace other – more costly – informal sources of finance. Small loans

are taken for a variety of purposes that can broadly be classified into categories of livestock, agriculture, trade

and service activities.

It is a disheartening reality that India's expansive formal credit system with its vast network and large resources

has not been able to adequately serve the credit needs of the poor, something it was created for. There are

several reasons why banks do not consider the poor as their potential clients and why the poor remain hesitant

to approach them.

Firstly, banks continue to rely on asset collateral as a credit risk mitigation tool. This automatically excludes the

poor from their target clientele as they are more often than not lacking any assets. Secondly, the existing cost

VALUES

PRINCIPLES

Transparency

o Maintaining simplicity and clarity in all activities and operations, so that high standards of fairness can

be established in all dealings.

Responsiveness

o Constantly working to identify the changing needs of clients and potential clients, and developing

suitable products and services to address these needs, thus keeping Spandana ahead of its competitors

Integrity

o Maintaining high standards of conduct, truthfulness and honesty in all dealings, in order to honor the

commitment made to our clients and organization.

Commitment

o Performing all activities and tasks with professionalism and enthusiasm in order to give the highest

level of client satisfaction and optimal efficiency.

Team Spirit

o Working together in order to create synergy that results in exponential growth.

Spandana believes that low-income women play a critical role both in the economics of their households and

their communities. Hence, it is committed to maintaining a special focus on women.

Spandana believes that poor households have risk taking abilities and are rational and judgmental while

assessing and improving their livelihoods. They are creative, innovative and enterprising. Access to credit brings

out these latent capacities. Spandana respects the opinions of its clients and believes in carrying out its business

without compromising our commitment to ethical values, transparency and efficiency.

Spandana has constantly responded to the felt needs of its clients and staff. Many of our clients have been using

the access to finance to significantly improve their livelihoods. The more enterprising ones, our star clients, have

articulated the need for loan products that they can avail of without necessarily being part of a group. Other

clients, either handling difficult economic scenarios or burdened with larger family needs, wish to continue in

the group system because of the solidarity and support it offers. We must respond to both of these stakeholders.

For the women that are ready to take larger doses of credit, we have developed products that treat them as

strong, independent entrepreneurs, hence our increasing focus on individual loans. For the second set of clients,

we continue to provide one of the cheapest, most well designed group loan products in the market. Further, as

an organization that has set benchmarks in the industry, we are constantly reinventing ourselves so that our staff

is stimulated with new challenges and opportunities. A sizable proportion of our staff has reported back to us

saying, “While we are providing for the needs of women-led enterprises, quite a few husbands are requesting

that we consider the requirements of their enterprises too. They want to become clients in their own right and

are eager to prove their capabilities to work hard and perform along with their spouses.” Taking this on board,

and with the strong realization that a large credit need among our existing client families remains unmet, we are

modifying the small business & micro-enterprise loan products to better suit our clients' requirements. We hope

to remain true to our principles of respect, efficiency and system design while developing and deploying these

new products. Not only would they fulfill an existing demand, but they would also energize our staff and help us

build a more diversified portfolio. This is critical, if we are to make further strides as a Non Banking Finance

Company in the market.

Page 7: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 07

* Acknowledgements to CGAP, The World Bank and Deutsche Bank

THE CONTEXT

What is Microfinance?

The Indian Microfinance Market – Quantum and Nature of Demand

Why Don't Banks Cater to this Segment?

Microfinance refers to the supply of loans and other basic financial services to the poor. Just like everyone else,

people living in poverty need a diverse range of financial instruments to run their businesses, build assets,

stabilize consumption and manage risk. Financial services needed by the poor include working capital loans,

consumer credit, savings, pensions, insurance and money transfer services.

Microfinance arose due to the reality that the poor rarely access services through the formal financial sector.

Rather, they address their need for financial services through a variety of financial relationships, mostly informal.

Credit is available from informal commercial money-lenders but usually at a very high interest rate. The

microfinance industry evolved as a solution to the erratic and insecure nature of the informal financial sector.

The modern microfinance movement originated during the 1970's in South Asia and Latin America. During this

time, experimental programs began to extend small, unsecured loans to groups of poor women to invest in

microenterprises. These early programs would lend money to women as members of a group with each group

member guaranteeing the repayment of all other members. This approach proved highly successful and the

programs challenged the prevailing conventional wisdom, proving that poor people without collateral could be

"creditworthy."

As the microfinance sector has evolved, the range of products has diversified in order to provide the poor with a

range of services to meet different needs. These products now include credit, savings, money transfers,

microinsurance and much more. In recent years, microfinance has attracted the attention of commercial banks,

mainstream investors and a host of new service providers.

According to World Bank data, over 25% of India's population of over one billion people lives in poverty. Their

access to financial services from banks and other formal institutions is low and the lack of adequate credit

facilities further limits the income generating potential of this group. The primary requirement for credit arises

from the disparity in the inflow and outflow of funds in most poor households. Money required for the repair of

houses and productive assets, health related expenses, education, marriage and rituals relating to life cycle

events like birth and death may not be readily available when the need arises.

Small loans offered by microfinance institutions provide an alternative source of funds and play an important

role in smoothing household cash-flows. The other important demand driver for microcredit in the region is the

intended enterprise of the client. She may require credit either to start a new venture or to expand an existing

one. Moreover, microfinance is sought to replace other – more costly – informal sources of finance. Small loans

are taken for a variety of purposes that can broadly be classified into categories of livestock, agriculture, trade

and service activities.

It is a disheartening reality that India's expansive formal credit system with its vast network and large resources

has not been able to adequately serve the credit needs of the poor, something it was created for. There are

several reasons why banks do not consider the poor as their potential clients and why the poor remain hesitant

to approach them.

Firstly, banks continue to rely on asset collateral as a credit risk mitigation tool. This automatically excludes the

poor from their target clientele as they are more often than not lacking any assets. Secondly, the existing cost

VALUES

PRINCIPLES

Transparency

o Maintaining simplicity and clarity in all activities and operations, so that high standards of fairness can

be established in all dealings.

Responsiveness

o Constantly working to identify the changing needs of clients and potential clients, and developing

suitable products and services to address these needs, thus keeping Spandana ahead of its competitors

Integrity

o Maintaining high standards of conduct, truthfulness and honesty in all dealings, in order to honor the

commitment made to our clients and organization.

Commitment

o Performing all activities and tasks with professionalism and enthusiasm in order to give the highest

level of client satisfaction and optimal efficiency.

Team Spirit

o Working together in order to create synergy that results in exponential growth.

Spandana believes that low-income women play a critical role both in the economics of their households and

their communities. Hence, it is committed to maintaining a special focus on women.

Spandana believes that poor households have risk taking abilities and are rational and judgmental while

assessing and improving their livelihoods. They are creative, innovative and enterprising. Access to credit brings

out these latent capacities. Spandana respects the opinions of its clients and believes in carrying out its business

without compromising our commitment to ethical values, transparency and efficiency.

Spandana has constantly responded to the felt needs of its clients and staff. Many of our clients have been using

the access to finance to significantly improve their livelihoods. The more enterprising ones, our star clients, have

articulated the need for loan products that they can avail of without necessarily being part of a group. Other

clients, either handling difficult economic scenarios or burdened with larger family needs, wish to continue in

the group system because of the solidarity and support it offers. We must respond to both of these stakeholders.

For the women that are ready to take larger doses of credit, we have developed products that treat them as

strong, independent entrepreneurs, hence our increasing focus on individual loans. For the second set of clients,

we continue to provide one of the cheapest, most well designed group loan products in the market. Further, as

an organization that has set benchmarks in the industry, we are constantly reinventing ourselves so that our staff

is stimulated with new challenges and opportunities. A sizable proportion of our staff has reported back to us

saying, “While we are providing for the needs of women-led enterprises, quite a few husbands are requesting

that we consider the requirements of their enterprises too. They want to become clients in their own right and

are eager to prove their capabilities to work hard and perform along with their spouses.” Taking this on board,

and with the strong realization that a large credit need among our existing client families remains unmet, we are

modifying the small business & micro-enterprise loan products to better suit our clients' requirements. We hope

to remain true to our principles of respect, efficiency and system design while developing and deploying these

new products. Not only would they fulfill an existing demand, but they would also energize our staff and help us

build a more diversified portfolio. This is critical, if we are to make further strides as a Non Banking Finance

Company in the market.

Page 8: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 09

structures of most banks coupled with various operational restrictions laid down by regulators makes it

uneconomical for them to serve this segment. Their reluctance to experiment with more client-need oriented

products and delivery channels contributes to this problem as well. Thirdly, the operational procedures laid

down for accessing credit are complicated and tedious which the semi-literate poor often find difficult to cope

with. Lastly, many of the banks are inconveniently located in the commercial centers of large towns, thereby

limiting convenient access to the rural and urban slum dwellers.

In the absence of formal sector lending, the poor turn to informal sources in order to meet their credit needs. This

informal market is characterized by exorbitant interest rates and other types of exploitation which often leads

them into a trap of debt and bankruptcy. A portion of this market is now being catered to by NGO MFIs who

realize that providing access to credit is an important intervention for the development of the poor. The

experience of this segment, which started decades ago, has been very encouraging in terms of increasing

demand and securing excellent repayment rates.

Having been established to satisfy the credit needs of the poor, MFIs have developed adequate systems and

procedures for the delivery of financial services to them. The risk involved in lending money without collateral

has been overcome by introducing the concept of group liability and incentivizing repayment through a

promise of continued credit. To suit client cash flows, repayments are usually made in small installments and at

frequent intervals. While helping to maintain a repayment rate of over 95%, this method also enables the service

providers to maintain regular contact with their borrowers for monitoring purposes. Since the MFIs are located

near their customers, they are able to reduce administrative costs and simplify routines. This approach, coupled

with realistic loan pricing, enables them to cover their costs. Since these interest rates are still much lower than

those charged by the informal sector moneylenders, the clients rarely face problems in loan servicing. The need-

based design and regular availability has given rise to a perception amongst the clients that loans will result in

future savings. Funds are usually invested for asset acquisition, business expansion, consumption smoothening

or retiring high cost debt. Microcredit, when performed in a sustainable manner, gives remunerative returns to

the investors and demonstrates that lending to the poor is a sound business proposition.

The microfinance industry, which began in 1976 with the establishment of the Grameen Bank in Bangladesh, is

now a world wide movement comprising thousands of specialist banks, credit unions, cooperatives, village

credit societies, NGO's and charities spanning both the richest and the poorest countries. Their common

purpose is to extend the outreach of banking services, particularly business credit, to those who do not qualify

for normal bank loans. Micro credits are granted at commercially viable interest rates, though they are much

lower than those charged by informal money lenders. Research by Deutsche Bank indicates that worldwide

demand for microcredit is upwards of US$250 billion. Of this global demand, only about 10% is currently being

served. Given the large latent demand for microfinance worldwide, growing awareness and the potential for

credit penetration, the role of MFIs in financial intermediation is set to expand exponentially. Some of the critical

challenges for the industry in the years to come include increasing financial sustainability, establishing

appropriate legal and regulatory mechanisms and improving governance practices. The challenge is to build

the capacity of the financial sector, drawing on lessons from international best practices in micro, small and rural

finance.

With access to savings, credit, insurance and other financial services, low income individuals are more resilient

and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have

What are the Consequences?

How MFI's Bridge this Gap

The Microfinance Industry Today

How do Financial Services Help the Poor?

demonstrated that microfinance can smooth consumption levels and significantly reduce the need to sell

assets to meet basic needs. With access to micro insurance, poor people can cope with sudden increased

expenses associated with death, serious illness and loss of assets.

Access to credit allows poor people to take advantage of economic opportunities that would otherwise be

inaccessible. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated

that reliable sources of credit provide a fundamental basis for planning and expanding business activities. Many

studies show that clients who join and stay in programs have better economic conditions than non-clients,

suggesting a correlation between these programs and economic improvements. A few studies have also shown

that over a long period of time, many clients do actually graduate out of poverty.

By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make

the transformation from daily subsistence living to actual preparation for the future. Households are able to

send more children to school for longer periods and to make greater investments in their children's education.

Increased earnings from financial services lead to better nutrition and better living conditions, which translates

into low incidence of illness. Increased earnings also allow clients to seek out and pay for health care and services

when needed, rather than go without or wait until their health seriously deteriorates.

Microfinance programs have generally targeted low income women. By providing access to financial services

only through women (i.e. making women responsible for loans, ensuring repayment through women,

maintaining savings accounts for women, providing insurance coverage through women), microfinance

programs send a strong message to households as well as to communities. Many qualitative and quantitative

studies have documented how access to financial services has improved the status of women within the family

and the community. Women have become more assertive and confident. In regions where women's mobility is

strictly regulated, women have become more visible and are better able to maneuver within the public sphere.

Women are able to own assets, including land and housing, and play a stronger role in decision making. In some

programs that have been active over many years, there are even reports of declining levels of violence against

women.

Microfinance, or financial services for the poor, can be profitable and thus sustainable. The November 2001 issue

of the Micro Banking Bulletin includes data from 62 self-sufficient MFIs. The average return on assets for this

group is 5.5%, which compares favorably to commercial-bank returns. Indeed, there are grounds for hope that

microfinance can become attractive to mainstream retail banks.

To maintain and increase its services over time, an MFI must charge interest rates high enough to cover the cost

of its loans otherwise the MFI will lose money. Unless it is continually infused with fresh capital from private

donors or governments, its activities will atrophy instead of expand. The problem is that donor and government

money is not reliable and there is not a sufficient supply of it to meet the demand. Commercial investment

funding is available, but MFIs must be sustainable (i.e. profitable) enough to continue, in order to attract this

investment.

There are three kinds of costs the MFI has to cover when it makes micro loans. The first two, the cost of the money

that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the

MFI for the money it lends is 10% and it experiences defaults of 1% of the amount lent, then these two costs will

total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers

both these costs for either loan.

Can Financial Services for the Poor be Sustainable?

The Role of Interest Rates

Page 9: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 09

structures of most banks coupled with various operational restrictions laid down by regulators makes it

uneconomical for them to serve this segment. Their reluctance to experiment with more client-need oriented

products and delivery channels contributes to this problem as well. Thirdly, the operational procedures laid

down for accessing credit are complicated and tedious which the semi-literate poor often find difficult to cope

with. Lastly, many of the banks are inconveniently located in the commercial centers of large towns, thereby

limiting convenient access to the rural and urban slum dwellers.

In the absence of formal sector lending, the poor turn to informal sources in order to meet their credit needs. This

informal market is characterized by exorbitant interest rates and other types of exploitation which often leads

them into a trap of debt and bankruptcy. A portion of this market is now being catered to by NGO MFIs who

realize that providing access to credit is an important intervention for the development of the poor. The

experience of this segment, which started decades ago, has been very encouraging in terms of increasing

demand and securing excellent repayment rates.

Having been established to satisfy the credit needs of the poor, MFIs have developed adequate systems and

procedures for the delivery of financial services to them. The risk involved in lending money without collateral

has been overcome by introducing the concept of group liability and incentivizing repayment through a

promise of continued credit. To suit client cash flows, repayments are usually made in small installments and at

frequent intervals. While helping to maintain a repayment rate of over 95%, this method also enables the service

providers to maintain regular contact with their borrowers for monitoring purposes. Since the MFIs are located

near their customers, they are able to reduce administrative costs and simplify routines. This approach, coupled

with realistic loan pricing, enables them to cover their costs. Since these interest rates are still much lower than

those charged by the informal sector moneylenders, the clients rarely face problems in loan servicing. The need-

based design and regular availability has given rise to a perception amongst the clients that loans will result in

future savings. Funds are usually invested for asset acquisition, business expansion, consumption smoothening

or retiring high cost debt. Microcredit, when performed in a sustainable manner, gives remunerative returns to

the investors and demonstrates that lending to the poor is a sound business proposition.

The microfinance industry, which began in 1976 with the establishment of the Grameen Bank in Bangladesh, is

now a world wide movement comprising thousands of specialist banks, credit unions, cooperatives, village

credit societies, NGO's and charities spanning both the richest and the poorest countries. Their common

purpose is to extend the outreach of banking services, particularly business credit, to those who do not qualify

for normal bank loans. Micro credits are granted at commercially viable interest rates, though they are much

lower than those charged by informal money lenders. Research by Deutsche Bank indicates that worldwide

demand for microcredit is upwards of US$250 billion. Of this global demand, only about 10% is currently being

served. Given the large latent demand for microfinance worldwide, growing awareness and the potential for

credit penetration, the role of MFIs in financial intermediation is set to expand exponentially. Some of the critical

challenges for the industry in the years to come include increasing financial sustainability, establishing

appropriate legal and regulatory mechanisms and improving governance practices. The challenge is to build

the capacity of the financial sector, drawing on lessons from international best practices in micro, small and rural

finance.

With access to savings, credit, insurance and other financial services, low income individuals are more resilient

and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have

What are the Consequences?

How MFI's Bridge this Gap

The Microfinance Industry Today

How do Financial Services Help the Poor?

demonstrated that microfinance can smooth consumption levels and significantly reduce the need to sell

assets to meet basic needs. With access to micro insurance, poor people can cope with sudden increased

expenses associated with death, serious illness and loss of assets.

Access to credit allows poor people to take advantage of economic opportunities that would otherwise be

inaccessible. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated

that reliable sources of credit provide a fundamental basis for planning and expanding business activities. Many

studies show that clients who join and stay in programs have better economic conditions than non-clients,

suggesting a correlation between these programs and economic improvements. A few studies have also shown

that over a long period of time, many clients do actually graduate out of poverty.

By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make

the transformation from daily subsistence living to actual preparation for the future. Households are able to

send more children to school for longer periods and to make greater investments in their children's education.

Increased earnings from financial services lead to better nutrition and better living conditions, which translates

into low incidence of illness. Increased earnings also allow clients to seek out and pay for health care and services

when needed, rather than go without or wait until their health seriously deteriorates.

Microfinance programs have generally targeted low income women. By providing access to financial services

only through women (i.e. making women responsible for loans, ensuring repayment through women,

maintaining savings accounts for women, providing insurance coverage through women), microfinance

programs send a strong message to households as well as to communities. Many qualitative and quantitative

studies have documented how access to financial services has improved the status of women within the family

and the community. Women have become more assertive and confident. In regions where women's mobility is

strictly regulated, women have become more visible and are better able to maneuver within the public sphere.

Women are able to own assets, including land and housing, and play a stronger role in decision making. In some

programs that have been active over many years, there are even reports of declining levels of violence against

women.

Microfinance, or financial services for the poor, can be profitable and thus sustainable. The November 2001 issue

of the Micro Banking Bulletin includes data from 62 self-sufficient MFIs. The average return on assets for this

group is 5.5%, which compares favorably to commercial-bank returns. Indeed, there are grounds for hope that

microfinance can become attractive to mainstream retail banks.

To maintain and increase its services over time, an MFI must charge interest rates high enough to cover the cost

of its loans otherwise the MFI will lose money. Unless it is continually infused with fresh capital from private

donors or governments, its activities will atrophy instead of expand. The problem is that donor and government

money is not reliable and there is not a sufficient supply of it to meet the demand. Commercial investment

funding is available, but MFIs must be sustainable (i.e. profitable) enough to continue, in order to attract this

investment.

There are three kinds of costs the MFI has to cover when it makes micro loans. The first two, the cost of the money

that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the

MFI for the money it lends is 10% and it experiences defaults of 1% of the amount lent, then these two costs will

total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers

both these costs for either loan.

Can Financial Services for the Poor be Sustainable?

The Role of Interest Rates

Page 10: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 11

ABOUT SPANDANA

Spandana at a GlanceUrban/Rural Mix as of March 31st, 2008

Urban Rural Mix

Rural49%

Urban45%

Semi Urban6%

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500

loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same

amount of staff time for meeting with the borrower to appraise the loan, process the loan disbursement and

repayments and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are

for one year. To break even on the $500 loan, the MFI would need to collect interest of $50+$5+$25=$80, which

represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest

of $10+$1+$25=$36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many

people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that

when loan sizes get very small, transaction costs loom larger because these costs cannot be cut below certain

minimums.

Lending programs that continually subsidize their borrowers will de-capitalize themselves unless they continue

to receive new subsidies from donors or governments. By contrast, MFIs who charge their clients enough to

cover all the loan costs can attract funding from commercial sources and are capable of exponential growth

without relying on scarce and uncertain subsidies as a source of funding. MFIs have to charge rates that are

higher than normal banking rates to keep the service available, but even these rates are far below what poor

people routinely pay to village money-lenders and other informal sources, whose percentage interest rates

routinely rise into the hundreds and even the thousands.

This does not mean, of course, that all high interest charges by MFIs are justifiable. Sometimes MFIs, especially

ones that are funded by donors, are not aggressive enough in containing transaction costs. The result is that they

pass on unnecessarily high transaction costs to their borrowers. Sustainability should be pursued by cutting

costs as much as possible, not just by raising interest rates to whatever the market will bear. Efficiency, therefore,

is key.

State-wise Presence as of March 31st, 2008

State Number Number Number Number Active Staff Loan % ofof of of of Loans Outstanding Out-

Districs Loans Centres Clients (Cr) standing

Andhra Pradesh 23 276 36,303 937,243 983,696 2,025 535.01 73.38

Karnataka 16 79 8,203 208,405 204,629 467 128.30 17.60

Tamil Nadu 5 10 1,369 31,828 31,531 55 17.50 2.40

Maharashtra 6 25 410 25,950 25,219 182 18.75 2.57

Orissa 10 26 1,070 29,159 30,396 172 23.00 3.15

Chhattisgarh 5 9 120 2,821 2,821 39 2.72 0.37

Madhya Pradesh 8 7 193 3,944 3,944 58 3.52 0.48

Rajasthan 2 3 25 301 301 26 0.28 0.04

Total 75 435 47,693 1,239,651 1,282,537 3,024 729 100

Andhra Pradesh 76%

Karnataka 17%

Tamil Nadu 3%

Maharashtra 2%

Orissa 2%

Chhattisgarh <1%

Madhya Pradesh <1%

Rajasthan<1%

Number of Clients

0

100

200

300

400

500

600

Loan Outstanding (Cr)

Andhra Pradesh 73%

Karnataka 18%

Tamil Nadu 2%

Maharashtra 3%

Orissa 3%

Chhattisgarh <1%

Madhya Pradesh <1%

Rajasthan<1%

Page 11: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 11

ABOUT SPANDANA

Spandana at a GlanceUrban/Rural Mix as of March 31st, 2008

Urban Rural Mix

Rural49%

Urban45%

Semi Urban6%

The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500

loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same

amount of staff time for meeting with the borrower to appraise the loan, process the loan disbursement and

repayments and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are

for one year. To break even on the $500 loan, the MFI would need to collect interest of $50+$5+$25=$80, which

represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest

of $10+$1+$25=$36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many

people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that

when loan sizes get very small, transaction costs loom larger because these costs cannot be cut below certain

minimums.

Lending programs that continually subsidize their borrowers will de-capitalize themselves unless they continue

to receive new subsidies from donors or governments. By contrast, MFIs who charge their clients enough to

cover all the loan costs can attract funding from commercial sources and are capable of exponential growth

without relying on scarce and uncertain subsidies as a source of funding. MFIs have to charge rates that are

higher than normal banking rates to keep the service available, but even these rates are far below what poor

people routinely pay to village money-lenders and other informal sources, whose percentage interest rates

routinely rise into the hundreds and even the thousands.

This does not mean, of course, that all high interest charges by MFIs are justifiable. Sometimes MFIs, especially

ones that are funded by donors, are not aggressive enough in containing transaction costs. The result is that they

pass on unnecessarily high transaction costs to their borrowers. Sustainability should be pursued by cutting

costs as much as possible, not just by raising interest rates to whatever the market will bear. Efficiency, therefore,

is key.

State-wise Presence as of March 31st, 2008

State Number Number Number Number Active Staff Loan % ofof of of of Loans Outstanding Out-

Districs Loans Centres Clients (Cr) standing

Andhra Pradesh 23 276 36,303 937,243 983,696 2,025 535.01 73.38

Karnataka 16 79 8,203 208,405 204,629 467 128.30 17.60

Tamil Nadu 5 10 1,369 31,828 31,531 55 17.50 2.40

Maharashtra 6 25 410 25,950 25,219 182 18.75 2.57

Orissa 10 26 1,070 29,159 30,396 172 23.00 3.15

Chhattisgarh 5 9 120 2,821 2,821 39 2.72 0.37

Madhya Pradesh 8 7 193 3,944 3,944 58 3.52 0.48

Rajasthan 2 3 25 301 301 26 0.28 0.04

Total 75 435 47,693 1,239,651 1,282,537 3,024 729 100

Andhra Pradesh 76%

Karnataka 17%

Tamil Nadu 3%

Maharashtra 2%

Orissa 2%

Chhattisgarh <1%

Madhya Pradesh <1%

Rajasthan<1%

Number of Clients

0

100

200

300

400

500

600

Loan Outstanding (Cr)

Andhra Pradesh 73%

Karnataka 18%

Tamil Nadu 2%

Maharashtra 3%

Orissa 3%

Chhattisgarh <1%

Madhya Pradesh <1%

Rajasthan<1%

Page 12: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 13

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Page 13: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 13

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Page 14: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 15

Repayment Rate 99.99%

Portfolio At Risk (>30 days) 0.01%

Loan Loss Rate 0.09%

Operating Cost Ratio 13.18%

Administrative cost ratio 5.76%

Personnel Costs as a Percent of Admin Costs 72.07%

No. of Active Borrowers per Staff Member 393

No. of Active Borrowers per Credit Assistant 535

Gross Portfolio Outstanding per Credit Assistant 3,289,857

No. of Clients per Credit Assistant 558

No. of Active Borrowers per Branch 2,733

Return on Assets 7.62%

Return on Equity 44.41%

Yield on Portfolio 22.43%

Operational Self Sufficiency 156.41%

Financial Cost Ratio 7.42%

Capital Adequacy 22.69%

Current Ratio 3.69

Cash to Total Assets 3.23%

Debt Service Coverage Ratio 2.88

Debt to Equity Ratio 5.16

Key Financial Ratios as of March 31st, 2008

COMPARISON WITH THE INDUSTRY

Benchmark data courtesy of the Microfinance Information Exchange (MIX). Benchmark data provided as of stMarch 31 , 2008 unless marked with * in which case 2007 data was used in place of unavailable 2008 data.

300,000,000

250,000,000

200,000,000

150,000,000

100,000,000

50,000,000

148,286,681

182,173,408

261,718,932

56,057,212

Share Spandana SKS BASIX

0

Gross Loan Portfolio (US$)

4.43%

Share Spandana SKS BASIX

Portfolio at Risk > 30 Days

0.01% 0.15%

1.21%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

300,000,000

250,000,000

200,000,000

150,000,000

100,000,000

50,000,000

163,955,391

Share Spandana SKS BASIX

0

Total Assets (US$)

350,000,000

400,000,000

208,876,249

336,873,020

67,068,396

Share Spandana SKS BASIX

Return on Assets

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

1.22%

7.62%

2.00%

0.59%

Share* Spandana SKS BASIX

Return on Equity

15.31%

44.41%

4.93%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

11.95%

Page 15: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 15

Repayment Rate 99.99%

Portfolio At Risk (>30 days) 0.01%

Loan Loss Rate 0.09%

Operating Cost Ratio 13.18%

Administrative cost ratio 5.76%

Personnel Costs as a Percent of Admin Costs 72.07%

No. of Active Borrowers per Staff Member 393

No. of Active Borrowers per Credit Assistant 535

Gross Portfolio Outstanding per Credit Assistant 3,289,857

No. of Clients per Credit Assistant 558

No. of Active Borrowers per Branch 2,733

Return on Assets 7.62%

Return on Equity 44.41%

Yield on Portfolio 22.43%

Operational Self Sufficiency 156.41%

Financial Cost Ratio 7.42%

Capital Adequacy 22.69%

Current Ratio 3.69

Cash to Total Assets 3.23%

Debt Service Coverage Ratio 2.88

Debt to Equity Ratio 5.16

Key Financial Ratios as of March 31st, 2008

COMPARISON WITH THE INDUSTRY

Benchmark data courtesy of the Microfinance Information Exchange (MIX). Benchmark data provided as of stMarch 31 , 2008 unless marked with * in which case 2007 data was used in place of unavailable 2008 data.

300,000,000

250,000,000

200,000,000

150,000,000

100,000,000

50,000,000

148,286,681

182,173,408

261,718,932

56,057,212

Share Spandana SKS BASIX

0

Gross Loan Portfolio (US$)

4.43%

Share Spandana SKS BASIX

Portfolio at Risk > 30 Days

0.01% 0.15%

1.21%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

300,000,000

250,000,000

200,000,000

150,000,000

100,000,000

50,000,000

163,955,391

Share Spandana SKS BASIX

0

Total Assets (US$)

350,000,000

400,000,000

208,876,249

336,873,020

67,068,396

Share Spandana SKS BASIX

Return on Assets

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

1.22%

7.62%

2.00%

0.59%

Share* Spandana SKS BASIX

Return on Equity

15.31%

44.41%

4.93%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

11.95%

Page 16: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 17

Share Spandana SKS BASIX

Cost per Borrower

11.6

0

5

10

15

20

25

30

7.5

18.7

25.1

Share Spandana SKS BASIX

Borrowers per Staff Member

327

0

50

100

150

250

300

200

350

400

450393

254

157

Share Spandana SKS BASIX

Debt to Equity Ratio

439.96%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

800.00%

900.00%

516.30%

536.31%

849.06%

Share* Spandana SKS BASIX

Operating Expense Ratio

9.61%

0.00%

2.00%

5.08%

9.64%

11.75%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Share* Spandana SKS BASIX

Profit Margin

9.16%

37.14%

7.91%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

16.50%

Share* Spandana SKS BASIX

Operational Self Sufficiency

110.09%

0.00%

20.00%

40.00%

156.41%

119.75%108.59%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

Share* Spandana SKS BASIX

Total Expense Ratio

13.04%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

12.45%

17.01%

21.12%

Share* Spandana SKS BASIX

Operating Expense / Loan Portfolio

10.97%

0.00%

2.00%

5.80%

12.33%

14.37%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Page 17: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 17

Share Spandana SKS BASIX

Cost per Borrower

11.6

0

5

10

15

20

25

30

7.5

18.7

25.1

Share Spandana SKS BASIX

Borrowers per Staff Member

327

0

50

100

150

250

300

200

350

400

450393

254

157

Share Spandana SKS BASIX

Debt to Equity Ratio

439.96%

0.00%

100.00%

200.00%

300.00%

400.00%

500.00%

600.00%

700.00%

800.00%

900.00%

516.30%

536.31%

849.06%

Share* Spandana SKS BASIX

Operating Expense Ratio

9.61%

0.00%

2.00%

5.08%

9.64%

11.75%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Share* Spandana SKS BASIX

Profit Margin

9.16%

37.14%

7.91%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

16.50%

Share* Spandana SKS BASIX

Operational Self Sufficiency

110.09%

0.00%

20.00%

40.00%

156.41%

119.75%108.59%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

Share* Spandana SKS BASIX

Total Expense Ratio

13.04%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

12.45%

17.01%

21.12%

Share* Spandana SKS BASIX

Operating Expense / Loan Portfolio

10.97%

0.00%

2.00%

5.80%

12.33%

14.37%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Page 18: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 19

PRODUCTSSpandana has loan, insurance and money transfer programs for its clients, key aspects of the products are outlined below:

Loan Products Terms

General Loan (weekly) Group based lending. 5 to 10 women are formed into joint liability groups. Loan is for income generation and debt relief.

Repayment Frequency: Weekly

Tenor: 50 Weeks (for loans above Rs. 10,000 – 50 to 75 weeks option is given)

Loan Size: Rs. 2,000 to 20,000

Clients: Daily wage laborers both skilled and unskilled and only women.

Interest Rate: 12.5% flat and 1% to 2.0% upfront fees

Individual Loan Individual Lending

Guarantee: PDC's and co-obligant guarantee

Should have a sizeable business/salary/rental income

Repayment Frequency: Monthly

Loan Size: Rs. 21,000 to Rs. 200,000

Clients: SME owners, salaried employees of class IV, etc. (both men and women)

Interest Rate: 21% diminishing in case of second and subsequent cycle clients and 24% in case of new clients and 2% upfront fees

Agri Family Loan Group Based lending. 4 to 6 small and marginal farmers are formed into joint liability groups (both men and women)

Loan is for agriculture and allied activities

Repayment Frequency: interest payable monthly but principle repayments match with harvest.

Tenor: One year

Loan Size: Rs. 5,000 to Rs. 30,000

Clients: small and marginal farmers with land holding of 1 to 10 acres (both men and women).

Interest rate: 18% diminishing and no fees

Dairy Loan Loan is given to milk producers and milk collection agents against guarantee given by the Dairy to which the farmer / agent supplies milk. Dairy deducts loan instalment from the farmer and remit to loan account.

Repayment Frequency: Once in ten/fifteen days to match with the Dairy's payment to milk producers.

Tenor: 10 Months

Loan Size:Rs.20,000 to 100,000

Interest Rate: 18% diminishing and no fees

Page 19: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 19

PRODUCTSSpandana has loan, insurance and money transfer programs for its clients, key aspects of the products are outlined below:

Loan Products Terms

General Loan (weekly) Group based lending. 5 to 10 women are formed into joint liability groups. Loan is for income generation and debt relief.

Repayment Frequency: Weekly

Tenor: 50 Weeks (for loans above Rs. 10,000 – 50 to 75 weeks option is given)

Loan Size: Rs. 2,000 to 20,000

Clients: Daily wage laborers both skilled and unskilled and only women.

Interest Rate: 12.5% flat and 1% to 2.0% upfront fees

Individual Loan Individual Lending

Guarantee: PDC's and co-obligant guarantee

Should have a sizeable business/salary/rental income

Repayment Frequency: Monthly

Loan Size: Rs. 21,000 to Rs. 200,000

Clients: SME owners, salaried employees of class IV, etc. (both men and women)

Interest Rate: 21% diminishing in case of second and subsequent cycle clients and 24% in case of new clients and 2% upfront fees

Agri Family Loan Group Based lending. 4 to 6 small and marginal farmers are formed into joint liability groups (both men and women)

Loan is for agriculture and allied activities

Repayment Frequency: interest payable monthly but principle repayments match with harvest.

Tenor: One year

Loan Size: Rs. 5,000 to Rs. 30,000

Clients: small and marginal farmers with land holding of 1 to 10 acres (both men and women).

Interest rate: 18% diminishing and no fees

Dairy Loan Loan is given to milk producers and milk collection agents against guarantee given by the Dairy to which the farmer / agent supplies milk. Dairy deducts loan instalment from the farmer and remit to loan account.

Repayment Frequency: Once in ten/fifteen days to match with the Dairy's payment to milk producers.

Tenor: 10 Months

Loan Size:Rs.20,000 to 100,000

Interest Rate: 18% diminishing and no fees

Page 20: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 21

Appraisal

- First cycle loans range from INR 1,000 to 12,000. The CA appraises loan applicants for amounts less

than INR 25,000 while the Branch Manager (“BM”) reviews applications above this amount. Loan

amounts tend to increase with successive cycles, thereby deepening the exposure of Spandana in a

given area over time.

- For first loan applicants, appraisal is based on the member's attendance at training, her discipline in

the group and ability to sustain a good relationship with the group.

- The appropriateness of the loan, both in terms of amount and purpose, is reviewed specific to each

client.

- High loans will be discouraged if it is felt that the business is too small to absorb the demanded

credit.

- For the second and remaining loan cycles the applicants are appraised based on their loan

repayment behaviour, improvement in their economic standing, attendance and discipline at the

centre meetings and the feasibility of the proposed activity. The CA appraises the application and

the BM sanctions it.

Sanction

- The borrower's attendance at meetings is one of the criteria for sanctioning subsequent loans. Each

borrower should have at least 50% attendance to get the subsequent loan.

- Sanction of the loan will be in the second week after receiving the loan application.

Disbursement

- Disbursement of loans occurs at the centre meetings by the CAs after taking an oath in the centre

meeting.

- All remaining group members should attend the centre meeting and express that they accept

responsibility of prompt repayment as agreed.

Repayment

- Loan repayments are made in centre meetings (6 A.M to 11 A.M) and all members present in the

centre meeting should verify the entry in the passbook before they leave the meeting.

- For group loans, the loan together with the service charge is repayable in 50 weeks in 50 equal

installments. 15% flat interest is charged on every loan taken by members and they have to repay

Rs.20 per week as a principal amount and Rs 3 per week as an interest for every Rs.1,000 loan taken.

The CA will put date and sign on each repayment day acknowledging the receipt of the weekly

instalment.

Prepayment

- The members who wish to take the next loan can prepay the outstanding loan amount after 35

weeks and interest for the following 5 weeks.

- She will be given the loan application on the day of prepayment and the loan, if approved, will be

disbursed during the following week's centre meeting.

- Prior to the next loan being released, her ability to repay the loan and also the purpose of loan will be

appraised by the CA.

Loan Procedure - Group Lending

The key steps involved in processing a group loan application are outlined below:

Group Formation

- 10 member groups are formed.

- Basic training is provided to the members covering Spandana's operating procedure.

- A group recognition test is carried out to test their understanding of the training provided.

- If the group passes the test, they become eligible to avail loans and go through the application

process.

Application

- All 10 group members present loan applications together at first centre meeting.

- The Credit Assistant (“CA”) ensures that members understand every aspect of the application.

- Information collected includes the member's name, their husband's name, purpose and size of

group.

- The remaining group members sign the application form as co-guarantors. Every member must be

present for the loans to be disbursed.

General Loan

Individual Loan

Money Transfer Program

Insurance Facilitation

Spandana's main loan product is the General Loan focusing on income generating activities. Members may

borrow up to INR. 12,000 for their first loan and subsequent loan cycles are on the basis of client's repayment

capacity. Loan amount is not determined by the cycle and is decided by the cash flows and loan absorption and

repayment capacity of the client. Loans are disbursed only after thorough appraisal by the Branch Manager. The

BM will visit the client and decide the loan amount. Loans are extended to members for 50 weeks with a weekly

repayment schedule.

Individual loans may be provided to micro-entrepreneurs, salaried people, contract workers and householders

meeting various net monthly income thresholds. Loans may be utilized for a wide range of purposes including

business expansion and working capital requirements, personal loans for debt consolidation, and housing

renovations.

Spandana has entered into an agreement with Western Union for a Money Transfer program. Spandana is

starting Money Transfer services for its rural and semi urban clients in Andhra Pradesh. Under the arrangement,

Spandana will initially leverage its network of 276 branches across the state to offer in-bound money transfer

services to its around 1 million customers. It will later expand to Karnataka, Tamil Nadu, Orissa and Maharashtra

during the next quarter, where the MFI also has a presence.

Spandana provides a life insurance product of Bajaj Allianz to all clients. Keeping borrower welfare and risk

mitigation in mind, life insurance has been made compulsory to all borrowers of Spandana loans. When taking

out a general loan, every borrower and her husband is covered under the life insurance program. However, in the

case of individual loans only the actual borrower is covered. The insurance premium is collected at the time of

the loan disbursement. In case of death of the borrower or her husband, after deducting the outstanding

principal amount and interest amount for five weeks from the sum insured, the rest is given to the family

members of the deceased (borrower or her husband).

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Spandana Annual Report 2007-08 21

Appraisal

- First cycle loans range from INR 1,000 to 12,000. The CA appraises loan applicants for amounts less

than INR 25,000 while the Branch Manager (“BM”) reviews applications above this amount. Loan

amounts tend to increase with successive cycles, thereby deepening the exposure of Spandana in a

given area over time.

- For first loan applicants, appraisal is based on the member's attendance at training, her discipline in

the group and ability to sustain a good relationship with the group.

- The appropriateness of the loan, both in terms of amount and purpose, is reviewed specific to each

client.

- High loans will be discouraged if it is felt that the business is too small to absorb the demanded

credit.

- For the second and remaining loan cycles the applicants are appraised based on their loan

repayment behaviour, improvement in their economic standing, attendance and discipline at the

centre meetings and the feasibility of the proposed activity. The CA appraises the application and

the BM sanctions it.

Sanction

- The borrower's attendance at meetings is one of the criteria for sanctioning subsequent loans. Each

borrower should have at least 50% attendance to get the subsequent loan.

- Sanction of the loan will be in the second week after receiving the loan application.

Disbursement

- Disbursement of loans occurs at the centre meetings by the CAs after taking an oath in the centre

meeting.

- All remaining group members should attend the centre meeting and express that they accept

responsibility of prompt repayment as agreed.

Repayment

- Loan repayments are made in centre meetings (6 A.M to 11 A.M) and all members present in the

centre meeting should verify the entry in the passbook before they leave the meeting.

- For group loans, the loan together with the service charge is repayable in 50 weeks in 50 equal

installments. 15% flat interest is charged on every loan taken by members and they have to repay

Rs.20 per week as a principal amount and Rs 3 per week as an interest for every Rs.1,000 loan taken.

The CA will put date and sign on each repayment day acknowledging the receipt of the weekly

instalment.

Prepayment

- The members who wish to take the next loan can prepay the outstanding loan amount after 35

weeks and interest for the following 5 weeks.

- She will be given the loan application on the day of prepayment and the loan, if approved, will be

disbursed during the following week's centre meeting.

- Prior to the next loan being released, her ability to repay the loan and also the purpose of loan will be

appraised by the CA.

Loan Procedure - Group Lending

The key steps involved in processing a group loan application are outlined below:

Group Formation

- 10 member groups are formed.

- Basic training is provided to the members covering Spandana's operating procedure.

- A group recognition test is carried out to test their understanding of the training provided.

- If the group passes the test, they become eligible to avail loans and go through the application

process.

Application

- All 10 group members present loan applications together at first centre meeting.

- The Credit Assistant (“CA”) ensures that members understand every aspect of the application.

- Information collected includes the member's name, their husband's name, purpose and size of

group.

- The remaining group members sign the application form as co-guarantors. Every member must be

present for the loans to be disbursed.

General Loan

Individual Loan

Money Transfer Program

Insurance Facilitation

Spandana's main loan product is the General Loan focusing on income generating activities. Members may

borrow up to INR. 12,000 for their first loan and subsequent loan cycles are on the basis of client's repayment

capacity. Loan amount is not determined by the cycle and is decided by the cash flows and loan absorption and

repayment capacity of the client. Loans are disbursed only after thorough appraisal by the Branch Manager. The

BM will visit the client and decide the loan amount. Loans are extended to members for 50 weeks with a weekly

repayment schedule.

Individual loans may be provided to micro-entrepreneurs, salaried people, contract workers and householders

meeting various net monthly income thresholds. Loans may be utilized for a wide range of purposes including

business expansion and working capital requirements, personal loans for debt consolidation, and housing

renovations.

Spandana has entered into an agreement with Western Union for a Money Transfer program. Spandana is

starting Money Transfer services for its rural and semi urban clients in Andhra Pradesh. Under the arrangement,

Spandana will initially leverage its network of 276 branches across the state to offer in-bound money transfer

services to its around 1 million customers. It will later expand to Karnataka, Tamil Nadu, Orissa and Maharashtra

during the next quarter, where the MFI also has a presence.

Spandana provides a life insurance product of Bajaj Allianz to all clients. Keeping borrower welfare and risk

mitigation in mind, life insurance has been made compulsory to all borrowers of Spandana loans. When taking

out a general loan, every borrower and her husband is covered under the life insurance program. However, in the

case of individual loans only the actual borrower is covered. The insurance premium is collected at the time of

the loan disbursement. In case of death of the borrower or her husband, after deducting the outstanding

principal amount and interest amount for five weeks from the sum insured, the rest is given to the family

members of the deceased (borrower or her husband).

Page 22: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 23

Loan Procedure - Individual Lending

The key steps involved in processing an individual loan application are outlined below:

Client Verification

- Clients may be either existing Spandana clients or new clients. They must have either a

stable income generating businesses or be salaried employees meeting certain income

criteria.

- CA's are required to complete a detailed Eligibility Register for each client. Criteria includes

the requirement for the client to have:

o either an existing business or to be a salaried employee;

o own a house or shop, or be guaranteed by co-obligant who owns a house

- The CAs must verify house ownership, meet the guarantor and perform reference checks

with neighbours.

- If the criteria are met the completed form is submitted to the BM and a joint review

followed by a credit analysis is undertaken.

Credit Analysis

- The BM takes primary responsibility for the credit analysis process.

- House and business/place of employment visits are undertaken by the BM.

- Details of the household cash flows are collected.

- Details about the business are collected including fixed assets, working capital and staff. A

detailed inspection of the books is carried out. A comparison of the business to others in

the industry is undertaken.

- Salaried employees receive a visit to the workplace of the client and verification of their

payslip, ID card, attendance records, frequency of transfer, retirement date and other debts.

Loan Approval

- Credit committee formed: comprised of one BM, one senior CA and the CA who originated

the loan. The committee meets twice weekly.

- CA will present the case.

- The credit committee verifies the consistency of purchases and sales, the consistency of

business profits, purpose of the loan, debt-equity ratio. Additionally, the committee

discusses the guarantee level of the loan and analyzes the repayment capacity in order to

assess the risk.

- Requirements for higher loan amounts are as follows:

o Up to Rs. 50,000 - The BM is authorized to approve the loan

o From Rs. 50,001 to 100,000 - The RM is authorized to approve such amounts.

o Loan requests above Rs. 100,000 require that a notice be sent to the HO with information

about the member before sanctioning the loan.

Loan Disbursement

- Know Your Customer checks are undertaken prior to loan disbursement.

- Borrower, spouse and guarantor should all be present.

- Loan conditions are outlined again.

- Loan disbursement occurs twice weekly.

Monitoring and Recovery

- After disbursement, utilization checks are carried out.

- The business is examined to judge whether there has been an improvement in the

physical stock, fixed assets and cash flows.

- Specified repayment dates are created at the time of loan disbursal, recovery is carried

out by the CA at the client's business place or residence.

- If the client defaults on a repayment the guarantor is responsible for making the

payment.

Page 23: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 23

Loan Procedure - Individual Lending

The key steps involved in processing an individual loan application are outlined below:

Client Verification

- Clients may be either existing Spandana clients or new clients. They must have either a

stable income generating businesses or be salaried employees meeting certain income

criteria.

- CA's are required to complete a detailed Eligibility Register for each client. Criteria includes

the requirement for the client to have:

o either an existing business or to be a salaried employee;

o own a house or shop, or be guaranteed by co-obligant who owns a house

- The CAs must verify house ownership, meet the guarantor and perform reference checks

with neighbours.

- If the criteria are met the completed form is submitted to the BM and a joint review

followed by a credit analysis is undertaken.

Credit Analysis

- The BM takes primary responsibility for the credit analysis process.

- House and business/place of employment visits are undertaken by the BM.

- Details of the household cash flows are collected.

- Details about the business are collected including fixed assets, working capital and staff. A

detailed inspection of the books is carried out. A comparison of the business to others in

the industry is undertaken.

- Salaried employees receive a visit to the workplace of the client and verification of their

payslip, ID card, attendance records, frequency of transfer, retirement date and other debts.

Loan Approval

- Credit committee formed: comprised of one BM, one senior CA and the CA who originated

the loan. The committee meets twice weekly.

- CA will present the case.

- The credit committee verifies the consistency of purchases and sales, the consistency of

business profits, purpose of the loan, debt-equity ratio. Additionally, the committee

discusses the guarantee level of the loan and analyzes the repayment capacity in order to

assess the risk.

- Requirements for higher loan amounts are as follows:

o Up to Rs. 50,000 - The BM is authorized to approve the loan

o From Rs. 50,001 to 100,000 - The RM is authorized to approve such amounts.

o Loan requests above Rs. 100,000 require that a notice be sent to the HO with information

about the member before sanctioning the loan.

Loan Disbursement

- Know Your Customer checks are undertaken prior to loan disbursement.

- Borrower, spouse and guarantor should all be present.

- Loan conditions are outlined again.

- Loan disbursement occurs twice weekly.

Monitoring and Recovery

- After disbursement, utilization checks are carried out.

- The business is examined to judge whether there has been an improvement in the

physical stock, fixed assets and cash flows.

- Specified repayment dates are created at the time of loan disbursal, recovery is carried

out by the CA at the client's business place or residence.

- If the client defaults on a repayment the guarantor is responsible for making the

payment.

Page 24: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 25

MICROFINANCE WITH A SOCIAL FOCUS

Social Responsibility

Spandana is committed to strengthening the socio-economic status of low-income households –

particularly women – in rural and urban areas by providing financial services on a continual basis in

order to improve livelihoods, establish identity and enhance self-image. Spandana believes that low-

income women play a critical role both in the economics of their households and their communities.

Hence, it is committed to maintaining a special focus on women.

Spandana believes that poor households have risk taking abilities and are rational and judgmental

while assessing and improving their livelihoods. They are creative, innovative and enterprising. Access

to credit brings out these latent capacities. Spandana respects the opinions of its clients and believes

in carrying out its business without compromising our commitment to ethical values, transparency

and efficiency.

Spandana places a premium on transparency. To that end, the organization has adopted a policy of

providing printed information on the client passbooks about interest rates with a clearly delineated

payment schedule, explained in terms of both the flat rate and the equivalent diminishing balance

rate along with any upfront charges. Our interest rates are our competitive advantage that we have

gained through cost-efficient operations. We have made it a point to keep the clients informed about

the interest rates that we charge and the exact installments that are due. A well-informed client not

only fits with our core mission of serving the marginalized, she also makes for a less risky client. Full

disclosure also prevents any potential fraud on the part of the staff by misreporting interest rates.

Clients are informed of any changes in the interest rates before they are implemented in the field and

these changes are reflected in the passbooks provided to the clients. Independent organizations have

acknowledged Spandana's commitment to transparency. We have received the highest disclosure

rating of five diamonds from the Mix Market, a web-based information server on microfinance

institutions. In 2004, we met the entry requirements for the Financial Transparency Award from the

Consultative Group to Assist the Poor (CGAP).

Additionally the Branch Managers, during their daily visits to the centers, advise clients against paying

bribes to the staff. Whether such announcements are made or not is verified randomly with the clients

by the Regional Managers and the Divisional Managers. The Branch Managers also make a loan

utilization check exactly one week after disbursement in order to determine whether the amount

reported and disbursed are in fact the same. This prevents phony loans and misreporting of disbursed

amounts by the staff.

The culture of the organization and the nature of the relationship with the clients are best symbolized

by the pledge taken by the Credit Officers during the daily Center meetings. It characterizes the

selfless ethos that all Spandana staff members adopt.

Page 25: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 25

MICROFINANCE WITH A SOCIAL FOCUS

Social Responsibility

Spandana is committed to strengthening the socio-economic status of low-income households –

particularly women – in rural and urban areas by providing financial services on a continual basis in

order to improve livelihoods, establish identity and enhance self-image. Spandana believes that low-

income women play a critical role both in the economics of their households and their communities.

Hence, it is committed to maintaining a special focus on women.

Spandana believes that poor households have risk taking abilities and are rational and judgmental

while assessing and improving their livelihoods. They are creative, innovative and enterprising. Access

to credit brings out these latent capacities. Spandana respects the opinions of its clients and believes

in carrying out its business without compromising our commitment to ethical values, transparency

and efficiency.

Spandana places a premium on transparency. To that end, the organization has adopted a policy of

providing printed information on the client passbooks about interest rates with a clearly delineated

payment schedule, explained in terms of both the flat rate and the equivalent diminishing balance

rate along with any upfront charges. Our interest rates are our competitive advantage that we have

gained through cost-efficient operations. We have made it a point to keep the clients informed about

the interest rates that we charge and the exact installments that are due. A well-informed client not

only fits with our core mission of serving the marginalized, she also makes for a less risky client. Full

disclosure also prevents any potential fraud on the part of the staff by misreporting interest rates.

Clients are informed of any changes in the interest rates before they are implemented in the field and

these changes are reflected in the passbooks provided to the clients. Independent organizations have

acknowledged Spandana's commitment to transparency. We have received the highest disclosure

rating of five diamonds from the Mix Market, a web-based information server on microfinance

institutions. In 2004, we met the entry requirements for the Financial Transparency Award from the

Consultative Group to Assist the Poor (CGAP).

Additionally the Branch Managers, during their daily visits to the centers, advise clients against paying

bribes to the staff. Whether such announcements are made or not is verified randomly with the clients

by the Regional Managers and the Divisional Managers. The Branch Managers also make a loan

utilization check exactly one week after disbursement in order to determine whether the amount

reported and disbursed are in fact the same. This prevents phony loans and misreporting of disbursed

amounts by the staff.

The culture of the organization and the nature of the relationship with the clients are best symbolized

by the pledge taken by the Credit Officers during the daily Center meetings. It characterizes the

selfless ethos that all Spandana staff members adopt.

Page 26: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 27

One of Spandana's key strengths is the training that is provided to the staff members. The theoretical

training provided at the Head Office is followed by a rigorous one-month training session in the field

wherein the staff members gain valuable hands-on experience. During this phase, strong emphasis is

given to appropriate lending and collection processes which include both technical and behavioral

aspects. The staff members understand that their livelihoods and the company's very existence are

completely dependent on the clients and therefore, they should be treated with utmost respect.

A thorough appraisal process is in place for the selection of clients and also for deciding on the

appropriate amounts to be sanctioned for a loan. This is done by taking into consideration the current

status, both economic and social, of the household. For the Individual Lending product, the appraisal

process even considers financial statements such as balance sheets, profit and loss statements and

cash flow statements in order to determine the appropriate loan amount. This ensures against

problems arising from over-lending.

As Spandana is a client-focused organization, our products are designed to bring value and service to

our client's lives. For example, we have initiated a tie-up with Western Union and UAE Exchange in

order to offer remittance and money transfer services to our clients. We do this by leveraging our large

scale and personal reach in order to offer convenient door-step service through our network of

dedicated credit officers. Additionally, Spandana has partnered with Bajaj Allianz in order to offer

insurance coverage to all of our clients and their spouses. To date, this program has already insured

over two million lives.

The product range and the features associated with each product clearly indicate our client focus and

they are also suited to those clients whose requirements would not otherwise be optimally served. For

instance, the Individual Loan is meant for clients who are lower level public and private sector

employees, small business owners and factory workers. These individuals are not readily served by

other mainstream financial institutions.

Similarly, the Agri-Family Loan is provided primarily to farmers for their non-farm requirements since

the mainstream financial institutions provide only crop loans. Even the repayment of these loans is

tailored to the cash flows of a farm household – interest is collected every month, but principal

repayment happens as and when the crop is sold, be it once or twice in a year.

Any new product that we have added has come from the client feedback reported by the operational

staff and this epitomizes our market-driven approach to financial services. We constantly endeavor to

respond to felt needs of our clients. Our configuration of rural, semi-urban and urban operations and

our product mix (group, individual and agri-family loans) are a testimony to the focus we put on

equitable solutions.

Client Focused Products

CLIENT CASE STUDIES

Giving Credit Where Credit is Due

In the Hands of Our Clients

On its own, a Spandana loan is merely money. But in the hands of our clients, it represents a tool that

allows them to release their latent drive and entrepreneurial spirit. In this way, Spandana loans provide

clients the opportunity to be in control of their circumstances rather than being a victim of them. The

case studies below are but a small sample of the myriad ways in which our clients have used their loans

to enrich their lives, their families and their communities. They are a testament to the notion that

poverty has many definitions. Our clients, though they may be poor by one measure, are nonetheless

rich in spirit, creativity and determination. Our loans give them the resources they need to harness

their ambitions, take control of their destinies and turn their dreams into a reality.

Shehnaz Begum

By any interpretation, Begum's situation was desperate. In 2000, Begum's husband took his own life,

leaving her with three children to raise and no source of income. To make matters even worse, Begum

was shunned by her husband's family and could not rely on them for assistance. Even her own family

was unable to provide for Begum and her three

children in their time of utmost need. The paltry

widower's benefit that she received from the

government upon the death of her husband was

enough to allay her short-term needs but if

Begum was going to be able to provide for her

family in the long term, she would need to be

able to leverage her entrepreneurial instincts.

Although short on material resources, Begum

had ample drive and determination. All she

needed was someone to trust in her vision. That is

where Spandana stepped in.

In 2004, Begum received her first loan from

Spandana amounting to Rs. 7,000. She used these

funds to purchase shoes in bulk from a

wholesaler along with a pushcart. These simple

items were all she needed to get her shoe

business up and running. She set up her cart in

the village market and as business picked up over

the course of the year, Begum realized her

potential and started seeking out new business

opportunities. The following year, she took out

another Rs. 8,000 loan from Spandana and used

Page 27: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 27

One of Spandana's key strengths is the training that is provided to the staff members. The theoretical

training provided at the Head Office is followed by a rigorous one-month training session in the field

wherein the staff members gain valuable hands-on experience. During this phase, strong emphasis is

given to appropriate lending and collection processes which include both technical and behavioral

aspects. The staff members understand that their livelihoods and the company's very existence are

completely dependent on the clients and therefore, they should be treated with utmost respect.

A thorough appraisal process is in place for the selection of clients and also for deciding on the

appropriate amounts to be sanctioned for a loan. This is done by taking into consideration the current

status, both economic and social, of the household. For the Individual Lending product, the appraisal

process even considers financial statements such as balance sheets, profit and loss statements and

cash flow statements in order to determine the appropriate loan amount. This ensures against

problems arising from over-lending.

As Spandana is a client-focused organization, our products are designed to bring value and service to

our client's lives. For example, we have initiated a tie-up with Western Union and UAE Exchange in

order to offer remittance and money transfer services to our clients. We do this by leveraging our large

scale and personal reach in order to offer convenient door-step service through our network of

dedicated credit officers. Additionally, Spandana has partnered with Bajaj Allianz in order to offer

insurance coverage to all of our clients and their spouses. To date, this program has already insured

over two million lives.

The product range and the features associated with each product clearly indicate our client focus and

they are also suited to those clients whose requirements would not otherwise be optimally served. For

instance, the Individual Loan is meant for clients who are lower level public and private sector

employees, small business owners and factory workers. These individuals are not readily served by

other mainstream financial institutions.

Similarly, the Agri-Family Loan is provided primarily to farmers for their non-farm requirements since

the mainstream financial institutions provide only crop loans. Even the repayment of these loans is

tailored to the cash flows of a farm household – interest is collected every month, but principal

repayment happens as and when the crop is sold, be it once or twice in a year.

Any new product that we have added has come from the client feedback reported by the operational

staff and this epitomizes our market-driven approach to financial services. We constantly endeavor to

respond to felt needs of our clients. Our configuration of rural, semi-urban and urban operations and

our product mix (group, individual and agri-family loans) are a testimony to the focus we put on

equitable solutions.

Client Focused Products

CLIENT CASE STUDIES

Giving Credit Where Credit is Due

In the Hands of Our Clients

On its own, a Spandana loan is merely money. But in the hands of our clients, it represents a tool that

allows them to release their latent drive and entrepreneurial spirit. In this way, Spandana loans provide

clients the opportunity to be in control of their circumstances rather than being a victim of them. The

case studies below are but a small sample of the myriad ways in which our clients have used their loans

to enrich their lives, their families and their communities. They are a testament to the notion that

poverty has many definitions. Our clients, though they may be poor by one measure, are nonetheless

rich in spirit, creativity and determination. Our loans give them the resources they need to harness

their ambitions, take control of their destinies and turn their dreams into a reality.

Shehnaz Begum

By any interpretation, Begum's situation was desperate. In 2000, Begum's husband took his own life,

leaving her with three children to raise and no source of income. To make matters even worse, Begum

was shunned by her husband's family and could not rely on them for assistance. Even her own family

was unable to provide for Begum and her three

children in their time of utmost need. The paltry

widower's benefit that she received from the

government upon the death of her husband was

enough to allay her short-term needs but if

Begum was going to be able to provide for her

family in the long term, she would need to be

able to leverage her entrepreneurial instincts.

Although short on material resources, Begum

had ample drive and determination. All she

needed was someone to trust in her vision. That is

where Spandana stepped in.

In 2004, Begum received her first loan from

Spandana amounting to Rs. 7,000. She used these

funds to purchase shoes in bulk from a

wholesaler along with a pushcart. These simple

items were all she needed to get her shoe

business up and running. She set up her cart in

the village market and as business picked up over

the course of the year, Begum realized her

potential and started seeking out new business

opportunities. The following year, she took out

another Rs. 8,000 loan from Spandana and used

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Spandana Annual Report 2007-08 29

these funds to set up a business collecting and processing scrap materials for resale to centers that

would recycle these items. Begum plowed her additional earnings from the scrap business back into

her pushcart business. She was able to diversify the range of merchandise that she sold in the market

by adding new items to her push cart such as plastic water jugs, plates, mugs and other daily usable

goods.

All told, Begum has received five loans from Spandana totaling Rs. 42,000. Every step of the way,

Spandana has been there to respond to the needs of Begum and her business, even providing an

interim supplemental loan when the expansion of her business required it. Begum now earns Rs.

12,000 a month between her two businesses. She is able to send all three of her children to school and

recently began purchasing gold on her eldest daughter's behalf for marriage purposes. Even after all

of her expenses, Begum now earns enough to save a portion of her daily income and currently has Rs.

20,000 in savings. These days, you can usually find Begum in the nearby market selling her wares. The

area around her pushcart is alive with activity and Begum herself beams with pride and happiness in

being able to provide a life for her children. In the hands of a loving mother, a Spandana loan can make

a child's future brighter.

K Lalitha

In recognition of their special status within the economics of a household, Spandana loans are

focused primarily on women. Nevertheless, a loan which benefits one member of the family will

assuredly benefit all members. In this way, a loan to a

mother is really a loan to the entire family.

Spandana acknowledges and values the

contributions of husbands to the welfare of their

households. Take Lalitha and her husband Ashok

for example. Their first Spandana loan of Rs. 7,000

was used to purchase a small marble polishing

machine that Ashok used to begin his own

marble polishing business. Prior to this, Ashok

was a daily wage laborer earning roughly Rs. 100

per day. Yet due to the vicissitudes of the local

labor market, Ashok was only able to work for 15

days in any given month. This monthly income of

Rs. 1,500 was not enough to support his wife and

their two infant children. The marble polishing

business allowed Ashok to properly control his

working schedule while at the same time

increasing his monthly income.

The success of his marble polishing business was

encouraging and the following year, Lalitha and

Ashok secured a second loan from Spandana

amounting to Rs. 8,000. This loan, together with

Ashok's earnings, was used to purchase a second, much larger marble polishing machine. With his

reputation as a capable marble polisher and his new industrial equipment, Ashok was able to link-up

with several building contractors in the surrounding area who were in need of his services. These

contractors now provide a steady stream of work and Ashok is currently able to earn Rs. 5,000 per

month from his business, an increase of over 200% from his pre-Spandana loan earnings.

Lalitha, seeing her husband's business grow and succeed and not content to sit idle while her husband

earned an income for the family, decided to take yet another loan from Spandana. This one, amounting

to Rs. 10,000, was used to open a small shop where she could sell snack items, eggs, soaps and

detergents. She also used her Spandana loan to purchase a refrigerator for the shop. This allowed her

to sell cold drinks, a major source of income for her business. As Lalitha's shop became more

successful, she sought out and received a fourth loan from Spandana for Rs. 15,000. This larger dose of

credit allowed Lalitha to drastically expand her stock and increase the range of goods that she sells in

her shop. She now sells everything from food and cleaning supplies to basic household goods and

books. She even used her loan to purchase a coin-operated STD phone stall, a valuable resource in her

community. As her business has expanded, she has seen her daily sales increase from Rs. 300 to Rs.

1,000. This wife and mother of two now seeks a fifth loan to expand her business even further. In the

hands of a dedicated husband and wife, a Spandana loan can benefit an entire family.

Malan Bee

When Bee's husband fell ill and was no longer able

to continue earning a living as a construction

worker, the primary responsibility for earning an

income for the family fell upon her. As a woman

with no prior working experience, the prospect

of making a living for her husband and four

children seemed bleak. But Bee is a resourceful

and enterprising woman, factors which would

bode well for the future of her family and her

community.

Bee had learned how to make incense sticks from

her neighbors. Realizing a business opportunity

in this newly acquired skill, she secured a loan

from Spandana for Rs. 8,000 in order to purchase

the raw materials necessary to manufacture

incense sticks. Her business quickly took off and

before long, Bee required a further loan of Rs.

10,000 in order to manufacture enough incense

t o m e e t t h e e v e r - g r o w i n g d e m a n d .

Manufacturing incense is an incredibly labor-

intensive process. Despite her constant efforts,

Bee was only able to produce and sell enough

Page 29: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Spandana Annual Report 2007-08 29

these funds to set up a business collecting and processing scrap materials for resale to centers that

would recycle these items. Begum plowed her additional earnings from the scrap business back into

her pushcart business. She was able to diversify the range of merchandise that she sold in the market

by adding new items to her push cart such as plastic water jugs, plates, mugs and other daily usable

goods.

All told, Begum has received five loans from Spandana totaling Rs. 42,000. Every step of the way,

Spandana has been there to respond to the needs of Begum and her business, even providing an

interim supplemental loan when the expansion of her business required it. Begum now earns Rs.

12,000 a month between her two businesses. She is able to send all three of her children to school and

recently began purchasing gold on her eldest daughter's behalf for marriage purposes. Even after all

of her expenses, Begum now earns enough to save a portion of her daily income and currently has Rs.

20,000 in savings. These days, you can usually find Begum in the nearby market selling her wares. The

area around her pushcart is alive with activity and Begum herself beams with pride and happiness in

being able to provide a life for her children. In the hands of a loving mother, a Spandana loan can make

a child's future brighter.

K Lalitha

In recognition of their special status within the economics of a household, Spandana loans are

focused primarily on women. Nevertheless, a loan which benefits one member of the family will

assuredly benefit all members. In this way, a loan to a

mother is really a loan to the entire family.

Spandana acknowledges and values the

contributions of husbands to the welfare of their

households. Take Lalitha and her husband Ashok

for example. Their first Spandana loan of Rs. 7,000

was used to purchase a small marble polishing

machine that Ashok used to begin his own

marble polishing business. Prior to this, Ashok

was a daily wage laborer earning roughly Rs. 100

per day. Yet due to the vicissitudes of the local

labor market, Ashok was only able to work for 15

days in any given month. This monthly income of

Rs. 1,500 was not enough to support his wife and

their two infant children. The marble polishing

business allowed Ashok to properly control his

working schedule while at the same time

increasing his monthly income.

The success of his marble polishing business was

encouraging and the following year, Lalitha and

Ashok secured a second loan from Spandana

amounting to Rs. 8,000. This loan, together with

Ashok's earnings, was used to purchase a second, much larger marble polishing machine. With his

reputation as a capable marble polisher and his new industrial equipment, Ashok was able to link-up

with several building contractors in the surrounding area who were in need of his services. These

contractors now provide a steady stream of work and Ashok is currently able to earn Rs. 5,000 per

month from his business, an increase of over 200% from his pre-Spandana loan earnings.

Lalitha, seeing her husband's business grow and succeed and not content to sit idle while her husband

earned an income for the family, decided to take yet another loan from Spandana. This one, amounting

to Rs. 10,000, was used to open a small shop where she could sell snack items, eggs, soaps and

detergents. She also used her Spandana loan to purchase a refrigerator for the shop. This allowed her

to sell cold drinks, a major source of income for her business. As Lalitha's shop became more

successful, she sought out and received a fourth loan from Spandana for Rs. 15,000. This larger dose of

credit allowed Lalitha to drastically expand her stock and increase the range of goods that she sells in

her shop. She now sells everything from food and cleaning supplies to basic household goods and

books. She even used her loan to purchase a coin-operated STD phone stall, a valuable resource in her

community. As her business has expanded, she has seen her daily sales increase from Rs. 300 to Rs.

1,000. This wife and mother of two now seeks a fifth loan to expand her business even further. In the

hands of a dedicated husband and wife, a Spandana loan can benefit an entire family.

Malan Bee

When Bee's husband fell ill and was no longer able

to continue earning a living as a construction

worker, the primary responsibility for earning an

income for the family fell upon her. As a woman

with no prior working experience, the prospect

of making a living for her husband and four

children seemed bleak. But Bee is a resourceful

and enterprising woman, factors which would

bode well for the future of her family and her

community.

Bee had learned how to make incense sticks from

her neighbors. Realizing a business opportunity

in this newly acquired skill, she secured a loan

from Spandana for Rs. 8,000 in order to purchase

the raw materials necessary to manufacture

incense sticks. Her business quickly took off and

before long, Bee required a further loan of Rs.

10,000 in order to manufacture enough incense

t o m e e t t h e e v e r - g r o w i n g d e m a n d .

Manufacturing incense is an incredibly labor-

intensive process. Despite her constant efforts,

Bee was only able to produce and sell enough

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Spandana Annual Report 2007-08 31

THE MANAGING DIRECTOR'S REPORT

incense to earn about Rs. 70 per day. In order to take her business to the next level, Bee would need

help.

She realized that if she could hire workers to assist her in the production of incense, she would be able

sell enough of her product to increase her daily earnings while at the same time being able to provide

a daily wage to her employees. With her third Spandana loan of Rs. 15,000, Bee purchased additional

supplies and hired three women to assist her in the production of incense. Her employees earn Rs. 10

for every kilogram of incense sticks that they manufacture. Most women are able to produce at least 6

kilograms of incense every day.

Despite this increased output, Bee was still unable to keep up with the demand for her incense.

Appreciating the need to expand her business further, Bee once again turned to Spandana and

received a fourth loan amounting to Rs. 15,000. She used these funds to purchase more raw materials

for manufacturing incense and hired additional employees. Today, Bee has 20 women working under

her making a daily wage through the production of incense. Even her two daughters are now involved

in the business. After deducting all of her business expenses (including raw materials and wages for

her 20 employees), Bee is able to earn Rs. 15,000 per month for her husband and 4 children. The family

lives together in a home that they own and she was even able to provide the funding necessary for her

son to lease his own auto so that he may work as an auto driver. Bee's entrepreneurial spirit, together

with support from Spandana, allowed her to maximize her potential and provide a living to dozens of

women. In the hands of one enterprising woman, a Spandana loan can empower a community.

Management Discussion And Analysis: The Managing Director's Report

Dear Stakeholders,

Spandana's tenth year was a milestone marked by resurgence and progress. After recovering from a

round of losses suffered last year as a result of the Krishna incident, the details of which have been

discussed in previous year's reports, Spandana successfully demonstrated the strength of our model

and the sustainability of our approach.

Without question this has been another extraordinary year for Spandana. In terms of geographical

outreach, the organization expanded into 4 new states and 37 new districts. Moreover, Spandana

opened an additional 140 branches while adding over 300,000 new clients. This remarkable growth

immediately stands out as one of the major achievements of the organization during the 2007-2008

fiscal year.

Indeed, the past year brought substantial diversification to our portfolio in terms of both

geographical focus and product range. In order to address challenges arising from market saturation

and portfolio concentration, Spandana continued to increase its presence in regions outside of

Andhra Pradesh. Whereas Andhra Pradesh comprised roughly 90% of Spandana's total portfolio at

the end of the 2006-2007 fiscal year, our expansion into new states and districts has diluted that

percentage to 75%. This attenuation in Andhra Pradesh was a direct result of our increased focus in

new regions. For example, our exposure in Karnataka was roughly doubled in the last year to

approximately 18% of our total portfolio. The 2007-2008 fiscal year also witnessed impressive gains in

Tamil Nadu, Maharashtra and Orissa. When expanding into these new regions, we sought established

markets where other microfinance organizations had already been operating successfully. We then

sent our most experienced staff into these additional sectors in order to bring their expertise to bear

in an unfamiliar market. Our success in these regions bears witness to their dedication and efforts.

In terms of our product range, our portfolio diversification was evidenced by the expansion of our

individual lending product. This was a product which arose from the felt needs of our clients, many of

whom articulated the need for a loan product that they could avail of without necessarily being part

of a group. Particularly, the individual loan is geared towards established clients who are ready to take

on larger doses of credit; thus acknowledging their status as strong, independent entrepreneurs.

Whereas this product comprised less than 4% of our total portfolio in the 2006-2007 fiscal year, the

individual loan now represents 13% of Spandana's total portfolio. It is also important to note the

introduction of new products during the past year, specifically the farm equipment loan which was

introduced last summer. Since then, roughly 1,000 tractors have been financed and this product

continues to expand and add diversity to our portfolio mix.

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Spandana Annual Report 2007-08 31

THE MANAGING DIRECTOR'S REPORT

incense to earn about Rs. 70 per day. In order to take her business to the next level, Bee would need

help.

She realized that if she could hire workers to assist her in the production of incense, she would be able

sell enough of her product to increase her daily earnings while at the same time being able to provide

a daily wage to her employees. With her third Spandana loan of Rs. 15,000, Bee purchased additional

supplies and hired three women to assist her in the production of incense. Her employees earn Rs. 10

for every kilogram of incense sticks that they manufacture. Most women are able to produce at least 6

kilograms of incense every day.

Despite this increased output, Bee was still unable to keep up with the demand for her incense.

Appreciating the need to expand her business further, Bee once again turned to Spandana and

received a fourth loan amounting to Rs. 15,000. She used these funds to purchase more raw materials

for manufacturing incense and hired additional employees. Today, Bee has 20 women working under

her making a daily wage through the production of incense. Even her two daughters are now involved

in the business. After deducting all of her business expenses (including raw materials and wages for

her 20 employees), Bee is able to earn Rs. 15,000 per month for her husband and 4 children. The family

lives together in a home that they own and she was even able to provide the funding necessary for her

son to lease his own auto so that he may work as an auto driver. Bee's entrepreneurial spirit, together

with support from Spandana, allowed her to maximize her potential and provide a living to dozens of

women. In the hands of one enterprising woman, a Spandana loan can empower a community.

Management Discussion And Analysis: The Managing Director's Report

Dear Stakeholders,

Spandana's tenth year was a milestone marked by resurgence and progress. After recovering from a

round of losses suffered last year as a result of the Krishna incident, the details of which have been

discussed in previous year's reports, Spandana successfully demonstrated the strength of our model

and the sustainability of our approach.

Without question this has been another extraordinary year for Spandana. In terms of geographical

outreach, the organization expanded into 4 new states and 37 new districts. Moreover, Spandana

opened an additional 140 branches while adding over 300,000 new clients. This remarkable growth

immediately stands out as one of the major achievements of the organization during the 2007-2008

fiscal year.

Indeed, the past year brought substantial diversification to our portfolio in terms of both

geographical focus and product range. In order to address challenges arising from market saturation

and portfolio concentration, Spandana continued to increase its presence in regions outside of

Andhra Pradesh. Whereas Andhra Pradesh comprised roughly 90% of Spandana's total portfolio at

the end of the 2006-2007 fiscal year, our expansion into new states and districts has diluted that

percentage to 75%. This attenuation in Andhra Pradesh was a direct result of our increased focus in

new regions. For example, our exposure in Karnataka was roughly doubled in the last year to

approximately 18% of our total portfolio. The 2007-2008 fiscal year also witnessed impressive gains in

Tamil Nadu, Maharashtra and Orissa. When expanding into these new regions, we sought established

markets where other microfinance organizations had already been operating successfully. We then

sent our most experienced staff into these additional sectors in order to bring their expertise to bear

in an unfamiliar market. Our success in these regions bears witness to their dedication and efforts.

In terms of our product range, our portfolio diversification was evidenced by the expansion of our

individual lending product. This was a product which arose from the felt needs of our clients, many of

whom articulated the need for a loan product that they could avail of without necessarily being part

of a group. Particularly, the individual loan is geared towards established clients who are ready to take

on larger doses of credit; thus acknowledging their status as strong, independent entrepreneurs.

Whereas this product comprised less than 4% of our total portfolio in the 2006-2007 fiscal year, the

individual loan now represents 13% of Spandana's total portfolio. It is also important to note the

introduction of new products during the past year, specifically the farm equipment loan which was

introduced last summer. Since then, roughly 1,000 tractors have been financed and this product

continues to expand and add diversity to our portfolio mix.

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Spandana Annual Report 2007-08 33

As Spandana is a client-focused organization, we have introduced several products to bring value and

service to our client's lives. For example, we have initiated a tie-up with Western Union and UAE

Exchange in order to offer remittance and money transfer services to our clients. We do this by

leveraging our large scale and personal reach in order to offer convenient door-step service through

our network of dedicated credit officers. Additionally, Spandana has partnered with Bajaj Allianz in

order to offer insurance coverage to all of our clients and their spouses. To date, this program has

already insured over two million lives.

The 2007-2008 fiscal year marked an exiting new chapter in Spandana's story as we received our first

round of equity financing from both JM Financial Trustee Company Pvt. Ltd and Lok Capital LLC. By

widening the ownership base of the organization, Spandana has been able to broaden the scope of

our services, improve risk taking ability, increase capital adequacy, enhance strategic thinking at the

top levels and build strong relationships with the mainstream.

In the years to come, Spandana will continue to redefine the scope of microfinance by identifying the

missing markets and reaching all segments that lack access to the formal financial market. This has the

triple benefit of financial inclusion, business growth and risk diversification. Spandana will

simultaneously focus on building senior management, improving governance of the board structure

and broadening Spandana's ownership base.

Going forward, Spandana will seek to expand into new regions while simultaneously developing new

products for existing clients and identifying new segments that are not currently being served.

However, this will not involve reducing services to any member. Instead, since Spandana is a high-

growth organization, our future expansion will be in segments in which Spandana has little or no

exposure at present. The success of the individual lending program, combined with the benefits it

brings in terms of portfolio diversification, will ensure that it becomes a mainstay of our product line.

Additionally, we will continue to expand the reach of our farm equipment loan product.

To ensure geographical diversification, Spandana will continue to focus much of its growth in areas

outside of Andhra Pradesh. The focus in the near future will be on seven neighbouring states:

Karnataka, Maharashtra, Orissa, Tamil Nadu, Madhya Pradesh, Chhattisgarh and Rajasthan. We are well

positioned to become the top service provider in Karnataka and we intend to increase outreach

exponentially in Maharashtra, Orissa, Tamil Nadu, Madhya Pradesh, Chhattisgarh and Rajasthan.

Spandana also seeks to diversify the clientele that it serves and the products that it offers. Part of this

diversification will involve expanding our services to men. Nevertheless, Spandana remains

committed to maintaining its focus on women, even as diversification takes place. As Spandana

evolves the focus on the future will be, as always, on low-income women. Presently, women comprise

97% of our borrowers.

Future Strategy and Focus

As a growing organization, we thoroughly understand the importance of technology, internal

controls and risk management and our focus in the coming year will be to strengthen these

departments in order to be able to sustain projected growth.

In sum, the 2007-2008 fiscal year can be thought of as a proving ground, not only for Spandana as an

organization but for the Indian microfinance sector as a whole. The events of Krishna raised serious

questions about the microfinance sector. Can microfinance institutions absorb losses? Can the sector

confront political instability? Is the market saturated? Will mainstream banks and investors flee at the

first sign of trouble? In each of these instances, Spandana offered resounding answers to the doubters

and proved to the skeptics once and for all that our approach is a valuable and sustainable one.

Ultimately, microfinance is a business predicated upon trust. Our clients must trust us to treat them

fairly while our lenders and investors must trust us to run a business that is sustainable and can

weather the political and financial storms that will invariably confront the industry. Spandana is proud

of our accomplishments over the past year and our resurgence is proof positive that microfinance is a

sustainable business model and an effective tool in the fight against poverty. We thank all of our

stakeholders for their trust and look forward to another successful year setting benchmarks in the

sector.

Sd/-

Padmaja Reddy

Managing Director

Conclusion

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Spandana Annual Report 2007-08 33

As Spandana is a client-focused organization, we have introduced several products to bring value and

service to our client's lives. For example, we have initiated a tie-up with Western Union and UAE

Exchange in order to offer remittance and money transfer services to our clients. We do this by

leveraging our large scale and personal reach in order to offer convenient door-step service through

our network of dedicated credit officers. Additionally, Spandana has partnered with Bajaj Allianz in

order to offer insurance coverage to all of our clients and their spouses. To date, this program has

already insured over two million lives.

The 2007-2008 fiscal year marked an exiting new chapter in Spandana's story as we received our first

round of equity financing from both JM Financial Trustee Company Pvt. Ltd and Lok Capital LLC. By

widening the ownership base of the organization, Spandana has been able to broaden the scope of

our services, improve risk taking ability, increase capital adequacy, enhance strategic thinking at the

top levels and build strong relationships with the mainstream.

In the years to come, Spandana will continue to redefine the scope of microfinance by identifying the

missing markets and reaching all segments that lack access to the formal financial market. This has the

triple benefit of financial inclusion, business growth and risk diversification. Spandana will

simultaneously focus on building senior management, improving governance of the board structure

and broadening Spandana's ownership base.

Going forward, Spandana will seek to expand into new regions while simultaneously developing new

products for existing clients and identifying new segments that are not currently being served.

However, this will not involve reducing services to any member. Instead, since Spandana is a high-

growth organization, our future expansion will be in segments in which Spandana has little or no

exposure at present. The success of the individual lending program, combined with the benefits it

brings in terms of portfolio diversification, will ensure that it becomes a mainstay of our product line.

Additionally, we will continue to expand the reach of our farm equipment loan product.

To ensure geographical diversification, Spandana will continue to focus much of its growth in areas

outside of Andhra Pradesh. The focus in the near future will be on seven neighbouring states:

Karnataka, Maharashtra, Orissa, Tamil Nadu, Madhya Pradesh, Chhattisgarh and Rajasthan. We are well

positioned to become the top service provider in Karnataka and we intend to increase outreach

exponentially in Maharashtra, Orissa, Tamil Nadu, Madhya Pradesh, Chhattisgarh and Rajasthan.

Spandana also seeks to diversify the clientele that it serves and the products that it offers. Part of this

diversification will involve expanding our services to men. Nevertheless, Spandana remains

committed to maintaining its focus on women, even as diversification takes place. As Spandana

evolves the focus on the future will be, as always, on low-income women. Presently, women comprise

97% of our borrowers.

Future Strategy and Focus

As a growing organization, we thoroughly understand the importance of technology, internal

controls and risk management and our focus in the coming year will be to strengthen these

departments in order to be able to sustain projected growth.

In sum, the 2007-2008 fiscal year can be thought of as a proving ground, not only for Spandana as an

organization but for the Indian microfinance sector as a whole. The events of Krishna raised serious

questions about the microfinance sector. Can microfinance institutions absorb losses? Can the sector

confront political instability? Is the market saturated? Will mainstream banks and investors flee at the

first sign of trouble? In each of these instances, Spandana offered resounding answers to the doubters

and proved to the skeptics once and for all that our approach is a valuable and sustainable one.

Ultimately, microfinance is a business predicated upon trust. Our clients must trust us to treat them

fairly while our lenders and investors must trust us to run a business that is sustainable and can

weather the political and financial storms that will invariably confront the industry. Spandana is proud

of our accomplishments over the past year and our resurgence is proof positive that microfinance is a

sustainable business model and an effective tool in the fight against poverty. We thank all of our

stakeholders for their trust and look forward to another successful year setting benchmarks in the

sector.

Sd/-

Padmaja Reddy

Managing Director

Conclusion

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Spandana Annual Report 2007-08 35

HUMAN RESOURCES

DEVELOPMENT REPORT

Spandana's position as a market leader in the Indian microfinance sector is a testament to the efforts

of our staff. The organization lays great emphasis on managing them efficiently and effectively. Our

credit assistants, branch managers and mid-level hierarchy of regional and divisional managers are

together responsible for the incredible growth achieved by Spandana during the life of the

organization. They have ensured that our unprecedented growth has not come at the expense of

portfolio quality. Our staff are imbued with the company values upon joining the organization and

this is reflected in everything that they do. Even as our staff has grown to over 4,000 in number, we

have not allowed any dilution in the messages sent out to our personnel during training and in the

course of their induction into operations.

The human resources functions are carried out by a separate department within the organization. The

HR Department has been established with a mandate for undertaking the critical functions required

for good human resource management, namely: Recruitment, Motivation, Capacity Building,

Performance Appraisal and Incentives. Clear policies and procedures have been laid out in the

organization's HR manual which draws upon the experiences of well managed organizations across

sectors as well as Spandana's own insights.

The hallmarks of Spandana's HR policy are clear assignment of responsibility, accountability,

continuous skill development, competitive salaries and maintaining the utmost levels of integrity. Our

staff are provided with properly defined performance targets which is appraised properly and

incentivized with attractive benefits. Spandana provides ample potential for growth within the

organization with the possibility of rising in a short time from the position of credit officer to branch

manager, regional manager, divisional manager and beyond. We have a passionate and dedicated

staff as a result.

We also have a culture of transparency and a democratic feedback system which allows all personnel

to directly speak with management. We collect paper based feedback every month on all issues, from

suggested changes in operations to any personal demands that staff may have. This reinforces their

sense of ownership of our operations and thereby their commitment to the organization. Our very low

staff turnover numbers are a testament to this fact.

As we have achieved ever greater scale, we are confident that we have successfully surmounted the

obstacles of transmitting the values and strengths of our organizational culture to an ever increasing

staff. At its core, Spandana is an organization that arose from an expressed need. As a client-focused

organization, Spandana attributes its success to the ability of its staff to learn about the needs of our

borrowers and respond to them. Our success over the years and continued existence in the future is

dependent on the ability of our staff to constantly learn and grow along with our clients.

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Spandana Annual Report 2007-08 35

HUMAN RESOURCES

DEVELOPMENT REPORT

Spandana's position as a market leader in the Indian microfinance sector is a testament to the efforts

of our staff. The organization lays great emphasis on managing them efficiently and effectively. Our

credit assistants, branch managers and mid-level hierarchy of regional and divisional managers are

together responsible for the incredible growth achieved by Spandana during the life of the

organization. They have ensured that our unprecedented growth has not come at the expense of

portfolio quality. Our staff are imbued with the company values upon joining the organization and

this is reflected in everything that they do. Even as our staff has grown to over 4,000 in number, we

have not allowed any dilution in the messages sent out to our personnel during training and in the

course of their induction into operations.

The human resources functions are carried out by a separate department within the organization. The

HR Department has been established with a mandate for undertaking the critical functions required

for good human resource management, namely: Recruitment, Motivation, Capacity Building,

Performance Appraisal and Incentives. Clear policies and procedures have been laid out in the

organization's HR manual which draws upon the experiences of well managed organizations across

sectors as well as Spandana's own insights.

The hallmarks of Spandana's HR policy are clear assignment of responsibility, accountability,

continuous skill development, competitive salaries and maintaining the utmost levels of integrity. Our

staff are provided with properly defined performance targets which is appraised properly and

incentivized with attractive benefits. Spandana provides ample potential for growth within the

organization with the possibility of rising in a short time from the position of credit officer to branch

manager, regional manager, divisional manager and beyond. We have a passionate and dedicated

staff as a result.

We also have a culture of transparency and a democratic feedback system which allows all personnel

to directly speak with management. We collect paper based feedback every month on all issues, from

suggested changes in operations to any personal demands that staff may have. This reinforces their

sense of ownership of our operations and thereby their commitment to the organization. Our very low

staff turnover numbers are a testament to this fact.

As we have achieved ever greater scale, we are confident that we have successfully surmounted the

obstacles of transmitting the values and strengths of our organizational culture to an ever increasing

staff. At its core, Spandana is an organization that arose from an expressed need. As a client-focused

organization, Spandana attributes its success to the ability of its staff to learn about the needs of our

borrowers and respond to them. Our success over the years and continued existence in the future is

dependent on the ability of our staff to constantly learn and grow along with our clients.

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SPANDANA SPHOORTY FINANCIAL LIMITED

th5 Annual Report 2007-2008

Board of Directors

Ms. Padmaja Reddy Gangireddy Managing Director

Mr. Lall Rajiv Behari Director

Mr. Dilip Kothari Director

Mr. Rahul Gupta Independent Director

Mr. Harinder Sawhney Director

Mr. M.V. Narendra Prasad Whole Time Director

Mr. G. Venkateswara Reddy Independent Director

Mr. Y.S.N. Murty Independent Director

Mr. R.M Nair SIDBI Nominee Director

Mr. T. Krishna Prasad ICICI Nominee Director

Ms. Malleswari. G Company Secretary

Auditors M/s. BSR & Companynd5, Merchant, Towers, 2 Floor

Road No. 4, Banjara Hills

Hyderabad - 500 034.

Registered & Administrative Office Plot No: 79, Care Crystal

Vinayaknagar Colony,

Gachibolwli, Hyderabad - 500 032.

Phone: 040 - 4438 6648

Fax: 040 - 4438 6666

E-mail: [email protected]

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Spandana Annual Report 2007-08 37

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SPANDANA SPHOORTY FINANCIAL LIMITED

th5 Annual Report 2007-2008

Board of Directors

Ms. Padmaja Reddy Gangireddy Managing Director

Mr. Lall Rajiv Behari Director

Mr. Dilip Kothari Director

Mr. Rahul Gupta Independent Director

Mr. Harinder Sawhney Director

Mr. M.V. Narendra Prasad Whole Time Director

Mr. G. Venkateswara Reddy Independent Director

Mr. Y.S.N. Murty Independent Director

Mr. R.M Nair SIDBI Nominee Director

Mr. T. Krishna Prasad ICICI Nominee Director

Ms. Malleswari. G Company Secretary

Auditors M/s. BSR & Companynd5, Merchant, Towers, 2 Floor

Road No. 4, Banjara Hills

Hyderabad - 500 034.

Registered & Administrative Office Plot No: 79, Care Crystal

Vinayaknagar Colony,

Gachibolwli, Hyderabad - 500 032.

Phone: 040 - 4438 6648

Fax: 040 - 4438 6666

E-mail: [email protected]

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Spandana Annual Report 2007-08 37

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FINANCIAL STATUS

Bankers

1. ICICI Bank Ltd.

2. HDFC Bank Ltd.

3. Indian Overseas Bank.

4. ING Vysya Bank.

5. Small Industries Development Bank of India (SIDBI).

6. Industrial Development Bank of India (IDBI).

7. AXIS Bank Limited.

8. The Hongkong Shanghai Banking Corporation Ltd.

9. BNP Paribas.

10. Yes Bank Limited

11. Centurion Bank Of Punjab

12. Development Credit Bank

13. Standard Chartered Bank

14. Punjab&Sind Bank

15. Development Credit Bank Limited

16. Karnataka Bank Limited

17. The Bank Of Rajasthan Limited

18. Karur Vysya Bank Limited

19. CITI Bank Limited

SPANDANA SPHOORTY FINANCIAL LIMITED(Formerly Spandana Sphoorty Innovative Financial Services Limited)

Registered office: Plot No: 79, Care Crystal

Vinayaka Nagar Colony, Gachibowli, Hyderabad. Pin: 500 032.

Notice is hereby given that the Fifth Annual General Meeting of the Company will be held at

Registered Office: Plot No: 79, Care Crystal, Vinayaknagar Colony, Gachibolwli, Hyderabad 500 032 on

Friday, 1st August 2008, at 11:30 A.M. to transact the following business:

Ordinary Business:

1. To receive, consider and adopt the Balance Sheet as at March 31, 2008 and the Profit and Loss

account of the Company for the year ended on that date and the Report of the Directors and the

Auditors thereon.

2. To appoint a Director in the place of Mr. M.V.Narendra Prasad, who retires by rotation and being

eligible for re-appointment.

3. To appoint a Director in the place of Mr. G.Venkateswara Reddy, who retires by rotation and being

eligible for re-appointment.

4. To appoint a Director in the place of Mr. Y.S.N.Murthy, who retires by rotation and being eligible for

re-appointment.

5. To appoint auditors to hold office from the conclusion of this Annual General Meeting until the

conclusion of the next Annual General Meeting and to fix their remuneration, and to pass the

following resolution thereof:

“RESOLVED THAT, M/s. B.S.R & Company Chartered Accountants, be and are hereby appointed as the

Statutory Auditors of the Company to hold office from the conclusion of this Annual General Meeting

to the conclusion of the next Annual General Meeting, on such remuneration as mutually agreed

upon between the Board of Directors and the Auditors.”

Special Business:

6. To consider and, if thought fit, to pass with or without modifications, the following as an Ordinary

Resolution:

“RESOLVED THAT, Mr. Rahul Gupta, who was appointed as additional director of the Company

and who holds office until the date of the Annual General Meeting, pursuant to Section 260 of the

Companies Act, 1956, and Articles of Association of the company and in respect of whom the

company has received a notice from a member under Section 257 of the Companies Act, 1956,

proposing his candidature, be and is hereby appointed as a Director of the company, liable to

retire by rotation.”

NOTICE

Spandana Annual Report 2007-08 39

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FINANCIAL STATUS

Bankers

1. ICICI Bank Ltd.

2. HDFC Bank Ltd.

3. Indian Overseas Bank.

4. ING Vysya Bank.

5. Small Industries Development Bank of India (SIDBI).

6. Industrial Development Bank of India (IDBI).

7. AXIS Bank Limited.

8. The Hongkong Shanghai Banking Corporation Ltd.

9. BNP Paribas.

10. Yes Bank Limited

11. Centurion Bank Of Punjab

12. Development Credit Bank

13. Standard Chartered Bank

14. Punjab&Sind Bank

15. Development Credit Bank Limited

16. Karnataka Bank Limited

17. The Bank Of Rajasthan Limited

18. Karur Vysya Bank Limited

19. CITI Bank Limited

SPANDANA SPHOORTY FINANCIAL LIMITED(Formerly Spandana Sphoorty Innovative Financial Services Limited)

Registered office: Plot No: 79, Care Crystal

Vinayaka Nagar Colony, Gachibowli, Hyderabad. Pin: 500 032.

Notice is hereby given that the Fifth Annual General Meeting of the Company will be held at

Registered Office: Plot No: 79, Care Crystal, Vinayaknagar Colony, Gachibolwli, Hyderabad 500 032 on

Friday, 1st August 2008, at 11:30 A.M. to transact the following business:

Ordinary Business:

1. To receive, consider and adopt the Balance Sheet as at March 31, 2008 and the Profit and Loss

account of the Company for the year ended on that date and the Report of the Directors and the

Auditors thereon.

2. To appoint a Director in the place of Mr. M.V.Narendra Prasad, who retires by rotation and being

eligible for re-appointment.

3. To appoint a Director in the place of Mr. G.Venkateswara Reddy, who retires by rotation and being

eligible for re-appointment.

4. To appoint a Director in the place of Mr. Y.S.N.Murthy, who retires by rotation and being eligible for

re-appointment.

5. To appoint auditors to hold office from the conclusion of this Annual General Meeting until the

conclusion of the next Annual General Meeting and to fix their remuneration, and to pass the

following resolution thereof:

“RESOLVED THAT, M/s. B.S.R & Company Chartered Accountants, be and are hereby appointed as the

Statutory Auditors of the Company to hold office from the conclusion of this Annual General Meeting

to the conclusion of the next Annual General Meeting, on such remuneration as mutually agreed

upon between the Board of Directors and the Auditors.”

Special Business:

6. To consider and, if thought fit, to pass with or without modifications, the following as an Ordinary

Resolution:

“RESOLVED THAT, Mr. Rahul Gupta, who was appointed as additional director of the Company

and who holds office until the date of the Annual General Meeting, pursuant to Section 260 of the

Companies Act, 1956, and Articles of Association of the company and in respect of whom the

company has received a notice from a member under Section 257 of the Companies Act, 1956,

proposing his candidature, be and is hereby appointed as a Director of the company, liable to

retire by rotation.”

NOTICE

Spandana Annual Report 2007-08 39

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7. To consider and, if thought fit, to pass with or without modifications, the following resolution as an

Ordinary Resolution:

“RESOLVED THAT, pursuant to the provisions of Sections 198, 269, 309 and 310 read with

Schedule XIII of the Companies Act, 1956 and other applicable provisions, if any of the said Act,

including any statutory modification(s) or re-enactment or any notification which the Central

Government may issue from time to time thereof and such other approvals as may be required in

this behalf, the approval of members be and is hereby accorded for the re-appointment of Mr. M.

Venkata Narendra Prasad as Wholetime Director of the Company w.e.f 1st August 2008 till the

ensuing Annual General Meeting as per the following remuneration:

S.No. Particulars Amount (Rs.)

1 Gross Remuneration 16,80,000 p.a

Bonus: As per the rules of the Company.

Other benefits

Mr. M. Venkata Narendra Prasad shall also be entitled to the following benefits:

1. Earned leave: As per the rules of the Company.

2. Company's Contribution to provident fund as per the rules of the Company.

3. Gratuity: As per the rules of the Company.

4. Encashment of leave: As per the rules of the Company.

5. Company car and telephone: Use of the Company's car and telephone at residence for official

purposes, as per the rules of the Company.

The aggregate remuneration inclusive of salary and other benefits payable to Sri M. Venkata

Narendra Prasad, shall always be subject to the overall ceilings laid down in Sections 198 and

309 and other applicable provisions of the Companies Act, 1956.”

8. To consider and, if thought fit, to pass with or without modifications, the following resolution as an

Ordinary Resolution:

“RESOLVED THAT existing Clause V.a of the Memorandum of Association of the Company as to

Share Capital be and is hereby deleted and in its place the following Clause V. a. be substituted:

“The Authorised share capital of the Company is Rs.50,00,00,000 (Rupees Fifty crore only) divided

into 1,64,83,000 (one crore sixty four lacs eighty three thousand only) equity shares of Rs.10

(rupees ten only) each and 3,35,17,000 (Three crores thirty five lacs seventeen thousand only)

compulsorily convertible preference shares of Rs.10/- (Rupees Ten only) each with the power to

increase and reduce the capital of the Company and to divide the shares in the capital for the time

being into several classes and attach thereto respectively, such preferential, deferred, qualified or

special rights, privileges or conditions as may be determined by or in accordance with the Articles

of Association of the Company for the time being and to vary, modify or abrogate any such rights,

privileges or conditions in such manner as may be permitted by the Companies Act, 1956, or by

the Articles of Association of the Company for the time being.”

9. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a

Special Resolution:

“RESOLVED THAT pursuant to the provisions of Section 31 and other applicable provisions of the

Companies Act, 1956, the Articles of Association of the Company, be and is hereby altered by

deleting the existing Article 3.2 and substituting in its place and instead thereof, the following

new Article 3.2:

“The Authorised Share Capital of the Company is Rs.50,00,00,000 (rupees fifty crore only) divided

into 1,64,83,000 (one crore sixty four lacs eighty three thousand only) equity shares of Rs.10/-

(rupees ten only) each and 3,35,17,000 (three crores thirty five lacs seventeen thousand only)

compulsorily convertible preference shares of Rs.10/- (rupees ten only) each with powers to

increase or reduce the same in accordance with the provisions of the Companies Act, 1956”.

10. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as

an Ordinary Resolution:

“RESOLVED THAT pursuant to the provisions of Section 293 (1)(a) and other applicable

provisions, if any, of the Companies Act, 1956, the Company hereby accords its sanctions and

authorises the Board of Directors of the Company to mortgage and/or charge, in addition to the

mortgages/charges created/to be created by the Company, in such form and manner and with

such ranking and at such time and on such terms as the Board may determine, on all or any of the

movable and/or immovable properties of the Company, both present and future and/or the

whole or any part of the undertaking(s) of the Company together with the power to take over the

management of the business and concern of the Company in certain events of default, in favour of

the Lenders, Agents and Trustees for securing the borrowings of the Company availed/to be

availed by way of Loans (in foreign currency and/or rupee currency) and Securities (comprising

fully/partly convertible Debentures and/or Non-convertible Debentures with or without

detachable or non-detachable Warrants and/or Secured Premium Notes or other debt

instruments),issued or to be issued by the Company and authorizes the board of Directors make

buyout from time to time, subject to the limit upto Rs.2000crores (Rupees Two Thousand Crores

only) together with interest, additional interest, compound interest in case of default,

accumulated interest, liquidated damages, commitment charger, premium on prepayment,

remuneration of the Agents/Trustees, premium (if any) on redemption, all other costs, charges and

expenses and all other moneys payable by the Company in terms of the Loan Agreements/Heads

of Agreements, Debenture Trust Deeds or any other Documents entered into/to be entered into

between the Company and the Lenders/Agents/Trustees in respect of the said loans/

borrowings/debentures and containing such specific terms and conditions and covenants in

respect of enforcement of security as may be stipulated in that behalf and agreed to between the

Board and the Lenders/Agents/Trustees.”

RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, the Board be and is

hereby authorised to finalise, settle and execute such documents/ deeds/ writings/ papers/

agreements as may be required and to do all such acts, deeds, matters and things, as it may in its

absolute discretion deem necessary, proper or desirable and to settle any question, difficulty or

doubt that may arise in regard to creating mortgages/charges as aforesaid.”

Spandana Annual Report 2007-08 41

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7. To consider and, if thought fit, to pass with or without modifications, the following resolution as an

Ordinary Resolution:

“RESOLVED THAT, pursuant to the provisions of Sections 198, 269, 309 and 310 read with

Schedule XIII of the Companies Act, 1956 and other applicable provisions, if any of the said Act,

including any statutory modification(s) or re-enactment or any notification which the Central

Government may issue from time to time thereof and such other approvals as may be required in

this behalf, the approval of members be and is hereby accorded for the re-appointment of Mr. M.

Venkata Narendra Prasad as Wholetime Director of the Company w.e.f 1st August 2008 till the

ensuing Annual General Meeting as per the following remuneration:

S.No. Particulars Amount (Rs.)

1 Gross Remuneration 16,80,000 p.a

Bonus: As per the rules of the Company.

Other benefits

Mr. M. Venkata Narendra Prasad shall also be entitled to the following benefits:

1. Earned leave: As per the rules of the Company.

2. Company's Contribution to provident fund as per the rules of the Company.

3. Gratuity: As per the rules of the Company.

4. Encashment of leave: As per the rules of the Company.

5. Company car and telephone: Use of the Company's car and telephone at residence for official

purposes, as per the rules of the Company.

The aggregate remuneration inclusive of salary and other benefits payable to Sri M. Venkata

Narendra Prasad, shall always be subject to the overall ceilings laid down in Sections 198 and

309 and other applicable provisions of the Companies Act, 1956.”

8. To consider and, if thought fit, to pass with or without modifications, the following resolution as an

Ordinary Resolution:

“RESOLVED THAT existing Clause V.a of the Memorandum of Association of the Company as to

Share Capital be and is hereby deleted and in its place the following Clause V. a. be substituted:

“The Authorised share capital of the Company is Rs.50,00,00,000 (Rupees Fifty crore only) divided

into 1,64,83,000 (one crore sixty four lacs eighty three thousand only) equity shares of Rs.10

(rupees ten only) each and 3,35,17,000 (Three crores thirty five lacs seventeen thousand only)

compulsorily convertible preference shares of Rs.10/- (Rupees Ten only) each with the power to

increase and reduce the capital of the Company and to divide the shares in the capital for the time

being into several classes and attach thereto respectively, such preferential, deferred, qualified or

special rights, privileges or conditions as may be determined by or in accordance with the Articles

of Association of the Company for the time being and to vary, modify or abrogate any such rights,

privileges or conditions in such manner as may be permitted by the Companies Act, 1956, or by

the Articles of Association of the Company for the time being.”

9. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a

Special Resolution:

“RESOLVED THAT pursuant to the provisions of Section 31 and other applicable provisions of the

Companies Act, 1956, the Articles of Association of the Company, be and is hereby altered by

deleting the existing Article 3.2 and substituting in its place and instead thereof, the following

new Article 3.2:

“The Authorised Share Capital of the Company is Rs.50,00,00,000 (rupees fifty crore only) divided

into 1,64,83,000 (one crore sixty four lacs eighty three thousand only) equity shares of Rs.10/-

(rupees ten only) each and 3,35,17,000 (three crores thirty five lacs seventeen thousand only)

compulsorily convertible preference shares of Rs.10/- (rupees ten only) each with powers to

increase or reduce the same in accordance with the provisions of the Companies Act, 1956”.

10. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as

an Ordinary Resolution:

“RESOLVED THAT pursuant to the provisions of Section 293 (1)(a) and other applicable

provisions, if any, of the Companies Act, 1956, the Company hereby accords its sanctions and

authorises the Board of Directors of the Company to mortgage and/or charge, in addition to the

mortgages/charges created/to be created by the Company, in such form and manner and with

such ranking and at such time and on such terms as the Board may determine, on all or any of the

movable and/or immovable properties of the Company, both present and future and/or the

whole or any part of the undertaking(s) of the Company together with the power to take over the

management of the business and concern of the Company in certain events of default, in favour of

the Lenders, Agents and Trustees for securing the borrowings of the Company availed/to be

availed by way of Loans (in foreign currency and/or rupee currency) and Securities (comprising

fully/partly convertible Debentures and/or Non-convertible Debentures with or without

detachable or non-detachable Warrants and/or Secured Premium Notes or other debt

instruments),issued or to be issued by the Company and authorizes the board of Directors make

buyout from time to time, subject to the limit upto Rs.2000crores (Rupees Two Thousand Crores

only) together with interest, additional interest, compound interest in case of default,

accumulated interest, liquidated damages, commitment charger, premium on prepayment,

remuneration of the Agents/Trustees, premium (if any) on redemption, all other costs, charges and

expenses and all other moneys payable by the Company in terms of the Loan Agreements/Heads

of Agreements, Debenture Trust Deeds or any other Documents entered into/to be entered into

between the Company and the Lenders/Agents/Trustees in respect of the said loans/

borrowings/debentures and containing such specific terms and conditions and covenants in

respect of enforcement of security as may be stipulated in that behalf and agreed to between the

Board and the Lenders/Agents/Trustees.”

RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, the Board be and is

hereby authorised to finalise, settle and execute such documents/ deeds/ writings/ papers/

agreements as may be required and to do all such acts, deeds, matters and things, as it may in its

absolute discretion deem necessary, proper or desirable and to settle any question, difficulty or

doubt that may arise in regard to creating mortgages/charges as aforesaid.”

Spandana Annual Report 2007-08 41

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11. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a

Special Resolution:

“RESOLVED THAT pursuant to the provisions of Sections 198, 269, 309 and 310 read with

Schedule XIII of the Companies Act, 1956 and other applicable provisions, if any of the said Act,

including any statutory modification(s) or re-enactment or any notification which the Central

Government may issue from time to time thereof and such other approvals as may be required in

this behalf, the approval of members be and is hereby accorded for the re-appointment of Mrs.

G.Padmaja Reddy as Managing Director of the Company with effect from 19th April 2008 to 18th

April 2013 on the following remuneration:

S.No. Particulars Amount (Rs.)

1. Gross Remuneration 72,00,000 p.a.

Bonus: As per the rules of the Company

Other benefits:

Mrs. Padmaja Reddy G. shall also be entitled to the following benefits:

1. Earned leave : As per the rules of the Company.

2. Company's Contribution to provident fund as per the rules of the Company.

3. Gratuity: As per the rules of the Company.

4. Encashment of leave: As per the rules of the Company.

5. Company car and telephone: Use of the Company's car and telephone at residence for official

purposes, as per the rules of the Company.

The aggregate remuneration inclusive of salary and other benefits payable to Mrs. Padmaja Reddy

Gangireddy, shall always be subject to the overall ceilings laid down in Sections 198 and 309 and

other applicable provisions of the Companies Act, 1956.

For Spandana Sphoorty Financial Limited

Date : 02-07-2008 Sd/-

Place: Hyderabad. Malleswari.G

Company Secretary

Notes:

1. A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote instead of himself and a proxy need not be a member.

2. The meeting has been called in terms of section 171 of the Companies Act, 1956.

3. The relevant explanatory statement pursuant to the provisions of section 173(2) of the Companies Act, 1956 is annexed hereto.

4. Members are requested to affix their signature at the space provided on the Attendance Slip annexed to the Proxy Form and hand over the slip at the entrance to the place of the Meeting.

5. The Shares of the Company are eligible for Dematerialization. On Circular No: NSDLPI/2008/1396 dated 1st July 2008 the ISIN: INE572J01011 was activated. Any shareholder interested to Dematerialize their shares they can approach the nearest Depository Participant.

6. The registered office of the Company was Changed from 7-1-19/5, Jyothi Bhopal Apartments, Opp: Country Club Road, Begumpet, Hyderabad - 500 016 to Plot No: 79, Care Crystal, Vinayaknagar Colony, Gachibowli, Hyderabad 500 032.

7. Members are requested to communicate their change of address, addressing to Company Secretary, Plot No: 79, Care Crystal, Vinayaknagar Colony, opp: Indiranagar Bus stop, Gachibowli, Hyderabad 500 032.

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11. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a

Special Resolution:

“RESOLVED THAT pursuant to the provisions of Sections 198, 269, 309 and 310 read with

Schedule XIII of the Companies Act, 1956 and other applicable provisions, if any of the said Act,

including any statutory modification(s) or re-enactment or any notification which the Central

Government may issue from time to time thereof and such other approvals as may be required in

this behalf, the approval of members be and is hereby accorded for the re-appointment of Mrs.

G.Padmaja Reddy as Managing Director of the Company with effect from 19th April 2008 to 18th

April 2013 on the following remuneration:

S.No. Particulars Amount (Rs.)

1. Gross Remuneration 72,00,000 p.a.

Bonus: As per the rules of the Company

Other benefits:

Mrs. Padmaja Reddy G. shall also be entitled to the following benefits:

1. Earned leave : As per the rules of the Company.

2. Company's Contribution to provident fund as per the rules of the Company.

3. Gratuity: As per the rules of the Company.

4. Encashment of leave: As per the rules of the Company.

5. Company car and telephone: Use of the Company's car and telephone at residence for official

purposes, as per the rules of the Company.

The aggregate remuneration inclusive of salary and other benefits payable to Mrs. Padmaja Reddy

Gangireddy, shall always be subject to the overall ceilings laid down in Sections 198 and 309 and

other applicable provisions of the Companies Act, 1956.

For Spandana Sphoorty Financial Limited

Date : 02-07-2008 Sd/-

Place: Hyderabad. Malleswari.G

Company Secretary

Notes:

1. A member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote instead of himself and a proxy need not be a member.

2. The meeting has been called in terms of section 171 of the Companies Act, 1956.

3. The relevant explanatory statement pursuant to the provisions of section 173(2) of the Companies Act, 1956 is annexed hereto.

4. Members are requested to affix their signature at the space provided on the Attendance Slip annexed to the Proxy Form and hand over the slip at the entrance to the place of the Meeting.

5. The Shares of the Company are eligible for Dematerialization. On Circular No: NSDLPI/2008/1396 dated 1st July 2008 the ISIN: INE572J01011 was activated. Any shareholder interested to Dematerialize their shares they can approach the nearest Depository Participant.

6. The registered office of the Company was Changed from 7-1-19/5, Jyothi Bhopal Apartments, Opp: Country Club Road, Begumpet, Hyderabad - 500 016 to Plot No: 79, Care Crystal, Vinayaknagar Colony, Gachibowli, Hyderabad 500 032.

7. Members are requested to communicate their change of address, addressing to Company Secretary, Plot No: 79, Care Crystal, Vinayaknagar Colony, opp: Indiranagar Bus stop, Gachibowli, Hyderabad 500 032.

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Extract from Clause V (a) at present

The Authorised Share Capital of the

Company is Rs.50,00,00,000 (Rupees Fifty

crore only) divided into 1,00,00,000 (One

crore only) Equity Shares of Rs.10 (Rupees

Ten only) each and 4,00,00,000 (Four crore

o n l y ) C o m p u l s o r i l y C o nv e r t i b l e

Preference Shares of Rs.10(Rupees Ten

only) each with power to increase or

reduce the share capital of the Company

and to divide the shares in the capital for

the time being into several classes and to

attach thereto respectively preferential,

cumulative convertible preference,

guaranteed, qualified or special rights,

privileges or conditions as may be

determined by or in accordance with the

Articles of Association of the Company

and to vary, modify, amalgamate or

abrogate such rights, privileges or

conditions in such manner as may for the

time being be provided by the Articles of

Association.

With the proposed amendment

The Authorised Share Capital of the

Company is Rs.50,00,00,000 (Rupees Fifty

crore only) divided into 1,64,83,000 (One

crore sixty four lacs eighty three thousand

only) Equity Shares of Rs.10/- (Rupees Ten

only) each and 3,35,17,000(Three crore

Thirty Five Lac Seventeen Thousand only)

Compulsorily Convertible Preference

Shares of Rs.10/- (Rupees Ten only) each

with power to increase or reduce the

share capital of the Company and to

divide the shares in the capital for the time

being into several classes and to attach

thereto respectively preferential ,

cumulative convertible preference,

guaranteed, qualified or special rights,

privileges or conditions as may be

determined by or in accordance with the

Articles of Association of the Company

and to vary, modify, amalgamate or

abrogate such rights, privileges or

conditions in such manner as may for the

time being be provided by the Articles of

Association.

The relevant Article 3.1 as at present and with the proposed amendment is given below for ready reference of the Members:

“3.1 The Authorised Share Capital of the

Company is Rs.50,00,00,000 (rupees Fifty

crore only) divided into 1,00,00,000 (One

crore only) Equity Shares of Rs.10 (Rupees

Ten only) each and 4,00,00,000 (Four crore

o n l y ) C o m p u l s o r i l y C o n v e r t i b l e

Preference Shares of Rs.10(Rupees Ten

only) each with powers to increase or

reduce the same in accordance with the

provisions of the Companies Act, 1956.

3.1 The Authorised Share Capital of the

Company is Rs.50,00,00,000 (Rupees Fifty

crore only) divided into 1,64,83,000 (One

crore Sixty Four Lac Eighty Three

Thousand only) Equity Shares of Rs.10

(Rupees Ten only) each and 3,35,17,000

(Three crore Thirty Five Lacs Seventeen

Thousand only)Compulsorily Convertible

Preference Shares of Rs.10 (Rupees Ten

only) each with powers to increase or

reduce the same in accordance with the

provisions of the Companies Act, 1956.

Present Article Proposed Article

Explanatory Statement under Section 173(2) of the Companies Act, 1956

Item 6

Mr. Rahul Gupta, was appointed as an Additional Director of the Company pursuant to Section

260 of the Companies Act 1956 w.e.f 29th January, 2008 and holds office upto the date of this

Annual General Meeting . The Company has received a notice along with requisite fee from a

member under Section 257 of the Companies Act, 1956, proposing his candidature as a Director of

the Company. Brief profile of Mr.Rahul Gupta is as follows:-

He is a chief operating officer and chief financial officer of Citibank Global Consumer Group,

Singapore. He has three decades of experience in several banking sectors at different positions

globally. He did his masters in Business Administration at University of South California, Los

Angeles, USA and Bachelor of Engineering in electronics at Birla Institute Technology & Science.

The Board recommends the Resolution for approval of members.

None of the other Directors other than Sri.Rahul Gupta is are concerned or interested in the

proposed Resolution.

Item 7

Due to increase of volume of operations in the accounts and financial areas, the Board of Directors

decided to appoint M. Venkata Narendra Prasad as Whole Time Director of the Company with the

said remuneration package with effect from 28th July 2008. Sri M. Venkata Narendra Prasad has

the experience of 7 years in the areas of Accounts, Finance and MIS.

The Board recommends the above resolution for the approval of the members as an an ordinary

resolution.

None of the Directors of the company other than Mr. M. Venkata Narendra Prasad are interested or

concerned in the resolution.

Item No.'s 8 & 9

At present, the authorised capital of the Company is Rs. 50 crores as set out in Clause V of the

Memorandum of Association of the Company divided in to 1 crore equity shares of Rs. 10/- each

and four crores compulsorily convertible preference Shares of Rs. 10/- each aggregating fifty

crores. Now, the Company is planning to convert the compulsorily convertible preference Shares

into equity shares.

Keeping in view of the above, it is proposed to change the authorized capital clause as follows:

The relevant extracts from Clause V at present vis-a-vis the proposed amendment are given below

for ready reference of the Members:

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Extract from Clause V (a) at present

The Authorised Share Capital of the

Company is Rs.50,00,00,000 (Rupees Fifty

crore only) divided into 1,00,00,000 (One

crore only) Equity Shares of Rs.10 (Rupees

Ten only) each and 4,00,00,000 (Four crore

o n l y ) C o m p u l s o r i l y C o nv e r t i b l e

Preference Shares of Rs.10(Rupees Ten

only) each with power to increase or

reduce the share capital of the Company

and to divide the shares in the capital for

the time being into several classes and to

attach thereto respectively preferential,

cumulative convertible preference,

guaranteed, qualified or special rights,

privileges or conditions as may be

determined by or in accordance with the

Articles of Association of the Company

and to vary, modify, amalgamate or

abrogate such rights, privileges or

conditions in such manner as may for the

time being be provided by the Articles of

Association.

With the proposed amendment

The Authorised Share Capital of the

Company is Rs.50,00,00,000 (Rupees Fifty

crore only) divided into 1,64,83,000 (One

crore sixty four lacs eighty three thousand

only) Equity Shares of Rs.10/- (Rupees Ten

only) each and 3,35,17,000(Three crore

Thirty Five Lac Seventeen Thousand only)

Compulsorily Convertible Preference

Shares of Rs.10/- (Rupees Ten only) each

with power to increase or reduce the

share capital of the Company and to

divide the shares in the capital for the time

being into several classes and to attach

thereto respectively preferential ,

cumulative convertible preference,

guaranteed, qualified or special rights,

privileges or conditions as may be

determined by or in accordance with the

Articles of Association of the Company

and to vary, modify, amalgamate or

abrogate such rights, privileges or

conditions in such manner as may for the

time being be provided by the Articles of

Association.

The relevant Article 3.1 as at present and with the proposed amendment is given below for ready reference of the Members:

“3.1 The Authorised Share Capital of the

Company is Rs.50,00,00,000 (rupees Fifty

crore only) divided into 1,00,00,000 (One

crore only) Equity Shares of Rs.10 (Rupees

Ten only) each and 4,00,00,000 (Four crore

o n l y ) C o m p u l s o r i l y C o n v e r t i b l e

Preference Shares of Rs.10(Rupees Ten

only) each with powers to increase or

reduce the same in accordance with the

provisions of the Companies Act, 1956.

3.1 The Authorised Share Capital of the

Company is Rs.50,00,00,000 (Rupees Fifty

crore only) divided into 1,64,83,000 (One

crore Sixty Four Lac Eighty Three

Thousand only) Equity Shares of Rs.10

(Rupees Ten only) each and 3,35,17,000

(Three crore Thirty Five Lacs Seventeen

Thousand only)Compulsorily Convertible

Preference Shares of Rs.10 (Rupees Ten

only) each with powers to increase or

reduce the same in accordance with the

provisions of the Companies Act, 1956.

Present Article Proposed Article

Explanatory Statement under Section 173(2) of the Companies Act, 1956

Item 6

Mr. Rahul Gupta, was appointed as an Additional Director of the Company pursuant to Section

260 of the Companies Act 1956 w.e.f 29th January, 2008 and holds office upto the date of this

Annual General Meeting . The Company has received a notice along with requisite fee from a

member under Section 257 of the Companies Act, 1956, proposing his candidature as a Director of

the Company. Brief profile of Mr.Rahul Gupta is as follows:-

He is a chief operating officer and chief financial officer of Citibank Global Consumer Group,

Singapore. He has three decades of experience in several banking sectors at different positions

globally. He did his masters in Business Administration at University of South California, Los

Angeles, USA and Bachelor of Engineering in electronics at Birla Institute Technology & Science.

The Board recommends the Resolution for approval of members.

None of the other Directors other than Sri.Rahul Gupta is are concerned or interested in the

proposed Resolution.

Item 7

Due to increase of volume of operations in the accounts and financial areas, the Board of Directors

decided to appoint M. Venkata Narendra Prasad as Whole Time Director of the Company with the

said remuneration package with effect from 28th July 2008. Sri M. Venkata Narendra Prasad has

the experience of 7 years in the areas of Accounts, Finance and MIS.

The Board recommends the above resolution for the approval of the members as an an ordinary

resolution.

None of the Directors of the company other than Mr. M. Venkata Narendra Prasad are interested or

concerned in the resolution.

Item No.'s 8 & 9

At present, the authorised capital of the Company is Rs. 50 crores as set out in Clause V of the

Memorandum of Association of the Company divided in to 1 crore equity shares of Rs. 10/- each

and four crores compulsorily convertible preference Shares of Rs. 10/- each aggregating fifty

crores. Now, the Company is planning to convert the compulsorily convertible preference Shares

into equity shares.

Keeping in view of the above, it is proposed to change the authorized capital clause as follows:

The relevant extracts from Clause V at present vis-a-vis the proposed amendment are given below

for ready reference of the Members:

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The Board recommends the above resolutions for the approval of the members as a Special Resolutions.

None of the Directors of the company are interested or concerned in the resolutions.

Item No.'s 10:

In terms of the provisions of section 293(1)(a) of the Companies Act, 1956, except with the consent of the Company in general meeting, Company can not create charge against the book debts of the Company.

The Board recommends the above resolution for the approval of the members as an ordinary resolution.

None of the other Directors are concerned or interested in the proposed Resolution.

Item No.'s 11:

The Company needs the services of Mrs. Padmaja Reddy, to take the company at higher levels & a respected organization in the industry. The present term of five years to act as Managing Director of the Company will be expired on 18th April 2008. Keeping in view of her past contributions & future growth of the company Board has recommended for reappointment of her as a Managing Director of the Company for a period of 5 years with effect from 18th April 2008 to 17th April 2013 with the above said remuneration.

The Board recommends the above resolutions for the approval of the members as a Special Resolutions.

None of the Directors of the company other than Mrs. Padmaja Reddy interested or concerned in the resolution.

By Order of the Board For Spandana Sphoorty Financial Limited

Date : 02.07.2008 Sd/-Place: Hyderabad. Malleswari.G

Company Secretary

DIRECTORS' REPORT

To

The members of

Spandana Sphoorty Financial Limited.

Your Directors have great pleasure in presenting their Fifth Annual Report together with the audited staccounts for the financial year ended 31 March 2008.

FINANCIAL RESULTS

stThe financial results of the Company for the year ended 31 March 2008 are as given below:

st stParticulars 31 March 2008 31 March 2007

Income from Operations 113,38,13,613 46,94,40,563

Other Income 14,06,82,884 2,65,40,691

Profit before Tax & Depreciation 46,88,44,271 4,89,08,999

Depreciation 91,96,969 63,33,598

Profit before tax 45,96,47,302 4,25,75,401

Provision for Tax 18,90,07,555 1,64,19,393

Profit after Tax 27,06,39,747 2,61,56,008

OPERATIONS

During the year under review your company disbursed an amount of Rs.11,92,30,68,375/- (Inclusive of

disbursements under managed portfolio). The Company achieved a profit before tax

Rs.45,96,47,302/- as against Rs.4,25,75,401/- and profit after tax Rs.27,06,39,747/- as against

Rs.2,61,56,008/- during the previous year .

DIVIDENDS

As was the case in the previous year, your directors decided not to declare dividend and to utilize the surplus

reserves to meet the huge fund requirement of the Company.

SUBSIDIARY COMPANIES

By virtue of the provisions of Section 4 of the Companies Act, 1956, our Company is treated as the

Holding Company for M/s. Spandana Sphoorty Marketing Services Private Limited, M/s M.G.Brothers

Finance Limited and M/s. Spandana Sphoorty Chit Funds Private Limited in which our company holds

5,03,000 Equity Shares of face value of Rs. 10/- each ; 631449 Equity shares of face value of Rs.10/- each

and 80,000 Equity shares of Rs. 10/- each respectively.

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The Board recommends the above resolutions for the approval of the members as a Special Resolutions.

None of the Directors of the company are interested or concerned in the resolutions.

Item No.'s 10:

In terms of the provisions of section 293(1)(a) of the Companies Act, 1956, except with the consent of the Company in general meeting, Company can not create charge against the book debts of the Company.

The Board recommends the above resolution for the approval of the members as an ordinary resolution.

None of the other Directors are concerned or interested in the proposed Resolution.

Item No.'s 11:

The Company needs the services of Mrs. Padmaja Reddy, to take the company at higher levels & a respected organization in the industry. The present term of five years to act as Managing Director of the Company will be expired on 18th April 2008. Keeping in view of her past contributions & future growth of the company Board has recommended for reappointment of her as a Managing Director of the Company for a period of 5 years with effect from 18th April 2008 to 17th April 2013 with the above said remuneration.

The Board recommends the above resolutions for the approval of the members as a Special Resolutions.

None of the Directors of the company other than Mrs. Padmaja Reddy interested or concerned in the resolution.

By Order of the Board For Spandana Sphoorty Financial Limited

Date : 02.07.2008 Sd/-Place: Hyderabad. Malleswari.G

Company Secretary

DIRECTORS' REPORT

To

The members of

Spandana Sphoorty Financial Limited.

Your Directors have great pleasure in presenting their Fifth Annual Report together with the audited staccounts for the financial year ended 31 March 2008.

FINANCIAL RESULTS

stThe financial results of the Company for the year ended 31 March 2008 are as given below:

st stParticulars 31 March 2008 31 March 2007

Income from Operations 113,38,13,613 46,94,40,563

Other Income 14,06,82,884 2,65,40,691

Profit before Tax & Depreciation 46,88,44,271 4,89,08,999

Depreciation 91,96,969 63,33,598

Profit before tax 45,96,47,302 4,25,75,401

Provision for Tax 18,90,07,555 1,64,19,393

Profit after Tax 27,06,39,747 2,61,56,008

OPERATIONS

During the year under review your company disbursed an amount of Rs.11,92,30,68,375/- (Inclusive of

disbursements under managed portfolio). The Company achieved a profit before tax

Rs.45,96,47,302/- as against Rs.4,25,75,401/- and profit after tax Rs.27,06,39,747/- as against

Rs.2,61,56,008/- during the previous year .

DIVIDENDS

As was the case in the previous year, your directors decided not to declare dividend and to utilize the surplus

reserves to meet the huge fund requirement of the Company.

SUBSIDIARY COMPANIES

By virtue of the provisions of Section 4 of the Companies Act, 1956, our Company is treated as the

Holding Company for M/s. Spandana Sphoorty Marketing Services Private Limited, M/s M.G.Brothers

Finance Limited and M/s. Spandana Sphoorty Chit Funds Private Limited in which our company holds

5,03,000 Equity Shares of face value of Rs. 10/- each ; 631449 Equity shares of face value of Rs.10/- each

and 80,000 Equity shares of Rs. 10/- each respectively.

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PORTFOLIO BUYOUT BY ICICI BANK

The Company has entered into Assignment agreement with scheduled banks in respect of certain

loan contracts, whereby underlying pool of Assets are transferred to these banks for a lump sum

consideration. During the year, the company has assigned loan portfolio having book value of INR

864.3 million to ICICI Bank. The Company has received a total consideration of INR 932.0 million arising

out of such sale of loans through direct assignment. The difference between the consideration

received and the book value of the loan portfolio assigned amounting to INR 67.7 millions has been

accounted for as a gain in the profit and loss account in the current year. Though we have FLDG

Commitment on future losses, the premium was accounted as a gain in the current year. We would like

to update on the current status of the portfolio in terms of how it is behaving to give a better sense of

future risk on the Company pertaining to this portfolio.

1. All loans sold are regular in payment.

2. One third of the Portfolio sold were collected and transferred.

3. The Company provided 1% provision on the total portfolio sold though the FLDG commitment is

only 10%.

CHANGES IN SHARE CAPITAL

i) During the year Authorised share capital of the Company increased from Rs. 10 Crores divided into

one crore equity shares of Rs. 10 each to Rs. 50 crores divided into One crore Equity Shares of

Rs.10/- each and four crores compulsorily convertible preference shares of Rs. 10/- each.

ii) In accordance with the resolution passed by the shareholders at the Extraordinary General thMeeting held on 26 June, 2007, the board has allotted 12,08,051 Equity shares of Rs. 115.86/- per

share and 33,516,041 compulsorily convertible preferential Shares of Rs.10/ to the Investors.

iii) The above allotment of shares resulted in an increase in the paid up equity capital of the Company

from Rs. 8,63,10,000/- to Rs. 9,83,90,510 /-

iv) With the approval of shareholders the Company is planning to convert 64,83,000 Convertible

Preference Authorised Capital to Equity Authorised Share Capital in the forth coming Annual

General Meeting. Hence your Directors recommended for your approval.

FINANCE

Your company has been regular in discharging its liability to ING Vysya Bank, Guntur, Indian Overseas

Bank, Vijayawada and Hyderabad, ICICI Bank, Mumbai, HSBC, Hyderabad, SIDBI, Hyderabad, HDFC

Bank, Hyderabad, Yes Bank, Hyderabad, IDBI, Hyderabad, BNP Paribas, Hyderabad, Punjab&Sind Bank,

Hyderabad, The Bank of Rajasthan Limited, Hyderabad, Standard Charted Bank, Hyderabad, Karnataka

Bank, Hyderabad, Axis Bank, Hyderabad, FWWB and Manavayya Holdings & Investments Pvt. Limited.

Your Company continued to enjoy good relationship with them during the year under review.

PUBLIC DEPOSITS

The Company has not accepted any deposits from the public, directors or its employees during the

year under review. The Board of Directors though circulation passed the resolution for non

acceptance of Public Deposits during the financial 2008-09 and submitted the same to the Statutory

Auditor as per the requirements of the Reserve Bank of India.

DIRECTORS

As per Section255 & 256 of the Companies Act, Mr.M.V.Narendra Prasad, Mr. Y.S.N.Murty and

Dr.G.Venkateswara Reddy retire by rotation in the ensuing Annual General Meeting. All of them,

being eligible, for re-appointment.

Mr. Rahul Gupta has been appointed as Additional-Non Executive Independent Director by the board thof Directors of the Company in their meeting held on 29 January 2008. According to the provisions of

Section 260 of the Companies Act 1956, he holds office only upto the date ensuing Annual General

Meeting. The company has received the notice in writing from one of the Members of the company

proposing his appointment U/s 257. Hence your directors recommended the matter for your

approval.

AUDIT COMMITTEE

ndAs per 252A of the Companies Act 1956, the Audit Committee was re-constituted on 2 November

2007 with the following members:

1. Mrs. Padmaja Reddy Gangireddy

2. Dr. Rajiv Lall

3. Mr.Harinder Sawhney

4. Mr. Y.S.N. Murty

The Committee met two times during the year on 25.06.2007 and 08.10.2007 and reviewed the

accounts of the Company and internal Controls, in compliance with the requirements of the

Companies Act, 1956.

PARTICULARS OF CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN

EXCHANGE EARNINGS AND OUTGO

a) Conservation of Energy

Our operations are not energy-intensive. However, significant measures are taken to reduce

energy consumption by using energy efficient computers.

As energy costs comprise a very small part of the total expenses, the financial impact of these

measures is not material.

b) Research and Development (R&D)

Research and development of new products and methodologies continue to be of importance to

us. This allows us to enhance quality of service and customer satisfaction through continuous

innovation.

c) Technology absorption, adaptation and innovation

We at Spandana believe that technology should aid in improving efficiencies and at the same time

should not disrupt the existing operational model with the efficiencies and the cost advantages

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PORTFOLIO BUYOUT BY ICICI BANK

The Company has entered into Assignment agreement with scheduled banks in respect of certain

loan contracts, whereby underlying pool of Assets are transferred to these banks for a lump sum

consideration. During the year, the company has assigned loan portfolio having book value of INR

864.3 million to ICICI Bank. The Company has received a total consideration of INR 932.0 million arising

out of such sale of loans through direct assignment. The difference between the consideration

received and the book value of the loan portfolio assigned amounting to INR 67.7 millions has been

accounted for as a gain in the profit and loss account in the current year. Though we have FLDG

Commitment on future losses, the premium was accounted as a gain in the current year. We would like

to update on the current status of the portfolio in terms of how it is behaving to give a better sense of

future risk on the Company pertaining to this portfolio.

1. All loans sold are regular in payment.

2. One third of the Portfolio sold were collected and transferred.

3. The Company provided 1% provision on the total portfolio sold though the FLDG commitment is

only 10%.

CHANGES IN SHARE CAPITAL

i) During the year Authorised share capital of the Company increased from Rs. 10 Crores divided into

one crore equity shares of Rs. 10 each to Rs. 50 crores divided into One crore Equity Shares of

Rs.10/- each and four crores compulsorily convertible preference shares of Rs. 10/- each.

ii) In accordance with the resolution passed by the shareholders at the Extraordinary General thMeeting held on 26 June, 2007, the board has allotted 12,08,051 Equity shares of Rs. 115.86/- per

share and 33,516,041 compulsorily convertible preferential Shares of Rs.10/ to the Investors.

iii) The above allotment of shares resulted in an increase in the paid up equity capital of the Company

from Rs. 8,63,10,000/- to Rs. 9,83,90,510 /-

iv) With the approval of shareholders the Company is planning to convert 64,83,000 Convertible

Preference Authorised Capital to Equity Authorised Share Capital in the forth coming Annual

General Meeting. Hence your Directors recommended for your approval.

FINANCE

Your company has been regular in discharging its liability to ING Vysya Bank, Guntur, Indian Overseas

Bank, Vijayawada and Hyderabad, ICICI Bank, Mumbai, HSBC, Hyderabad, SIDBI, Hyderabad, HDFC

Bank, Hyderabad, Yes Bank, Hyderabad, IDBI, Hyderabad, BNP Paribas, Hyderabad, Punjab&Sind Bank,

Hyderabad, The Bank of Rajasthan Limited, Hyderabad, Standard Charted Bank, Hyderabad, Karnataka

Bank, Hyderabad, Axis Bank, Hyderabad, FWWB and Manavayya Holdings & Investments Pvt. Limited.

Your Company continued to enjoy good relationship with them during the year under review.

PUBLIC DEPOSITS

The Company has not accepted any deposits from the public, directors or its employees during the

year under review. The Board of Directors though circulation passed the resolution for non

acceptance of Public Deposits during the financial 2008-09 and submitted the same to the Statutory

Auditor as per the requirements of the Reserve Bank of India.

DIRECTORS

As per Section255 & 256 of the Companies Act, Mr.M.V.Narendra Prasad, Mr. Y.S.N.Murty and

Dr.G.Venkateswara Reddy retire by rotation in the ensuing Annual General Meeting. All of them,

being eligible, for re-appointment.

Mr. Rahul Gupta has been appointed as Additional-Non Executive Independent Director by the board thof Directors of the Company in their meeting held on 29 January 2008. According to the provisions of

Section 260 of the Companies Act 1956, he holds office only upto the date ensuing Annual General

Meeting. The company has received the notice in writing from one of the Members of the company

proposing his appointment U/s 257. Hence your directors recommended the matter for your

approval.

AUDIT COMMITTEE

ndAs per 252A of the Companies Act 1956, the Audit Committee was re-constituted on 2 November

2007 with the following members:

1. Mrs. Padmaja Reddy Gangireddy

2. Dr. Rajiv Lall

3. Mr.Harinder Sawhney

4. Mr. Y.S.N. Murty

The Committee met two times during the year on 25.06.2007 and 08.10.2007 and reviewed the

accounts of the Company and internal Controls, in compliance with the requirements of the

Companies Act, 1956.

PARTICULARS OF CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN

EXCHANGE EARNINGS AND OUTGO

a) Conservation of Energy

Our operations are not energy-intensive. However, significant measures are taken to reduce

energy consumption by using energy efficient computers.

As energy costs comprise a very small part of the total expenses, the financial impact of these

measures is not material.

b) Research and Development (R&D)

Research and development of new products and methodologies continue to be of importance to

us. This allows us to enhance quality of service and customer satisfaction through continuous

innovation.

c) Technology absorption, adaptation and innovation

We at Spandana believe that technology should aid in improving efficiencies and at the same time

should not disrupt the existing operational model with the efficiencies and the cost advantages

Spandana Annual Report 2007-08 49

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that have given Spandana its market leadership status. The current weekly branches have a

computerized MIS which has made data storage and data retrieval very speedy at the branch level.

Keeping in view the unique operational model that we have for our Individual Lending product,

we have developed an in-house software for data management associated with this product. We

are also exploring various options available for the microfinance sector to handle the MIS

requirements in line with our current scale of operations and future plans for expansion.

d) Foreign exchange earnings and outgo

During the year, there was no foreign exchange earning and no outgo.

REPORTING TO RBI

Spandana has been filing all the necessary reports to RBI on time and has been submitting the reports

on monthly basis.

DIRECTORS' RESPONSIBILITY STATEMENT AS REQUIRED UNDER SECTION 217(2AA) OF THE

COMPANIES ACT, 1956:

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, with respect to

Directors' Responsibility Statement, it is hereby confirmed that:

a. In the preparation of the accounts for the financial year ended 31st March, 2008, the applicable

accounting standards have been followed along with proper explanation relating to material

departures, wherever applicable;

b. The Directors have selected such accounting policies and applied them consistently and made

judgments and estimates that were reasonable and prudent so as to give a true and fair view of

the State of Affairs of the Company at the end of the Financial Year and of the Profit or Loss of the

Company for the year under review;

c. The Directors have taken proper and sufficient care for the maintenance of adequate accounting

records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets

of the Company and for preventing and detecting fraud and other irregularities;

d. The Directors have prepared the accounts for the Financial Year ended 31st March, 2008 on a

'going concern' basis.

e. The financial statements have been audited by Joint Statutory Auditors, M/s. B.S.R & Company &

M/s K.V.R. Subba Rao, Chartered Accountants, the Independent Auditors.

AUDITORS

The Companys' Statutory Auditors shall retire at the conclusion of this Annual General Meeting and

are eligible for re-appointment. The certificates from the auditors have been received to the effect that

their re-appointment, if made, would be within the limits prescribed under Section 224 (1B) of the

Companies Act, 1956.

AUDITORS' REPORT

The remarks as contained in the Auditor's Report, read with notes forming part of Accounts are Self

Explanatory.

PARTICULARS OF EMPLOYEES

During the year under review, no employee of the Company was in receipt of remuneration requiring

disclosure under Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of

Employees) Rules, 1975.

EMPLOYEE RELATIONS

Your Company continues to have cordial and harmonious relation ship with the employees.

GROUP GARTUITY

Your Company has created a Group Gratuity Fund an amount of Rs. 45,88,907/- and the same was

invested with M/s Birla Sun life Insurance Company Limited.

GRATITUDE AND ACKNOWLEDGEMENT

The directors would like to place on record their appreciation for the contribution made by the

employees to the significant growth of the Company. The trust reposed in your company by its

esteemed customers helped stabilized growth during the year under review. Your Directors also

express their gratitude fro the co-operation extended by the Bankers of the Company &

governmental Agencies like Reserve Bank of India, Ministry of Corporate Affairs etc. during the year

under review and it looks forward for such continuing support to enhance its goal.

For and on behalf of the Board

(Spandana Sphoorty Financial Limited)

Date : 02-07-2008 Sd/- Sd/-

Place: Hyderabad Padmaja Reddy G. M.V. Narendra Prasad

Managing Director Director

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that have given Spandana its market leadership status. The current weekly branches have a

computerized MIS which has made data storage and data retrieval very speedy at the branch level.

Keeping in view the unique operational model that we have for our Individual Lending product,

we have developed an in-house software for data management associated with this product. We

are also exploring various options available for the microfinance sector to handle the MIS

requirements in line with our current scale of operations and future plans for expansion.

d) Foreign exchange earnings and outgo

During the year, there was no foreign exchange earning and no outgo.

REPORTING TO RBI

Spandana has been filing all the necessary reports to RBI on time and has been submitting the reports

on monthly basis.

DIRECTORS' RESPONSIBILITY STATEMENT AS REQUIRED UNDER SECTION 217(2AA) OF THE

COMPANIES ACT, 1956:

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, with respect to

Directors' Responsibility Statement, it is hereby confirmed that:

a. In the preparation of the accounts for the financial year ended 31st March, 2008, the applicable

accounting standards have been followed along with proper explanation relating to material

departures, wherever applicable;

b. The Directors have selected such accounting policies and applied them consistently and made

judgments and estimates that were reasonable and prudent so as to give a true and fair view of

the State of Affairs of the Company at the end of the Financial Year and of the Profit or Loss of the

Company for the year under review;

c. The Directors have taken proper and sufficient care for the maintenance of adequate accounting

records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets

of the Company and for preventing and detecting fraud and other irregularities;

d. The Directors have prepared the accounts for the Financial Year ended 31st March, 2008 on a

'going concern' basis.

e. The financial statements have been audited by Joint Statutory Auditors, M/s. B.S.R & Company &

M/s K.V.R. Subba Rao, Chartered Accountants, the Independent Auditors.

AUDITORS

The Companys' Statutory Auditors shall retire at the conclusion of this Annual General Meeting and

are eligible for re-appointment. The certificates from the auditors have been received to the effect that

their re-appointment, if made, would be within the limits prescribed under Section 224 (1B) of the

Companies Act, 1956.

AUDITORS' REPORT

The remarks as contained in the Auditor's Report, read with notes forming part of Accounts are Self

Explanatory.

PARTICULARS OF EMPLOYEES

During the year under review, no employee of the Company was in receipt of remuneration requiring

disclosure under Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of

Employees) Rules, 1975.

EMPLOYEE RELATIONS

Your Company continues to have cordial and harmonious relation ship with the employees.

GROUP GARTUITY

Your Company has created a Group Gratuity Fund an amount of Rs. 45,88,907/- and the same was

invested with M/s Birla Sun life Insurance Company Limited.

GRATITUDE AND ACKNOWLEDGEMENT

The directors would like to place on record their appreciation for the contribution made by the

employees to the significant growth of the Company. The trust reposed in your company by its

esteemed customers helped stabilized growth during the year under review. Your Directors also

express their gratitude fro the co-operation extended by the Bankers of the Company &

governmental Agencies like Reserve Bank of India, Ministry of Corporate Affairs etc. during the year

under review and it looks forward for such continuing support to enhance its goal.

For and on behalf of the Board

(Spandana Sphoorty Financial Limited)

Date : 02-07-2008 Sd/- Sd/-

Place: Hyderabad Padmaja Reddy G. M.V. Narendra Prasad

Managing Director Director

Spandana Annual Report 2007-08 51

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Spandana Annual Report 2007-08 53

AUDITORS' REPORT TO THE MEMBERS OF SPANDANA SPHOORTY FINANCIAL LIMITED

(formerly Spandana Sphoorty Innovative Financial Services Limited)

1 We have audited the attached balance sheet of Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited) (“the Company”) as at 31 March 2008, the profit and loss account and the cash flow statement for the year ended on that date, annexed thereto. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

2 We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3 As required by the Companies (Auditor's Report) Order, 2003 (“the Order”), as amended, issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Companies Act, 1956, we enclose in the Annexure I a statement on the matters specified in paragraphs 4 and 5 of the said Order.

4 Further to our comments in the Annexure I referred to in paragraph 3 above, we report that:

(a) we have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;

(b) in our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

(c) the balance sheet, profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account;

(d) in our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956;

(e) on the basis of written representations received from the directors, as on 31 March 2008, and taken on record by the Board of Directors, we report that none of the Directors is disqualified as on 31 March 2008 from being appointed as a Director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956;

(f ) in our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the balance sheet, of the state of affairs of the Company as at 31 March 2008;

(ii) in the case of the profit and loss account, of the profit for the year ended on that date; and

(iii) in the case of cash flow statement, of the cash flows for the year ended on that date.

for B S R & Company

Chartered Accountants

Sd/-

Zubin Shekary

Partner

Membership No: 48814

Place : Hyderabad

Date : 02-07-2008

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Spandana Annual Report 2007-08 53

AUDITORS' REPORT TO THE MEMBERS OF SPANDANA SPHOORTY FINANCIAL LIMITED

(formerly Spandana Sphoorty Innovative Financial Services Limited)

1 We have audited the attached balance sheet of Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited) (“the Company”) as at 31 March 2008, the profit and loss account and the cash flow statement for the year ended on that date, annexed thereto. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

2 We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3 As required by the Companies (Auditor's Report) Order, 2003 (“the Order”), as amended, issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Companies Act, 1956, we enclose in the Annexure I a statement on the matters specified in paragraphs 4 and 5 of the said Order.

4 Further to our comments in the Annexure I referred to in paragraph 3 above, we report that:

(a) we have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit;

(b) in our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books;

(c) the balance sheet, profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account;

(d) in our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956;

(e) on the basis of written representations received from the directors, as on 31 March 2008, and taken on record by the Board of Directors, we report that none of the Directors is disqualified as on 31 March 2008 from being appointed as a Director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956;

(f ) in our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the balance sheet, of the state of affairs of the Company as at 31 March 2008;

(ii) in the case of the profit and loss account, of the profit for the year ended on that date; and

(iii) in the case of cash flow statement, of the cash flows for the year ended on that date.

for B S R & Company

Chartered Accountants

Sd/-

Zubin Shekary

Partner

Membership No: 48814

Place : Hyderabad

Date : 02-07-2008

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Spandana Annual Report 2007-08 55

14. According to the information and explanations given to us and on the basis of our examination of the

records of the Company, the Company has been generally regular in depositing amounts

deducted/accrued in the books of account in respect of undisputed statutory dues including Provident

Fund, Employees' State Insurance, Income-tax, Sales-tax, Wealth tax, Service tax, Custom duty, Excise duty

and other material statutory dues with the appropriate authorities during the year.

Further, since the Central Government has till date not prescribed the amount of cess payable under

section 441A of the Companies Act, 1956, we are not in a position to comment upon the regularity or

otherwise of the Company in depositing the same.

According to the information and explanations given to us, no undisputed amounts payable in respect of

Provident Fund, Employees' State Insurance, Income-tax, Sales-tax, Wealth tax, Service tax, Customs duty,

Excise duty, Cess and other material statutory dues were in arrears as at 31 March 2008 for a period of more

than six months from the date they became payable.

As explained to us, the Company did not have any dues on account of Investor Education and Protection

Fund, Income tax, Sales tax, Wealth tax, Service tax, Customs duty, Excise duty and Cess which have not been

deposited with the appropriate authorities on account of any dispute.

15. The Company does not have any accumulated losses at the end of the financial year and has not incurred

cash losses in the financial year and in the immediately preceding financial year.

16. In our opinion and according to the information and explanations given to us, the Company has not

defaulted in repayment of dues to its bankers or to any financial institutions. The Company did not have

any outstanding debentures during the year.

17. The Company has not granted any loans and advances on the basis of security by way of pledge of shares,

debentures and other securities.

18. In our opinion, and according to the information and explanations given to us, the Company is not a chit

fund or a nidhi/ mutual benefit fund/ society.

for B S R & Company

Chartered Accountants

Sd/-

Zubin Shekary

Partner

Membership No: 48814

Place: Hyderabad

Date: 02-07-2008

ANNEXURE I TO THE AUDITORS' REPORT

Annexure referred to in paragraph 3 of our report of even date to the members of Spandana Sphoorty Financial

Limited (“the Company”) (formerly Spandana Sphoorty Innovative Financial Limited):

1. The Company has maintained proper records showing full particulars, including quantitative details and

situation of fixed assets.

2. The Company has a regular programme of physical verification of its fixed assets by which all fixed assets are

verified every year. In our opinion, the periodicity of physical verification is reasonable having regard to the

size of the Company and the nature of its assets. In accordance with this programme, fixed assets were

verified during the year and no material discrepancies were noted on such verification.

3. Fixed assets disposed during the year were not substantial, and therefore, do not affect the going concern

assumption.

4. The Company is a Non Banking Finance Company ('NBFC'), engaged in the business of proving loans.

Accordingly, it does not hold any physical inventories. Thus, paragraph 4(ii) of the Order is not applicable.

5. The Company has not granted any loans, secured or unsecured, to companies, firms or other parties covered

in the register maintained under section 301 of the Companies Act, 1956.

6. The Company has taken loans from companies and other parties covered in the register maintained under

section 301 of the Companies Act, 1956. The maximum amount outstanding during the year was Rs

432,616,965 and the year-end balance of such loans was Rs 200,000,000.

7. In our opinion, the rate of interest and other terms and conditions on which loans have been taken from

companies, firms or other parties listed in the register maintained under section 301 of the Companies Act,

1956 are not, prima facie, prejudicial to the interest of the company.

8. In the case of loans taken from companies and other parties listed in the register maintained under section

301, the company has been regular in repaying the principal amounts as stipulated and in the payment of

interest.

9. In our opinion and according to the information and explanations given to us, there is an adequate internal

control system commensurate with the size of the Company and the nature of its business with regard to the

purchase of fixed assets and with regard to the sale of services. The activities of the Company do not involve

purchase of inventory and the sale of goods. We have not observed any major weakness in the internal

control system during the course of our audit.

10. In our opinion and according to the information and explanations given to us, the particulars of contracts or

arrangements referred to in section 301 of the Companies Act, 1956 have been entered in the register

required to be maintained under that section. In our opinion and according to the information and

explanations given to us, the transactions made in pursuance of contracts and arrangements entered in the

register maintained under section 301 of the Companies Act, 1956 and exceeding the value of rupees five

lakhs with any party during the year have been made at prices which are reasonable having regard to the

prevailing market prices at the relevant time.

11. The Company has not accepted any deposits from the public.

12. In our opinion, the Company has an internal audit system commensurate with the size and nature of its

business.

13. The Central Government has not prescribed the maintenance of cost records under clause (d) of sub-

section (1) of section 209 of the Companies Act, 1956 for any of the services rendered by the Company.

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Spandana Annual Report 2007-08 55

14. According to the information and explanations given to us and on the basis of our examination of the

records of the Company, the Company has been generally regular in depositing amounts

deducted/accrued in the books of account in respect of undisputed statutory dues including Provident

Fund, Employees' State Insurance, Income-tax, Sales-tax, Wealth tax, Service tax, Custom duty, Excise duty

and other material statutory dues with the appropriate authorities during the year.

Further, since the Central Government has till date not prescribed the amount of cess payable under

section 441A of the Companies Act, 1956, we are not in a position to comment upon the regularity or

otherwise of the Company in depositing the same.

According to the information and explanations given to us, no undisputed amounts payable in respect of

Provident Fund, Employees' State Insurance, Income-tax, Sales-tax, Wealth tax, Service tax, Customs duty,

Excise duty, Cess and other material statutory dues were in arrears as at 31 March 2008 for a period of more

than six months from the date they became payable.

As explained to us, the Company did not have any dues on account of Investor Education and Protection

Fund, Income tax, Sales tax, Wealth tax, Service tax, Customs duty, Excise duty and Cess which have not been

deposited with the appropriate authorities on account of any dispute.

15. The Company does not have any accumulated losses at the end of the financial year and has not incurred

cash losses in the financial year and in the immediately preceding financial year.

16. In our opinion and according to the information and explanations given to us, the Company has not

defaulted in repayment of dues to its bankers or to any financial institutions. The Company did not have

any outstanding debentures during the year.

17. The Company has not granted any loans and advances on the basis of security by way of pledge of shares,

debentures and other securities.

18. In our opinion, and according to the information and explanations given to us, the Company is not a chit

fund or a nidhi/ mutual benefit fund/ society.

for B S R & Company

Chartered Accountants

Sd/-

Zubin Shekary

Partner

Membership No: 48814

Place: Hyderabad

Date: 02-07-2008

ANNEXURE I TO THE AUDITORS' REPORT

Annexure referred to in paragraph 3 of our report of even date to the members of Spandana Sphoorty Financial

Limited (“the Company”) (formerly Spandana Sphoorty Innovative Financial Limited):

1. The Company has maintained proper records showing full particulars, including quantitative details and

situation of fixed assets.

2. The Company has a regular programme of physical verification of its fixed assets by which all fixed assets are

verified every year. In our opinion, the periodicity of physical verification is reasonable having regard to the

size of the Company and the nature of its assets. In accordance with this programme, fixed assets were

verified during the year and no material discrepancies were noted on such verification.

3. Fixed assets disposed during the year were not substantial, and therefore, do not affect the going concern

assumption.

4. The Company is a Non Banking Finance Company ('NBFC'), engaged in the business of proving loans.

Accordingly, it does not hold any physical inventories. Thus, paragraph 4(ii) of the Order is not applicable.

5. The Company has not granted any loans, secured or unsecured, to companies, firms or other parties covered

in the register maintained under section 301 of the Companies Act, 1956.

6. The Company has taken loans from companies and other parties covered in the register maintained under

section 301 of the Companies Act, 1956. The maximum amount outstanding during the year was Rs

432,616,965 and the year-end balance of such loans was Rs 200,000,000.

7. In our opinion, the rate of interest and other terms and conditions on which loans have been taken from

companies, firms or other parties listed in the register maintained under section 301 of the Companies Act,

1956 are not, prima facie, prejudicial to the interest of the company.

8. In the case of loans taken from companies and other parties listed in the register maintained under section

301, the company has been regular in repaying the principal amounts as stipulated and in the payment of

interest.

9. In our opinion and according to the information and explanations given to us, there is an adequate internal

control system commensurate with the size of the Company and the nature of its business with regard to the

purchase of fixed assets and with regard to the sale of services. The activities of the Company do not involve

purchase of inventory and the sale of goods. We have not observed any major weakness in the internal

control system during the course of our audit.

10. In our opinion and according to the information and explanations given to us, the particulars of contracts or

arrangements referred to in section 301 of the Companies Act, 1956 have been entered in the register

required to be maintained under that section. In our opinion and according to the information and

explanations given to us, the transactions made in pursuance of contracts and arrangements entered in the

register maintained under section 301 of the Companies Act, 1956 and exceeding the value of rupees five

lakhs with any party during the year have been made at prices which are reasonable having regard to the

prevailing market prices at the relevant time.

11. The Company has not accepted any deposits from the public.

12. In our opinion, the Company has an internal audit system commensurate with the size and nature of its

business.

13. The Central Government has not prescribed the maintenance of cost records under clause (d) of sub-

section (1) of section 209 of the Companies Act, 1956 for any of the services rendered by the Company.

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Spandana Annual Report 2007-08 57

ANNEXURE II TO THE AUDITORS' REPORT

To the members of

SPANDANA SPHOORTY FINANCIAL LIMITED

(formerly Spandana Sphoorty Innovative Financial Services Limited)

We have audited the attached balance sheet of Spandana Sphoorty Financial Limited (formerly

Spandana Sphoorty Innovative Financial Services Limited) (the Comp as at 31 March 2008 and profit

and loss account for the year ended on that date annexed thereto.

Further to our audit report of even date issued under section 224 the Companies Act, 1956, as required

by the Non Banking Finance Companies Auditors' report (Reserve Bank) Directions, 1998 based on the

information and explanations given to us and based on the records produced, we state below a

statement of matters specified in paragraph 3 of the said Directions.

1 The Company has obtained a certificate of registration from Reserve Bank of India dated

11 January 2008 as a Non Banking Finance Company without accepting public deposit. The

registration number is N-09.00414.

2 The Board of Directors has passed a resolution in the meeting held on 23 April 2007 for not

acceptance of public deposits and the Company has not accepted any public deposits during the

year ended 31 March 2008.

3 The Company has complied with prudential norms relating to income recognition, accounting

standards, asset classification and provisioning for bad and doubtful debts as applicable.

for B S R & CompanyChartered Accountants

Sd/-

Zubin Shekary

Partner

Membership No: 48814

Place: Hyderabad

Date : 02-07-2008

SOURCES OF FUNDS Schedule 31 March 2008 31 March 2007

Shareholders' funds

Share capital 1 433,550,920 86,310,000

Reserves and surplus 2 450,365,028 64,713,766

883,915,948 151,023,766

Loan funds

Secured loans 3 4,725,953,373 2,751,301,019

Unsecured loans (Subordinated debt) 200,000,000 194,500,000

Deferred tax liability, net 2,811,177 2,244,139

5,812,680,498 3,099,068,924

APPLICATION OF FUNDS

Fixed assets 4

Gross block 54,754,957 33,347,995

Less: Accumulated depreciation 17,831,108 8,921,731

Net block 36,923,849 24,426,264

Capital Work in Progress 1,021,033 “

37,944,882 24,426,264

Investments 5 14,245,685 6,333,000

Current assets, loans and advances

Cash and bank balances 6 1,012,615,766 448,016,094

Loans and advances 7 4,882,683,751 2,698,322,198

Other current assets 8 77,257,822 28,941,259

5,972,557,339 3,175,279,552

Current liabilities and provisions

Current liabilities 9 44,868,948 92,957,155

Provisions 10 167,298,461 14,307,889

212,167,409 107,265,045

Net current assets 5,760,389,930 3,068,014,507

Miscellaneous expenditure 11 100,001 295,153

(to the extent not written off ) 5,812,680,498 3,099,068,924

Significant accounting policies 18

Notes to accounts 19

The Schedules referred to above form an integral part of the Balance Sheet

As per our report attachedfor BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/- Sd/-Zubin Shekary K.V.R Subba Rao Managing Director Director PartnerMembership No. 48814

Hyderabad Sd/-02, July 2008 Company Secretary

Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited)

Balance Sheet as at 31 March 2008 (All amounts in Indian rupees, except share data)

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Spandana Annual Report 2007-08 57

ANNEXURE II TO THE AUDITORS' REPORT

To the members of

SPANDANA SPHOORTY FINANCIAL LIMITED

(formerly Spandana Sphoorty Innovative Financial Services Limited)

We have audited the attached balance sheet of Spandana Sphoorty Financial Limited (formerly

Spandana Sphoorty Innovative Financial Services Limited) (the Comp as at 31 March 2008 and profit

and loss account for the year ended on that date annexed thereto.

Further to our audit report of even date issued under section 224 the Companies Act, 1956, as required

by the Non Banking Finance Companies Auditors' report (Reserve Bank) Directions, 1998 based on the

information and explanations given to us and based on the records produced, we state below a

statement of matters specified in paragraph 3 of the said Directions.

1 The Company has obtained a certificate of registration from Reserve Bank of India dated

11 January 2008 as a Non Banking Finance Company without accepting public deposit. The

registration number is N-09.00414.

2 The Board of Directors has passed a resolution in the meeting held on 23 April 2007 for not

acceptance of public deposits and the Company has not accepted any public deposits during the

year ended 31 March 2008.

3 The Company has complied with prudential norms relating to income recognition, accounting

standards, asset classification and provisioning for bad and doubtful debts as applicable.

for B S R & CompanyChartered Accountants

Sd/-

Zubin Shekary

Partner

Membership No: 48814

Place: Hyderabad

Date : 02-07-2008

SOURCES OF FUNDS Schedule 31 March 2008 31 March 2007

Shareholders' funds

Share capital 1 433,550,920 86,310,000

Reserves and surplus 2 450,365,028 64,713,766

883,915,948 151,023,766

Loan funds

Secured loans 3 4,725,953,373 2,751,301,019

Unsecured loans (Subordinated debt) 200,000,000 194,500,000

Deferred tax liability, net 2,811,177 2,244,139

5,812,680,498 3,099,068,924

APPLICATION OF FUNDS

Fixed assets 4

Gross block 54,754,957 33,347,995

Less: Accumulated depreciation 17,831,108 8,921,731

Net block 36,923,849 24,426,264

Capital Work in Progress 1,021,033 “

37,944,882 24,426,264

Investments 5 14,245,685 6,333,000

Current assets, loans and advances

Cash and bank balances 6 1,012,615,766 448,016,094

Loans and advances 7 4,882,683,751 2,698,322,198

Other current assets 8 77,257,822 28,941,259

5,972,557,339 3,175,279,552

Current liabilities and provisions

Current liabilities 9 44,868,948 92,957,155

Provisions 10 167,298,461 14,307,889

212,167,409 107,265,045

Net current assets 5,760,389,930 3,068,014,507

Miscellaneous expenditure 11 100,001 295,153

(to the extent not written off ) 5,812,680,498 3,099,068,924

Significant accounting policies 18

Notes to accounts 19

The Schedules referred to above form an integral part of the Balance Sheet

As per our report attachedfor BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/- Sd/-Zubin Shekary K.V.R Subba Rao Managing Director Director PartnerMembership No. 48814

Hyderabad Sd/-02, July 2008 Company Secretary

Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited)

Balance Sheet as at 31 March 2008 (All amounts in Indian rupees, except share data)

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Spandana Annual Report 2007-08 59

Cash flows from operating activities 31 March 2008 31 March 2007

Profit before tax 459,647,302 42,575,401

Adjustments:

Depreciation 9,196,969 6,333,598

Provisions and Write Offs 74,863,567 88,727,617

Interest and Finance Charges 416,527,325 259,740,361

Interest income (23,397,049) (5,058,032)

Profit on sale of assets (143,485) (25,473)

Preliminary expenditure written-off 195,152 195,152

Operating cash flows before working capital changes and other assets 936,889,781 392,488,624

(Increase) / decrease in current assets (37,312,720) 74,791,971

Increase in loans and advances (2,189,481,100) (1,636,737,843)

(Decrease)/Increase in current liabilities and provisions (50,722,043) (107,224,732)

Cash generated from operations (1,340,626,082) (1,276,681,980)

Income taxes paid, net (108,987,095) (14,175,254)

Net cash provided by operating activities (1,449,613,177) (1,290,857,234)

Cash flows from investing activities

Purchase of fixed assets (23,213,402) (15,125,098)

Proceeds from sale of fixed assets 641,299 335,000

Purchase of investments (7,912,685) -

Interest received 10,937,274 4,742,180

Income from mutual funds 1,348,100 315,852

Net cash provided by / (used in) investing activities (18,199,414) (9,732,066)

Cash flows from financing activities

Proceeds from issuance of share capital (net of share issue expenses) 463,588,445 -

Government grant received - 7,000,000

Proceeds/(repayment) of unsecured loans 5,500,000 -

Proceeds from long-term borrowings 1,974,652,353 1,687,788,740

Dividends paid (including dividend tax) 0 984,150

Interest paid -411328535 -259740362

Net cash provided by / (used in) financing activities 2,032,412,263 1,434,064,228

Net increase in cash and cash equivalents 564,599,672 133,474,928

Cash and cash equivalents at the beginning of the year (Note 1) 448,016,094 314,541,166

Cash and cash equivalents at the end of the year 1,012,615,766 448,016,094

Spandana Sphoorty Financial Limited(formerly Spandana Sphoorty Innovative Financial Services Limited)

Cash flow statement for the year ended 31 March 2008(All amounts in Indian rupees, except share data)

Schedule 31 March 2008 31 March 2007

Income

Income from operations 12 1,133,813,613 469,440,563

Other income 13 140,682,883 26,540,691

1,274,496,496 495,981,254

Expenditure

Financial expenses 14 416,527,325 148,001,612

Personnel expenses 15 232,969,484 143,224,705

Operating and other expenses 16 81,096,698 66,923,170

Depreciation 9,196,969 6,333,598

Provisions and write offs 17 74,863,567 88,727,617

Preliminary expenses written-off 195,152 195,152

814,849,194 453,405,853

Profit before tax 459,647,302 42,575,401

Provision for tax 189,007,555 16,419,393

Current tax 187,531,050 13,873,405

Deferred tax expense/(benefit) 1,254,981 2,244,139

Fringe benefit tax 221,524 301,849

Profit after tax 270,639,748 26,156,008

Balance in Profit and Loss Account brought forward -

-

Amount available for appropriation 270,639,748 26,156,008

Appropriations

Transfer to Statutory reserve 54,127,950 5,741,981

Provision for Dividends - (863,100)

Provision for Dividend Tax - (121,049)

Balance carried to Balance Sheet 216,511,798 21,398,176

Earnings per share

Basic and diluted - Par value Rs.10 per share 28.68 2.58

Significant accounting policies

Notes to accountsThe Schedules referred to above form an integral part of the Profit and Loss Account

As per our report attachedfor BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/- Sd/-Zubin Shekary K.V.R Subba Rao Managing Director Director PartnerMembership No.: 48814

Hyderabad Sd/-02, July 2008 Company Secretary

Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited)

Profit and Loss Account for the year ended 31 March 2008 (All amounts in Indian rupees, except share data)

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Spandana Annual Report 2007-08 59

Cash flows from operating activities 31 March 2008 31 March 2007

Profit before tax 459,647,302 42,575,401

Adjustments:

Depreciation 9,196,969 6,333,598

Provisions and Write Offs 74,863,567 88,727,617

Interest and Finance Charges 416,527,325 259,740,361

Interest income (23,397,049) (5,058,032)

Profit on sale of assets (143,485) (25,473)

Preliminary expenditure written-off 195,152 195,152

Operating cash flows before working capital changes and other assets 936,889,781 392,488,624

(Increase) / decrease in current assets (37,312,720) 74,791,971

Increase in loans and advances (2,189,481,100) (1,636,737,843)

(Decrease)/Increase in current liabilities and provisions (50,722,043) (107,224,732)

Cash generated from operations (1,340,626,082) (1,276,681,980)

Income taxes paid, net (108,987,095) (14,175,254)

Net cash provided by operating activities (1,449,613,177) (1,290,857,234)

Cash flows from investing activities

Purchase of fixed assets (23,213,402) (15,125,098)

Proceeds from sale of fixed assets 641,299 335,000

Purchase of investments (7,912,685) -

Interest received 10,937,274 4,742,180

Income from mutual funds 1,348,100 315,852

Net cash provided by / (used in) investing activities (18,199,414) (9,732,066)

Cash flows from financing activities

Proceeds from issuance of share capital (net of share issue expenses) 463,588,445 -

Government grant received - 7,000,000

Proceeds/(repayment) of unsecured loans 5,500,000 -

Proceeds from long-term borrowings 1,974,652,353 1,687,788,740

Dividends paid (including dividend tax) 0 984,150

Interest paid -411328535 -259740362

Net cash provided by / (used in) financing activities 2,032,412,263 1,434,064,228

Net increase in cash and cash equivalents 564,599,672 133,474,928

Cash and cash equivalents at the beginning of the year (Note 1) 448,016,094 314,541,166

Cash and cash equivalents at the end of the year 1,012,615,766 448,016,094

Spandana Sphoorty Financial Limited(formerly Spandana Sphoorty Innovative Financial Services Limited)

Cash flow statement for the year ended 31 March 2008(All amounts in Indian rupees, except share data)

Schedule 31 March 2008 31 March 2007

Income

Income from operations 12 1,133,813,613 469,440,563

Other income 13 140,682,883 26,540,691

1,274,496,496 495,981,254

Expenditure

Financial expenses 14 416,527,325 148,001,612

Personnel expenses 15 232,969,484 143,224,705

Operating and other expenses 16 81,096,698 66,923,170

Depreciation 9,196,969 6,333,598

Provisions and write offs 17 74,863,567 88,727,617

Preliminary expenses written-off 195,152 195,152

814,849,194 453,405,853

Profit before tax 459,647,302 42,575,401

Provision for tax 189,007,555 16,419,393

Current tax 187,531,050 13,873,405

Deferred tax expense/(benefit) 1,254,981 2,244,139

Fringe benefit tax 221,524 301,849

Profit after tax 270,639,748 26,156,008

Balance in Profit and Loss Account brought forward -

-

Amount available for appropriation 270,639,748 26,156,008

Appropriations

Transfer to Statutory reserve 54,127,950 5,741,981

Provision for Dividends - (863,100)

Provision for Dividend Tax - (121,049)

Balance carried to Balance Sheet 216,511,798 21,398,176

Earnings per share

Basic and diluted - Par value Rs.10 per share 28.68 2.58

Significant accounting policies

Notes to accountsThe Schedules referred to above form an integral part of the Profit and Loss Account

As per our report attachedfor BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/- Sd/-Zubin Shekary K.V.R Subba Rao Managing Director Director PartnerMembership No.: 48814

Hyderabad Sd/-02, July 2008 Company Secretary

Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited)

Profit and Loss Account for the year ended 31 March 2008 (All amounts in Indian rupees, except share data)

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Spandana Annual Report 2007-08 61

Notes:

1. Cash and cash equivalents comprise: 31 March 2008 31 March 2007

Cash on hand 49,588,479 33,684,393

Balances in

Current accounts 205,377,996 178,531,744

Deposit accounts 757,649,291 235,799,957

1,012,615,766 448,016,094

As per our report attached

for BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/-

Zubin Shekary Managing Director Director

Partner

Membership No.: 48814

Hyderabad Sd/-

02, July 2008 Company Secretary

Spandana Sphoorty Financial Limited(formerly Spandana Sphoorty Innovative Financial Services Limited)

(All amounts in Indian rupees, except share data)

Schedules to the Accounts

Schedule 1

Share capital 31 March 2008 31 March 2007

Authorised

10,000,000 Equity Shares of Rs. 10/- each 100,000,000 100,000,000

40,000,000 Preference Shares of Rs. 10/- each 400,000,000 -

Previous Year - 10,000,000 Equity Shares of Rs. 10/- each

Issued, subscribed and paid-up

9,839,051 Equity shares (Previous years 8,631,000)

of Rs. 10- each fully paid up (includes 1,208,051

Equity shares of Rs. 10/- issued during

the current year 2007-08) 98,390,510 8,631,000

33,516,041 Compulsorily Convertible Preference Shares

Rs. 10- each fully paid up 335,160,410 -

433,550,920 86,310,000

Schedule 2

Reserves and surplus 31 March 2008 31 March 2007

General reserve

At the commencement of the year 24,616,667 3,218,491

Less: Gratuity Provision (Transition) 1,336,011

Add: Transfer from Profit and Loss Account - 21,398,176

23,280,656 24,616,667

Securities Premium Reserve

Share Premium (Issue of Compulsorily

Convertiable Preferance Shares) 127,884,279 -

Less: Share issue expenses 11,536,754

116,347,525 -

Capital reserve

Grant received from SIDBI 7,000,000 7,000,000

Statutory reserve

At the commencement of the year 33,097,099 27,355,118

Add: Transfer from Profit and Loss Account 54,127,950 5,741,981

87,225,049 33,097,099

Balance in Profit and Loss Account 216,511,798 -

450,365,028 64,713,766

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Spandana Annual Report 2007-08 61

Notes:

1. Cash and cash equivalents comprise: 31 March 2008 31 March 2007

Cash on hand 49,588,479 33,684,393

Balances in

Current accounts 205,377,996 178,531,744

Deposit accounts 757,649,291 235,799,957

1,012,615,766 448,016,094

As per our report attached

for BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/-

Zubin Shekary Managing Director Director

Partner

Membership No.: 48814

Hyderabad Sd/-

02, July 2008 Company Secretary

Spandana Sphoorty Financial Limited(formerly Spandana Sphoorty Innovative Financial Services Limited)

(All amounts in Indian rupees, except share data)

Schedules to the Accounts

Schedule 1

Share capital 31 March 2008 31 March 2007

Authorised

10,000,000 Equity Shares of Rs. 10/- each 100,000,000 100,000,000

40,000,000 Preference Shares of Rs. 10/- each 400,000,000 -

Previous Year - 10,000,000 Equity Shares of Rs. 10/- each

Issued, subscribed and paid-up

9,839,051 Equity shares (Previous years 8,631,000)

of Rs. 10- each fully paid up (includes 1,208,051

Equity shares of Rs. 10/- issued during

the current year 2007-08) 98,390,510 8,631,000

33,516,041 Compulsorily Convertible Preference Shares

Rs. 10- each fully paid up 335,160,410 -

433,550,920 86,310,000

Schedule 2

Reserves and surplus 31 March 2008 31 March 2007

General reserve

At the commencement of the year 24,616,667 3,218,491

Less: Gratuity Provision (Transition) 1,336,011

Add: Transfer from Profit and Loss Account - 21,398,176

23,280,656 24,616,667

Securities Premium Reserve

Share Premium (Issue of Compulsorily

Convertiable Preferance Shares) 127,884,279 -

Less: Share issue expenses 11,536,754

116,347,525 -

Capital reserve

Grant received from SIDBI 7,000,000 7,000,000

Statutory reserve

At the commencement of the year 33,097,099 27,355,118

Add: Transfer from Profit and Loss Account 54,127,950 5,741,981

87,225,049 33,097,099

Balance in Profit and Loss Account 216,511,798 -

450,365,028 64,713,766

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Spandana Annual Report 2007-08 63

Schedule 3

Secured Loans 31 March 2008 31 March 2007

Term Loans

From Banks (Secured by Book Debts and Cash Collateral )

ING Vysya Bank 783,674,892 716,458,256

ICICI Bank 600,000,000 -

Indian Overseas Bank 569,051,883 682,154,008

Punjab and Sind Bank 486,110,000 -

IDBI Bank 480,000,000 200,000,000

HDFC Bank 334,160,119 292,500,000

YES Bank 225,000,000 50,000,000

AXIS Bank 200,000,000 -

Bank of Rajasthan 140,000,000 -

Karnataka Bank 96,814,042 -

Standard Chartered Bank 40,000,000 -

BNP Paribas 37,500,000 -

HSBC Bank - 35,000,000

3,992,310,936 1,976,112,264

From others (Secured by Book Debts)

Small Industries Development Bank of India (SIDBI) 286,472,400 703,383,200

Maanaveeya Holdings and Investments Pvt. Ltd. 280,000,000 -

Friends of 'WWB, India 118,888,879 71,805,555

685,361,279 775,188,755

Other Loans

HDFC Bank, Cash Credit 48,281,158 -

4,725,953,373 2,751,301,019

Schedule 4 "See page 66"

Schedule 5

Investments in Subsidiaries (Unquoted) 31 March 2008 31 March 2007

631,449 Equity shares (FV Rs.10)

in M G Brothers Finance Limited 7,912,685 -

503,000 Equity shares (FV Rs.10) (Previous years 503,000)

in Spandana Sphoorty Marketing Services Private Limited 5,533,000 5,533,000

80,000 Equity shares (FV Rs.10) (Previous years 80,000)

in Spandana Sphoorty Chit Funds Private Limited 800,000 800,000

14,245,685 6,333,000

Schedule 6

Cash and bank balances 31 March 2008 31 March 2007

Cash on hand 49,588,479 33,684,393

Balances with Scheduled banks

Current accounts 205,377,996 178,531,744

Deposit accounts * 757,649,291 235,799,957

*lien marked against term loans from banks

and in the form of cash colleteral for assigned loans

1,012,615,766 448,016,094

Schedule 7

Loans and advances 31 March 2008 31 March 2007

Opening Loan outstanding 3,916,014,766 2,891,963,111

Add: Loans disbursed during the Year 11,923,068,375 6,558,118,000

15,839,083,141 9,450,081,111

Less: Loans recovered during the year 8,603,865,431 5,344,467,365

Portfolio transferred (50,843,560) 59,830,060

Portfolio written off 5,119,547 129,768,920

8,558,141,418 5,534,066,345

Loans outstanding at the end of the year 7,280,941,722 3,916,014,766

Less: Managed portfolio 2,092,536,100 1,060,488,902

Loans and advances outstanding 5,220,816,063 2,855,525,864

Less: Additioanl Loan Recovery 338,132,312 157,203,666

4,882,683,751 2,698,322,198

Schedule 8

Other Current assets

Interest accrued but not due on loans 26,111,472 6,373,254

Interest accrued on Term Deposits 16,611,774 5,500,099

Income Tax Refund receivable 5,997,410 3,741,815

Rent deposits 9,091,331 3,704,958

Staff Loans 5,969,317 5,340,072

Tax Deducted at Source 3,345,553 970,801

Advance given to staff for expenses 550,512 407,194

Amount pending with court 320,000 320,000

Commission receivable from Western Union 80,889 32,926

Remittances receivable from Western Union 1,165,758 507,682

Fringe Benefit tax (Net) 58,912 166,746

Others 7,954,893 1,875,713

Total 77,257,822 28,941,259

Schedule 9

Current liabilities 31 March 2008 31 March 2007

Interest accrued but not due on borrowings 10,909,431 5,710,641

Amount transferrable to Bajaj Allianz 9,199,627 198,395

Tax Deducted at Source

Outstanding Expenses 23,019,956 18,567,965

Add Audit Fees

Other current liabilities 1,739,934 91,697

Security Deposits from borrowers - 60,989,195

Interest payable on security deposits - 7,399,262

44,868,948 92,957,155

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Spandana Annual Report 2007-08 63

Schedule 3

Secured Loans 31 March 2008 31 March 2007

Term Loans

From Banks (Secured by Book Debts and Cash Collateral )

ING Vysya Bank 783,674,892 716,458,256

ICICI Bank 600,000,000 -

Indian Overseas Bank 569,051,883 682,154,008

Punjab and Sind Bank 486,110,000 -

IDBI Bank 480,000,000 200,000,000

HDFC Bank 334,160,119 292,500,000

YES Bank 225,000,000 50,000,000

AXIS Bank 200,000,000 -

Bank of Rajasthan 140,000,000 -

Karnataka Bank 96,814,042 -

Standard Chartered Bank 40,000,000 -

BNP Paribas 37,500,000 -

HSBC Bank - 35,000,000

3,992,310,936 1,976,112,264

From others (Secured by Book Debts)

Small Industries Development Bank of India (SIDBI) 286,472,400 703,383,200

Maanaveeya Holdings and Investments Pvt. Ltd. 280,000,000 -

Friends of 'WWB, India 118,888,879 71,805,555

685,361,279 775,188,755

Other Loans

HDFC Bank, Cash Credit 48,281,158 -

4,725,953,373 2,751,301,019

Schedule 4 "See page 66"

Schedule 5

Investments in Subsidiaries (Unquoted) 31 March 2008 31 March 2007

631,449 Equity shares (FV Rs.10)

in M G Brothers Finance Limited 7,912,685 -

503,000 Equity shares (FV Rs.10) (Previous years 503,000)

in Spandana Sphoorty Marketing Services Private Limited 5,533,000 5,533,000

80,000 Equity shares (FV Rs.10) (Previous years 80,000)

in Spandana Sphoorty Chit Funds Private Limited 800,000 800,000

14,245,685 6,333,000

Schedule 6

Cash and bank balances 31 March 2008 31 March 2007

Cash on hand 49,588,479 33,684,393

Balances with Scheduled banks

Current accounts 205,377,996 178,531,744

Deposit accounts * 757,649,291 235,799,957

*lien marked against term loans from banks

and in the form of cash colleteral for assigned loans

1,012,615,766 448,016,094

Schedule 7

Loans and advances 31 March 2008 31 March 2007

Opening Loan outstanding 3,916,014,766 2,891,963,111

Add: Loans disbursed during the Year 11,923,068,375 6,558,118,000

15,839,083,141 9,450,081,111

Less: Loans recovered during the year 8,603,865,431 5,344,467,365

Portfolio transferred (50,843,560) 59,830,060

Portfolio written off 5,119,547 129,768,920

8,558,141,418 5,534,066,345

Loans outstanding at the end of the year 7,280,941,722 3,916,014,766

Less: Managed portfolio 2,092,536,100 1,060,488,902

Loans and advances outstanding 5,220,816,063 2,855,525,864

Less: Additioanl Loan Recovery 338,132,312 157,203,666

4,882,683,751 2,698,322,198

Schedule 8

Other Current assets

Interest accrued but not due on loans 26,111,472 6,373,254

Interest accrued on Term Deposits 16,611,774 5,500,099

Income Tax Refund receivable 5,997,410 3,741,815

Rent deposits 9,091,331 3,704,958

Staff Loans 5,969,317 5,340,072

Tax Deducted at Source 3,345,553 970,801

Advance given to staff for expenses 550,512 407,194

Amount pending with court 320,000 320,000

Commission receivable from Western Union 80,889 32,926

Remittances receivable from Western Union 1,165,758 507,682

Fringe Benefit tax (Net) 58,912 166,746

Others 7,954,893 1,875,713

Total 77,257,822 28,941,259

Schedule 9

Current liabilities 31 March 2008 31 March 2007

Interest accrued but not due on borrowings 10,909,431 5,710,641

Amount transferrable to Bajaj Allianz 9,199,627 198,395

Tax Deducted at Source

Outstanding Expenses 23,019,956 18,567,965

Add Audit Fees

Other current liabilities 1,739,934 91,697

Security Deposits from borrowers - 60,989,195

Interest payable on security deposits - 7,399,262

44,868,948 92,957,155

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Spandana Annual Report 2007-08 65

Schedule 10

Provisions 31 March 2008 31 March 2007

Provision for taxation [net of advance tax Rs. 95,000,000 ] 92,531,050 13,873,405

Provision on Standard Assets 70,178,504 434,484

Provision for gratuity 4,588,907 -

167,298,461 14,307,889

Schedule 11

Miscellaneous expenditure 31 March 2008 31 March 2007

(to the extent not written-off or adjusted)

Opening Balance 295,153 490,305

Additions during the year - -

Less:Amortised during the year 195,152 195,152

100,001 295,153

Schedule 12

Income from operations 31 March 2008 31 March 2007

Interest income from portfolio loans 1,083,797,693 444,594,143

Group registration fees 50,015,920 24,846,420

1,133,813,613 469,440,563

Schedule 13

Other income 31 March 2008 31 March 2007

Interest on fixed deposits 17,039,215 4,742,180

[Tax deducted at source Rs. 3,210,350

(Previous year Rs. 962,254)]

Recovery from loans written off 40,724,694 20,406,693

Insurance facilitation charges 7,054,316 37,431

Commission on remittances 449,145 152,950

Income from asset assignment 67,646,604 -

Profit on sale of vehicles 143,485 25,473

Interest accrued on security deposits 5,009,733 -

Income from mutual fund investments 1,348,100 315,852

Miscellaneous income 1,267,592 860,112

140,682,883 26,540,691

Schedule 14

Financial Expenses 31 March 2008 31 March 2007

Interest

on term loans from banks 299,896,030 42,165,529

on term loans from financial institutions 77,030,893 65,910,311

on other loans 17,087,224 15,182,020

Processing fee and other charges 22,513,178 24,743,751

416,527,325 148,001,612

Schedule 15

Personnel expenses 31 March 2008 31 March 2007

Salaries, wages and bonus 210,635,752 128,170,067

Contribution to provident and other funds 8,346,615 6,823,255

Leave encashment 220,680 229,795

Gratuity 2,564,954 -

Staff welfare 11,201,483 8,001,588

232,969,484 143,224,705

Schedule 16

Operating and other expenses 31 March 2008 31 March 2007

Death Relief and Rehabilitation Assistance 24,614,674 24,217,286

Bank Charges 8,285,992 6,489,443

Office Rent and Electricity 19,990,824 12,344,584

Printing & Stationery 9,745,022 6,135,297

Franking charges - 5,530,631

Certification

Administration and other expenses 8,042,072 2,804,375

Postage & Telephone 2,922,739 2,139,755

Staff Recruitment and Training 2,820,674 1,977,219

Travelling Expenses 1,790,986 1,250,339

Rates & Taxes 534,644 322,495

Computers and Network maintenance 305,812 267,970

Professional charges 597,440 1,992,078

Sitting fees to Independent Directors 30,000 30,000

Others 264,129 585,179

Audit Fees 1,151,690 836,520

Certification

81,096,698 66,923,170

Schedule 17

Provisions and write offs 31 March 2008 31 March 2007

Standard Assets provision 69,744,020 7,910

Bad Debts written off 5,119,547 88,719,707

Total 74,863,567 88,727,617

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Spandana Annual Report 2007-08 65

Schedule 10

Provisions 31 March 2008 31 March 2007

Provision for taxation [net of advance tax Rs. 95,000,000 ] 92,531,050 13,873,405

Provision on Standard Assets 70,178,504 434,484

Provision for gratuity 4,588,907 -

167,298,461 14,307,889

Schedule 11

Miscellaneous expenditure 31 March 2008 31 March 2007

(to the extent not written-off or adjusted)

Opening Balance 295,153 490,305

Additions during the year - -

Less:Amortised during the year 195,152 195,152

100,001 295,153

Schedule 12

Income from operations 31 March 2008 31 March 2007

Interest income from portfolio loans 1,083,797,693 444,594,143

Group registration fees 50,015,920 24,846,420

1,133,813,613 469,440,563

Schedule 13

Other income 31 March 2008 31 March 2007

Interest on fixed deposits 17,039,215 4,742,180

[Tax deducted at source Rs. 3,210,350

(Previous year Rs. 962,254)]

Recovery from loans written off 40,724,694 20,406,693

Insurance facilitation charges 7,054,316 37,431

Commission on remittances 449,145 152,950

Income from asset assignment 67,646,604 -

Profit on sale of vehicles 143,485 25,473

Interest accrued on security deposits 5,009,733 -

Income from mutual fund investments 1,348,100 315,852

Miscellaneous income 1,267,592 860,112

140,682,883 26,540,691

Schedule 14

Financial Expenses 31 March 2008 31 March 2007

Interest

on term loans from banks 299,896,030 42,165,529

on term loans from financial institutions 77,030,893 65,910,311

on other loans 17,087,224 15,182,020

Processing fee and other charges 22,513,178 24,743,751

416,527,325 148,001,612

Schedule 15

Personnel expenses 31 March 2008 31 March 2007

Salaries, wages and bonus 210,635,752 128,170,067

Contribution to provident and other funds 8,346,615 6,823,255

Leave encashment 220,680 229,795

Gratuity 2,564,954 -

Staff welfare 11,201,483 8,001,588

232,969,484 143,224,705

Schedule 16

Operating and other expenses 31 March 2008 31 March 2007

Death Relief and Rehabilitation Assistance 24,614,674 24,217,286

Bank Charges 8,285,992 6,489,443

Office Rent and Electricity 19,990,824 12,344,584

Printing & Stationery 9,745,022 6,135,297

Franking charges - 5,530,631

Certification

Administration and other expenses 8,042,072 2,804,375

Postage & Telephone 2,922,739 2,139,755

Staff Recruitment and Training 2,820,674 1,977,219

Travelling Expenses 1,790,986 1,250,339

Rates & Taxes 534,644 322,495

Computers and Network maintenance 305,812 267,970

Professional charges 597,440 1,992,078

Sitting fees to Independent Directors 30,000 30,000

Others 264,129 585,179

Audit Fees 1,151,690 836,520

Certification

81,096,698 66,923,170

Schedule 17

Provisions and write offs 31 March 2008 31 March 2007

Standard Assets provision 69,744,020 7,910

Bad Debts written off 5,119,547 88,719,707

Total 74,863,567 88,727,617

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Spandana Annual Report 2007-08 67

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Schedules to the Accounts (continued)

Background

Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited) (“SSFL” or “the Company”) was incorporated on 10 March 2003 as a limited Company. The Company is engaged in the business of micro finance lending activities, following group lending methodology and providing small value unsecured group loans to the extent of Rs 15,000 to poor people and lower income group in urban and rural areas. The tenure of these loans is generally spread over fifty weeks; other services offered to the members of the Company include facilitating remittances and insurance. The Company also provides individual loans, small business loans, diary loans and tractor loans. The Company also acts as agent to manage group loans given on behalf of the Banks.

Schedule 18: Significant accounting policies

1. Basis of preparation of financial statements

The financial statements have been prepared and presented under the historical cost convention on the accrual basis of accounting in accordance with the Generally Accepted Accounting Principles (GAAP) in India and comply with the mandatory Accounting Standards ('AS') issued by the Institute of Chartered Accountants of India ('ICAI'), the relevant provisions of the Companies Act, 1956 ('the Act') and the relevant guidelines of Reserve Bank of India ('RBI') to the extent applicable to a non banking finance company. The financial statements are presented in Indian Rupees rounded off to the nearest rupee.

2. Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities on the date of the financial statements. Actual results could differ from those estimates. Any revision to accounting estimates is recognized prospectively in current and future periods.

3. Revenue Recognition

Interest income on loan portfolio (including interest on managed portfolio) is recognized in the profit and loss account on accrual basis using effective interest method except in the case of non-performing assets (“NPA's”) where it is recognized, upon realization, as per the prudential norms of RBI.

Group membership fee that are non-refundable in nature is recognized on upfront basis.

Interest on term deposits has been accrued on the time proportion basis, using the underlying interest rate.

Dividend income is accounted when the right to receive the dividend is established.

4. Assignment of certain Loan portfolio

During the year Company has entered into Assignment agreement with scheduled banks in respect of certain loan contracts, whereby underlying pool of Assets are transferred to these banks for a lump sum consideration. During the year, the company has assigned loan portfolio having book value of INR 864.3 million to Scheduled Bank. The Company has received a total consideration of INR 932.0 million arising out of such sale of loans through direct assignment. The difference between the consideration received and the book value of the loan portfolio assigned amounting to INR 67.7 millions has been accounted as a gain in the profit and loss account in the current year, as all the right to benefits specified in the contract have been unconditionally and irrevocably transferred to the Banks without any recourse obligation.

5. Classification of loan portfolio and provisioning policy

All loan exposures are classified as per RBI guidelines, into performing and non-performing assets (“NPAs”). Further, NPAs are classified into sub-standard, doubtful and loss assets in accordance with the extant Non-Banking Financial (Non-Deposit Accepting and Holding) Companies prudential Norms (Reserve Bank) Direction, 2007. The provisioning rates and classification criteria for NPAs, which are not lower than the rates prescribed in RBI guidelines, are given below:

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Spandana Annual Report 2007-08 67

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Schedules to the Accounts (continued)

Background

Spandana Sphoorty Financial Limited (formerly Spandana Sphoorty Innovative Financial Services Limited) (“SSFL” or “the Company”) was incorporated on 10 March 2003 as a limited Company. The Company is engaged in the business of micro finance lending activities, following group lending methodology and providing small value unsecured group loans to the extent of Rs 15,000 to poor people and lower income group in urban and rural areas. The tenure of these loans is generally spread over fifty weeks; other services offered to the members of the Company include facilitating remittances and insurance. The Company also provides individual loans, small business loans, diary loans and tractor loans. The Company also acts as agent to manage group loans given on behalf of the Banks.

Schedule 18: Significant accounting policies

1. Basis of preparation of financial statements

The financial statements have been prepared and presented under the historical cost convention on the accrual basis of accounting in accordance with the Generally Accepted Accounting Principles (GAAP) in India and comply with the mandatory Accounting Standards ('AS') issued by the Institute of Chartered Accountants of India ('ICAI'), the relevant provisions of the Companies Act, 1956 ('the Act') and the relevant guidelines of Reserve Bank of India ('RBI') to the extent applicable to a non banking finance company. The financial statements are presented in Indian Rupees rounded off to the nearest rupee.

2. Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities on the date of the financial statements. Actual results could differ from those estimates. Any revision to accounting estimates is recognized prospectively in current and future periods.

3. Revenue Recognition

Interest income on loan portfolio (including interest on managed portfolio) is recognized in the profit and loss account on accrual basis using effective interest method except in the case of non-performing assets (“NPA's”) where it is recognized, upon realization, as per the prudential norms of RBI.

Group membership fee that are non-refundable in nature is recognized on upfront basis.

Interest on term deposits has been accrued on the time proportion basis, using the underlying interest rate.

Dividend income is accounted when the right to receive the dividend is established.

4. Assignment of certain Loan portfolio

During the year Company has entered into Assignment agreement with scheduled banks in respect of certain loan contracts, whereby underlying pool of Assets are transferred to these banks for a lump sum consideration. During the year, the company has assigned loan portfolio having book value of INR 864.3 million to Scheduled Bank. The Company has received a total consideration of INR 932.0 million arising out of such sale of loans through direct assignment. The difference between the consideration received and the book value of the loan portfolio assigned amounting to INR 67.7 millions has been accounted as a gain in the profit and loss account in the current year, as all the right to benefits specified in the contract have been unconditionally and irrevocably transferred to the Banks without any recourse obligation.

5. Classification of loan portfolio and provisioning policy

All loan exposures are classified as per RBI guidelines, into performing and non-performing assets (“NPAs”). Further, NPAs are classified into sub-standard, doubtful and loss assets in accordance with the extant Non-Banking Financial (Non-Deposit Accepting and Holding) Companies prudential Norms (Reserve Bank) Direction, 2007. The provisioning rates and classification criteria for NPAs, which are not lower than the rates prescribed in RBI guidelines, are given below:

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Deferred tax

Deferred tax charge or benefit reflects the tax effects of timing differences between accounting income and taxable income for the year. The deferred tax charge or benefit and the corresponding deferred tax liabilities or assets are recognized using the tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets are recognized only to the extent there is reasonable certainty that the assets can be realized in future; however, where there is unabsorbed depreciation or carry forward of losses, deferred tax assets are recognized only if there is a virtual certainty of realization of such assets. Deferred tax assets are reviewed at each balance sheet date and written-down or written-up to reflect the amount that is reasonably/virtually certain to be realised.

Fringe benefit tax

Consequent to the introduction of Fringe Benefit Tax (“FBT”) effective 1 April 2005, the Company provides for and discloses the FBT in accordance with the provisions of Section 115 WC of the Income Tax Act, 1961 and guidance note on FBT issued by the ICAI.

10. Earnings per share

The basic and diluted earnings per share ('EPS') is computed by dividing the net profit after tax for the year attributable to equity shareholders by the weighted average number of equity shares outstanding during the year.

11. Provisions and contingent liabilities

The Company creates a provision when there is a present obligation as a result of an obligating event that probably requires an outflow of resources and a reliable estimate can be made of the amount for the obligation. A disclosure for a contingent liability is made when there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. Where there is a possible obligation or a present obligation that the likelihood of outflow of resource is remote, no provision or disclosure is made.

12. Impairment of assets

The Company assesses at each balance sheet date whether there is any indication that any assets forming part of its cash generating units may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. If such recoverable amount of the asset or the recoverable amount of the cash generating unit to which the asset belongs to is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognized in the profit and loss account. If at the balance sheet date, there is an indication that a previously assessed impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the reassessed recoverable amount subject to a maximum of depreciated historical cost.

Schedule 19: Notes to the accounts

1. During the year, Company has changed its method of accounting interest income from a flat interest rate method to an effective interest rate based on the internal rate of return as the Company believes that the change results in a more appropriate presentation of the underlying terms of the arrangement with the borrowers. The change in method of accounting has been effected to bring the financial statements in compliance with the requirement of Accounting Standard 9 “Revenue Recognition”. On account of such change the current year interest income has increased by Rs. 32,410,441.

Spandana Annual Report 2007-08 69

Past Classification General Individual Small Tractor Agri- Dairy Due days Loan Loan Business Loan Family Loan

Loan Loan

1 to 30 Standard 1% 1% 50% 1% 1% 1%

31 to 60 Sub standard 50% 1% 100% 1% 25% 50%

61 to 90 Sub standard 50% 25% 100% 20% 50% 50%

91 to 120 Sub standard 100% 50% 100% 40% 100% 100%

> 120 Doubtful 100% 100% 100% 100% 100% 100%

In addition to the specific provision on NPAs, the Company maintains general provision of 1% on outstanding balance of standard assets. The Company has not rescheduled/ restructured any loans during the year.

6. Fixed assets and depreciation

Fixed assets are carried at cost of acquisition less accumulated depreciation. The cost of fixed assets comprises the purchase price, taxes, duties, freight (net of rebates and discounts) and any other directly attributable costs of bringing the assets to their working condition for their intended use. Borrowing costs directly attributable to acquisition of those fixed assets which necessarily take a substantial period of time to get ready for their intended use are capitalized.

Advances paid towards the acquisition of fixed assets outstanding at each balance sheet date and the cost of fixed assets acquired but not ready for their intended use before such date are disclosed as capital work-in-progress.

Depreciation on fixed assets is provided using the written down method as per the rates of depreciation prescribed in Schedule XIV to the Companies Act, 1956. Depreciation is calculated on a pro-rata basis from / upto the month the assets are purchased / sold.

7. Investments

Investments that are readily realizable and intended to be held to the period of not more than a year are classified as current investments. Current investments are carried at lower of cost and fair value determined on individual investment basis. All other investments are classified as long term investments. Long term investments are carried at cost. Provision is recognized for any diminution in the value of investments, other than temporary.

8. Employee benefits

Contributions to gratuity fund (a defined benefit plan), determined by independent actuary at the balance sheet date are charged to profit and loss account.

Contributions payable to the recognized provident fund which is defined contribution schemes, is charged to the profit and loss account. All actuarial gains and losses arising during the year are recognized in the profit and loss account.

The service rules of the Company do not provide for the carry forward of the accumulated leave balance.

9. Income Tax

Income tax expense comprises current tax, deferred tax and fringe benefit tax.

Current tax

The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to the Company.

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Deferred tax

Deferred tax charge or benefit reflects the tax effects of timing differences between accounting income and taxable income for the year. The deferred tax charge or benefit and the corresponding deferred tax liabilities or assets are recognized using the tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax assets are recognized only to the extent there is reasonable certainty that the assets can be realized in future; however, where there is unabsorbed depreciation or carry forward of losses, deferred tax assets are recognized only if there is a virtual certainty of realization of such assets. Deferred tax assets are reviewed at each balance sheet date and written-down or written-up to reflect the amount that is reasonably/virtually certain to be realised.

Fringe benefit tax

Consequent to the introduction of Fringe Benefit Tax (“FBT”) effective 1 April 2005, the Company provides for and discloses the FBT in accordance with the provisions of Section 115 WC of the Income Tax Act, 1961 and guidance note on FBT issued by the ICAI.

10. Earnings per share

The basic and diluted earnings per share ('EPS') is computed by dividing the net profit after tax for the year attributable to equity shareholders by the weighted average number of equity shares outstanding during the year.

11. Provisions and contingent liabilities

The Company creates a provision when there is a present obligation as a result of an obligating event that probably requires an outflow of resources and a reliable estimate can be made of the amount for the obligation. A disclosure for a contingent liability is made when there is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. Where there is a possible obligation or a present obligation that the likelihood of outflow of resource is remote, no provision or disclosure is made.

12. Impairment of assets

The Company assesses at each balance sheet date whether there is any indication that any assets forming part of its cash generating units may be impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. If such recoverable amount of the asset or the recoverable amount of the cash generating unit to which the asset belongs to is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognized in the profit and loss account. If at the balance sheet date, there is an indication that a previously assessed impairment loss no longer exists, the recoverable amount is reassessed and the asset is reflected at the reassessed recoverable amount subject to a maximum of depreciated historical cost.

Schedule 19: Notes to the accounts

1. During the year, Company has changed its method of accounting interest income from a flat interest rate method to an effective interest rate based on the internal rate of return as the Company believes that the change results in a more appropriate presentation of the underlying terms of the arrangement with the borrowers. The change in method of accounting has been effected to bring the financial statements in compliance with the requirement of Accounting Standard 9 “Revenue Recognition”. On account of such change the current year interest income has increased by Rs. 32,410,441.

Spandana Annual Report 2007-08 69

Past Classification General Individual Small Tractor Agri- Dairy Due days Loan Loan Business Loan Family Loan

Loan Loan

1 to 30 Standard 1% 1% 50% 1% 1% 1%

31 to 60 Sub standard 50% 1% 100% 1% 25% 50%

61 to 90 Sub standard 50% 25% 100% 20% 50% 50%

91 to 120 Sub standard 100% 50% 100% 40% 100% 100%

> 120 Doubtful 100% 100% 100% 100% 100% 100%

In addition to the specific provision on NPAs, the Company maintains general provision of 1% on outstanding balance of standard assets. The Company has not rescheduled/ restructured any loans during the year.

6. Fixed assets and depreciation

Fixed assets are carried at cost of acquisition less accumulated depreciation. The cost of fixed assets comprises the purchase price, taxes, duties, freight (net of rebates and discounts) and any other directly attributable costs of bringing the assets to their working condition for their intended use. Borrowing costs directly attributable to acquisition of those fixed assets which necessarily take a substantial period of time to get ready for their intended use are capitalized.

Advances paid towards the acquisition of fixed assets outstanding at each balance sheet date and the cost of fixed assets acquired but not ready for their intended use before such date are disclosed as capital work-in-progress.

Depreciation on fixed assets is provided using the written down method as per the rates of depreciation prescribed in Schedule XIV to the Companies Act, 1956. Depreciation is calculated on a pro-rata basis from / upto the month the assets are purchased / sold.

7. Investments

Investments that are readily realizable and intended to be held to the period of not more than a year are classified as current investments. Current investments are carried at lower of cost and fair value determined on individual investment basis. All other investments are classified as long term investments. Long term investments are carried at cost. Provision is recognized for any diminution in the value of investments, other than temporary.

8. Employee benefits

Contributions to gratuity fund (a defined benefit plan), determined by independent actuary at the balance sheet date are charged to profit and loss account.

Contributions payable to the recognized provident fund which is defined contribution schemes, is charged to the profit and loss account. All actuarial gains and losses arising during the year are recognized in the profit and loss account.

The service rules of the Company do not provide for the carry forward of the accumulated leave balance.

9. Income Tax

Income tax expense comprises current tax, deferred tax and fringe benefit tax.

Current tax

The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to the Company.

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5. Segmental Reporting

The company operates in a single reportable segment i.e. lending to members, which have similar risk and returns for the purpose of AS-17 on 'segmental reporting' issued by ICAI. The Company does not have any reportable geographical segment.

6. Managerial remuneration :(Amount in Rs)

Particulars 31 March 2008 31 March 2007

Salary and allowances 3,291,893 3,656,809

Contribution to provident and other funds 18,720 18,720

Total 3,310,513 3,675,529

7. Legal and professional charges include auditors' remuneration as given below:

(Amount in Rs)

Particulars For the year ended For the year ended 31 March 2008 31 March 2007

Audit fees 926,970 674,160

Tax audit fees 224,720 112,360

Reimbursement of expenses - 50,000

Spandana Annual Report 2007-08 71

1. Provisions on Non Performing Assets (NPAs):

(Amount in Rs)

3. Contingent liability not provided for:

Guarantees given on managed and assigned portfolio

Sl. No. Name of the Banks Sanctioned Portfolio FLDG (%) Contingent Links Outstanding Liability

1 ICICI Bank (Managed Portfolio) 2,000,000,000 323,612,260, 6 - 8% 20,112,273

2 ICICI Bank 931,952,064 864,305,460 10% 93,195,207

3 HDFC Bank 700,001,240 404,816,720 10% 77,000,136

4 Centurion Bank of Punjab 500,000,000 399,801,660 8% 40,000,000

5 Development Credit Bank 100,000,000 100,000,000 10% 10,000,000

Total 4,231,953,304 2,092,536,100 240,307,616

Other contingent liabilities not acknowledged as debt by the Company is Rs 83,620,910.

4. Deferred Tax Liability and Provision for Income Taxes:(Amount in Rs)

For the year ended 31 March 2008 31 March 2007

Current tax 184,287,240 13,873,405

Deferred tax Asset -

Gratuity 687,942

Deferred tax Liability

Depreciation 3,499,119 2,244,139

Deferred tax Net 2,811,177 2,244,139

Fringe benefit tax 221,524 301,849

Asset classification Loan Portfolio Provision made Written off Balance Active Loans (in numbers)

Standard Portfolio 5,219,998,179 69,744,020 - 5,219,998,179 1,254,882

Sub Standard Portfolio 5,937,431 5,119,547 5,119,547 817,884 3,288

Doubtful Portfolio - - - -

Loss Asset - - - -

Total 5,225,935,610 74,812,371 5,119,547 5,220,816,062 1,258,170

Page 71: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

5. Segmental Reporting

The company operates in a single reportable segment i.e. lending to members, which have similar risk and returns for the purpose of AS-17 on 'segmental reporting' issued by ICAI. The Company does not have any reportable geographical segment.

6. Managerial remuneration :(Amount in Rs)

Particulars 31 March 2008 31 March 2007

Salary and allowances 3,291,893 3,656,809

Contribution to provident and other funds 18,720 18,720

Total 3,310,513 3,675,529

7. Legal and professional charges include auditors' remuneration as given below:

(Amount in Rs)

Particulars For the year ended For the year ended 31 March 2008 31 March 2007

Audit fees 926,970 674,160

Tax audit fees 224,720 112,360

Reimbursement of expenses - 50,000

Spandana Annual Report 2007-08 71

1. Provisions on Non Performing Assets (NPAs):

(Amount in Rs)

3. Contingent liability not provided for:

Guarantees given on managed and assigned portfolio

Sl. No. Name of the Banks Sanctioned Portfolio FLDG (%) Contingent Links Outstanding Liability

1 ICICI Bank (Managed Portfolio) 2,000,000,000 323,612,260, 6 - 8% 20,112,273

2 ICICI Bank 931,952,064 864,305,460 10% 93,195,207

3 HDFC Bank 700,001,240 404,816,720 10% 77,000,136

4 Centurion Bank of Punjab 500,000,000 399,801,660 8% 40,000,000

5 Development Credit Bank 100,000,000 100,000,000 10% 10,000,000

Total 4,231,953,304 2,092,536,100 240,307,616

Other contingent liabilities not acknowledged as debt by the Company is Rs 83,620,910.

4. Deferred Tax Liability and Provision for Income Taxes:(Amount in Rs)

For the year ended 31 March 2008 31 March 2007

Current tax 184,287,240 13,873,405

Deferred tax Asset -

Gratuity 687,942

Deferred tax Liability

Depreciation 3,499,119 2,244,139

Deferred tax Net 2,811,177 2,244,139

Fringe benefit tax 221,524 301,849

Asset classification Loan Portfolio Provision made Written off Balance Active Loans (in numbers)

Standard Portfolio 5,219,998,179 69,744,020 - 5,219,998,179 1,254,882

Sub Standard Portfolio 5,937,431 5,119,547 5,119,547 817,884 3,288

Doubtful Portfolio - - - -

Loss Asset - - - -

Total 5,225,935,610 74,812,371 5,119,547 5,220,816,062 1,258,170

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B) Other related parties with whom transactions have taken place during the year

Sl. Name of the Relation- Nature of 2007 - 08 2006 - 07No. transacting ship transactions

party Volume of Amount Volume of Amount transactions payable / transactions payable /

during (receivable) during (receivable) the year as at the year as at

31 March 2008 31 March 2008 1. MV Narendra Director Personal Loan 49,975 Nil 69,000 49,975

Prasad

9. Earnings Per Share (EPS)(Amount in Rs)

Particulars 31 March 2008 31 March 2007

EarningsProfit after tax 270,639,748 22,283,988

Shares Weighted average number of 9,435,264 8,631,000equity shares outstanding during the year

Basic EPS of par value of Rs.10 28.68 2.58

The Company has during the year issued 33,516,041 Compulsorily convertible preference shares which are convertible at a conversion price to be mutually agreed between the parties. Since the conversion price of these shares has not been fixed so far, the dilutive effect of the preference shares and its effect on the earnings per share is not determined.

10. Break up of loan portfolio

Loans and advances 31 March 2008 31 March 2007

Opening Loan outstanding 3,916,014,766 2,891,963,111

Add: Loans disbursed during the Year 11,923,068,375 6,558,118,000 15,839,083,141 9,450,081,111

Less: Loans recovered during the year 8,571,454,990 5,344,467,365

Portfolio transferred (50,843,560) 59,830,060

Portfolio written off 5,119,547 129,768,920 8,525,730,977 5,534,066,345

Loans outstanding at the end of the year 7,313,352,164 3,916,014,766

Less: Assigned portfolio 2,092,536,100 1,060,488,902

Balance 5,220,816,064 2,855,525,864

Spandana Annual Report 2007-08 73

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Page 73: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

B) Other related parties with whom transactions have taken place during the year

Sl. Name of the Relation- Nature of 2007 - 08 2006 - 07No. transacting ship transactions

party Volume of Amount Volume of Amount transactions payable / transactions payable /

during (receivable) during (receivable) the year as at the year as at

31 March 2008 31 March 2008 1. MV Narendra Director Personal Loan 49,975 Nil 69,000 49,975

Prasad

9. Earnings Per Share (EPS)(Amount in Rs)

Particulars 31 March 2008 31 March 2007

EarningsProfit after tax 270,639,748 22,283,988

Shares Weighted average number of 9,435,264 8,631,000equity shares outstanding during the year

Basic EPS of par value of Rs.10 28.68 2.58

The Company has during the year issued 33,516,041 Compulsorily convertible preference shares which are convertible at a conversion price to be mutually agreed between the parties. Since the conversion price of these shares has not been fixed so far, the dilutive effect of the preference shares and its effect on the earnings per share is not determined.

10. Break up of loan portfolio

Loans and advances 31 March 2008 31 March 2007

Opening Loan outstanding 3,916,014,766 2,891,963,111

Add: Loans disbursed during the Year 11,923,068,375 6,558,118,000 15,839,083,141 9,450,081,111

Less: Loans recovered during the year 8,571,454,990 5,344,467,365

Portfolio transferred (50,843,560) 59,830,060

Portfolio written off 5,119,547 129,768,920 8,525,730,977 5,534,066,345

Loans outstanding at the end of the year 7,313,352,164 3,916,014,766

Less: Assigned portfolio 2,092,536,100 1,060,488,902

Balance 5,220,816,064 2,855,525,864

Spandana Annual Report 2007-08 73

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Page 74: 202.65.155.131202.65.155.131/pdfs/Annual Report 2007-08.pdf · Spandana Annual Report 2007-08 CONTENTS 03 Preface???? The Context????????? About Spandana? * *???? Client Case Studies

Change in the fair value of plan assets

Particulars For the year ended 31 March 2008

Balance at April 1, 2007 -

Expected return on plan assets -

Actuarial gains -

Employer contributions -

Benefits paid -

Balance at March 31, 2008 Nil

Amount recognized in Balance Sheet

Particulars For the year ended 31 March 2008

Present value of funded obligations 4,588,907

Fair value on plan assets -

Net liability/(asset) 4,588,907

Amounts in the balance sheet For the year ended 31 March 2008

Provisions 4,588,907

Net liability/(asset) 4,588,907

Expense recognized in statement of profit and loss account

Particulars For the year ended 31 March 2008

Current service cost 2,564,954

Interest on defined benefit obligation 161,916

Expected return on plan assets -

Net actuarial loss/(gain) recognized in the year (161,916)

Amount included in “Personnel expense” 2,564,954

Asset Information

Category of Assets As at 31 March 2008

Insurer managed funds Nil

Total Nil

Summary of Actuarial Assumptions

Particulars For the year ended 31 March 2008

Discount Rate 8%

Expected return on plan assets 8%

Salary escalation rate 5% p.a.

Discount rate: The discount rate is based on the prevailing market yields of Indian government securities as at the balance sheet date for the estimated term of the obligations.

Expected rate of return on plan assets: This is based on the expectation of the average long term rate of return expected on investments of the fund during the estimated term of the obligations.

Salary escalation rate: The estimates of future salary increases considered takes into account the inflation, seniority, promotion and other relevant factors.

Spandana Annual Report 2007-08 75

11. Security Deposits and Additional loan recovery:

Security Deposits:

stDuring the year the Company has repaid the entire balance of Security Deposit outstanding as on 31 March

2007. The details of repayment/ adjustment of Security Deposit are given below:

For the year ended 31 March 2008 31 March 2007

Opening balance 60,989,195 202,230,238

Add: Collected during the year 25,009,313

Less: Repaid during the year 60,989,195 166,250,356

Closing balance - 60,989,195

Additional Loan Recovery (ALR):

The Company has accepted advance loan repayments over and above the installment due from borrowers and

the same is accounted for. In case of instances where the borrower fails to pay or falls short of loan installment,

the same is adjusted against the installment.

For the year ended 31 March 2008 31 March 2007

Opening balance 157,203,666 52,385,216

Add: Collected during the year 763,713,642 344,284,092

Less: Repaid/ Adjusted during the year 582,784,997 239,465,642

Closing balance 338,132,312 157,203,666

12. Employee Benefit Plans

Effective 1 April 2007, the Company adopted revised Accounting Standard on Employee Benefits. Pursuant to

the adoption, the transitional obligations of the Company amounts to Rs. 1,336,011 net of deferred tax Rs.

687,942. As required by the standard, the obligation has been recorded with the transfer of Rs. 1,336,011 to

revenue reserves.

The following table set out the status of the gratuity plan as required under AS 15 (Revised)

Reconciliation of opening and closing balances of the present value of the defined benefit

Obligation

Change in Defined Benefit Obligation

Particulars For the year ended 31 March 2008

Balance at April 1, 2007 2,023,953

Service cost 2,564,954

Interest cost 161,916

Actuarial loss/(Gain) (161,916)

Benefits paid -

Balance at March 31, 2008 4,588,907

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Change in the fair value of plan assets

Particulars For the year ended 31 March 2008

Balance at April 1, 2007 -

Expected return on plan assets -

Actuarial gains -

Employer contributions -

Benefits paid -

Balance at March 31, 2008 Nil

Amount recognized in Balance Sheet

Particulars For the year ended 31 March 2008

Present value of funded obligations 4,588,907

Fair value on plan assets -

Net liability/(asset) 4,588,907

Amounts in the balance sheet For the year ended 31 March 2008

Provisions 4,588,907

Net liability/(asset) 4,588,907

Expense recognized in statement of profit and loss account

Particulars For the year ended 31 March 2008

Current service cost 2,564,954

Interest on defined benefit obligation 161,916

Expected return on plan assets -

Net actuarial loss/(gain) recognized in the year (161,916)

Amount included in “Personnel expense” 2,564,954

Asset Information

Category of Assets As at 31 March 2008

Insurer managed funds Nil

Total Nil

Summary of Actuarial Assumptions

Particulars For the year ended 31 March 2008

Discount Rate 8%

Expected return on plan assets 8%

Salary escalation rate 5% p.a.

Discount rate: The discount rate is based on the prevailing market yields of Indian government securities as at the balance sheet date for the estimated term of the obligations.

Expected rate of return on plan assets: This is based on the expectation of the average long term rate of return expected on investments of the fund during the estimated term of the obligations.

Salary escalation rate: The estimates of future salary increases considered takes into account the inflation, seniority, promotion and other relevant factors.

Spandana Annual Report 2007-08 75

11. Security Deposits and Additional loan recovery:

Security Deposits:

stDuring the year the Company has repaid the entire balance of Security Deposit outstanding as on 31 March

2007. The details of repayment/ adjustment of Security Deposit are given below:

For the year ended 31 March 2008 31 March 2007

Opening balance 60,989,195 202,230,238

Add: Collected during the year 25,009,313

Less: Repaid during the year 60,989,195 166,250,356

Closing balance - 60,989,195

Additional Loan Recovery (ALR):

The Company has accepted advance loan repayments over and above the installment due from borrowers and

the same is accounted for. In case of instances where the borrower fails to pay or falls short of loan installment,

the same is adjusted against the installment.

For the year ended 31 March 2008 31 March 2007

Opening balance 157,203,666 52,385,216

Add: Collected during the year 763,713,642 344,284,092

Less: Repaid/ Adjusted during the year 582,784,997 239,465,642

Closing balance 338,132,312 157,203,666

12. Employee Benefit Plans

Effective 1 April 2007, the Company adopted revised Accounting Standard on Employee Benefits. Pursuant to

the adoption, the transitional obligations of the Company amounts to Rs. 1,336,011 net of deferred tax Rs.

687,942. As required by the standard, the obligation has been recorded with the transfer of Rs. 1,336,011 to

revenue reserves.

The following table set out the status of the gratuity plan as required under AS 15 (Revised)

Reconciliation of opening and closing balances of the present value of the defined benefit

Obligation

Change in Defined Benefit Obligation

Particulars For the year ended 31 March 2008

Balance at April 1, 2007 2,023,953

Service cost 2,564,954

Interest cost 161,916

Actuarial loss/(Gain) (161,916)

Benefits paid -

Balance at March 31, 2008 4,588,907

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Schedule to the Balance Sheet of Spandana Sphoorty Financial Limited(formerly Spandana Shoorty Innovative Financial Services Limited)

as required in terms of Paragraph 13 of Non-Banking Financial (Non-Deposit Accepting or Holding)

Companies Prudential Norms (Reserve Bank) Directions, 2007

(Rs. In lakhs)LIABILITIES SIDE:

(1) Loans and advances availed by the NBFCs inclusive of Amount Amount interest accrued thereon but not paid: Outstanding Overdue

(a) Debentures : Secured - - Unsecured - -

(other than falling within meaning of public depostis*)

(b) Deferred credits - -

(c) Term Loans 47,260 -

(d) Inter-corporate loans and borrowing - -

(e) Commercial Paer - -

(f ) Public Deposits*

(g) Otber Loans (Subordinated Loan) 2,000 -

*Please see Note 1 below

(2) Break-up of (1)(f ) above (Outstanding public deposits inclusive of interest accrued thereon but not paid):

(a) In the form of unsecured debentures - -

b) In the form of partly secured debentures i.e. debentures - - where there is a shortfall in the value of security

(c) Other public deposits - -

ASSESTS SIDE : Amount Outstanding

3. Break-up of Loans and Advances including bills receivables [other than those included in (4) below] :

(a) Secured

(b) Unsecured

4. Break-up of leased assets and stock on hire and hypothecation loans counting towards EL/HP activites

(i) Lease assets including lease rentals under sundry debtors :(a) Financial lease(b) Operating lease

(ii) Stock on hire including hire charges under sundry debtors:(a) Assests on hire(b) Repossessed assets

(iii) Hypothecation loans counting towards EL/HP activities(a) Loans where assets have been repossessed(b) Loans other than (a) above

Spandana Annual Report 2007-08 77

13. Unsecured loan (Subordinated debt):

The company has raised subordinated debt during the year, the breakup of which is as follows:

Name of the entity Date Rate Loan Amount Maturity

Spandana Rural & Urban 31-08-2007 8.25% 150,000,000 31-08-2013Development Organisation

Spandana Mutual Benefit Trust 31-08-2007 8.25% 50,000,000 31-08-2013

Total 200,000,000

14. Capital Adequacy Ratio:

2008-2007

i) Capital Adequacy Ratio (CRAR) 22.69%

ii) CRAR Tier I Capital (%) 17.46%

iii) CRAR Tier II Capital (%) 5.23%

15. Investments during the year

Name of the Scheme Purchase Units Purchase Value Sold Units Sale Proceeds

Reliance Liquidity Fund 62,970,207 663,445,000 63,010,431 664,460,661

ING Liquid Fund 8,289,969 83,000,000 8,289,969 83,332,437

16. Social Responsibilities

The Company is in the business of offering financial services to low income households in rural and urban areas. The Company also offers training to the groups to generate income for their livelihood and to ensure a better life.

17. Amounts payable to Micro , Small and Medium enterprises

The management has initiated the process of identifying enterprises which have provided goods and services to the Company and which qualify under the definition of micro and small enterprises, as defined under Micro, Small and Medium Enterprises Development Act, 2006. Accordingly, the disclosure in respect of the amounts payable to such enterprises as at 31 March 2008 has been made in the financial statements based on information received and available with the Company. Further in the view of the management, the impact of interest, if any, that may be payable in accordance with the provisions of the Act is not expected to be material. The Company has not received any claim for interest from any supplier under the said Act.

18. Previous year's figures have been regrouped / reclassified, where necessary, to conform to current year's classification.

As per our report attachedfor BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/- Sd/-Zubin Shekary K.V.R Subba Rao Managing Director Director PartnerMembership No. 48814

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Schedule to the Balance Sheet of Spandana Sphoorty Financial Limited(formerly Spandana Shoorty Innovative Financial Services Limited)

as required in terms of Paragraph 13 of Non-Banking Financial (Non-Deposit Accepting or Holding)

Companies Prudential Norms (Reserve Bank) Directions, 2007

(Rs. In lakhs)LIABILITIES SIDE:

(1) Loans and advances availed by the NBFCs inclusive of Amount Amount interest accrued thereon but not paid: Outstanding Overdue

(a) Debentures : Secured - - Unsecured - -

(other than falling within meaning of public depostis*)

(b) Deferred credits - -

(c) Term Loans 47,260 -

(d) Inter-corporate loans and borrowing - -

(e) Commercial Paer - -

(f ) Public Deposits*

(g) Otber Loans (Subordinated Loan) 2,000 -

*Please see Note 1 below

(2) Break-up of (1)(f ) above (Outstanding public deposits inclusive of interest accrued thereon but not paid):

(a) In the form of unsecured debentures - -

b) In the form of partly secured debentures i.e. debentures - - where there is a shortfall in the value of security

(c) Other public deposits - -

ASSESTS SIDE : Amount Outstanding

3. Break-up of Loans and Advances including bills receivables [other than those included in (4) below] :

(a) Secured

(b) Unsecured

4. Break-up of leased assets and stock on hire and hypothecation loans counting towards EL/HP activites

(i) Lease assets including lease rentals under sundry debtors :(a) Financial lease(b) Operating lease

(ii) Stock on hire including hire charges under sundry debtors:(a) Assests on hire(b) Repossessed assets

(iii) Hypothecation loans counting towards EL/HP activities(a) Loans where assets have been repossessed(b) Loans other than (a) above

Spandana Annual Report 2007-08 77

13. Unsecured loan (Subordinated debt):

The company has raised subordinated debt during the year, the breakup of which is as follows:

Name of the entity Date Rate Loan Amount Maturity

Spandana Rural & Urban 31-08-2007 8.25% 150,000,000 31-08-2013Development Organisation

Spandana Mutual Benefit Trust 31-08-2007 8.25% 50,000,000 31-08-2013

Total 200,000,000

14. Capital Adequacy Ratio:

2008-2007

i) Capital Adequacy Ratio (CRAR) 22.69%

ii) CRAR Tier I Capital (%) 17.46%

iii) CRAR Tier II Capital (%) 5.23%

15. Investments during the year

Name of the Scheme Purchase Units Purchase Value Sold Units Sale Proceeds

Reliance Liquidity Fund 62,970,207 663,445,000 63,010,431 664,460,661

ING Liquid Fund 8,289,969 83,000,000 8,289,969 83,332,437

16. Social Responsibilities

The Company is in the business of offering financial services to low income households in rural and urban areas. The Company also offers training to the groups to generate income for their livelihood and to ensure a better life.

17. Amounts payable to Micro , Small and Medium enterprises

The management has initiated the process of identifying enterprises which have provided goods and services to the Company and which qualify under the definition of micro and small enterprises, as defined under Micro, Small and Medium Enterprises Development Act, 2006. Accordingly, the disclosure in respect of the amounts payable to such enterprises as at 31 March 2008 has been made in the financial statements based on information received and available with the Company. Further in the view of the management, the impact of interest, if any, that may be payable in accordance with the provisions of the Act is not expected to be material. The Company has not received any claim for interest from any supplier under the said Act.

18. Previous year's figures have been regrouped / reclassified, where necessary, to conform to current year's classification.

As per our report attachedfor BSR & Company For K.V.R Subba Rao & Co for Spandana Sphoorty Financial LimitedChartered Accountants Chartered Accountants (formerly Spandana Sphoorty

Innovative Financial Services Limited)

Sd/- Sd/- Sd/- Sd/-Zubin Shekary K.V.R Subba Rao Managing Director Director PartnerMembership No. 48814

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5. Break-up of Investments :

Current Investments

1. Quoted :

(i) Shares : (a) Equity

(b) Preference

(ii) Debentures and Bonds

(iii) Units of mutual funds

(iv) Government Securities - -

(v) Others (please specify) - -

2. Unquoted :

(i) Shares : (a) Equity 142 -

(b) Preference - -

(ii) Debentures and bonds - -

(iii) Units of mutual funds - -

(iv) Government Securities - -

(v) Others (please specify) - -

Long Term investments

1. Quoted :

(i) Shares : (a) Equity

(b) Preference

(ii) Debentures and Bonds - -

(iii) Units of mutual funds - -

(iv) Government Securities - -

(v) Others (please specify) - -

2. Unquoted : - -

i) Shares : (a) Equity - -

(b) Preference - -

(ii) Debentures and bonds - -

(iii) Units of mutual funds - -

(iv) Government Securities - -

v) Others (please specify) - -

(6) Borrower group-wise classification of all leased assets,

stock-on -hire and loans and advances :

Please see Note 2 below

Category Amount net of provisions

Secured Unsecured Total

1. Related Parties**

(a) Subsidiaries - - -

(b) Companies in the same guoup - - -

(c) Other related parties - - -

2. Other than related parties - - -

Total - - -

(7) Investor group-wise classification of all investments

(current and long term) in shares and securities

(both quoted and unquoted) :

Please see note 3 below

Category Market value/ Book Value Break-up or (Net of

fair value or NAV Provisions)1. Related Parties**

(a) Subsidiaries 142 121

(b) Companies in the same guoup - -

(c) Other related parties - -

2. Other than related parties - -

Total

**As per Accounting Standard of ICAI (Please see Note 3)

(8) Other information

Particulars Amount

(i) Gross Non-Performing Assests

(a) Related parties - -

(b) Other than related parties - -

(ii) Net Non-Performing Assests

(a) Related parties - -

(b) Other than related parties - -

(iii) Assests acquired in satisfaction of debt - -

Notes :

1. As defined in pararaph 2(1)(xii) of the Non-Banking Financial Companies acceptance of Public

Deposits (Reserve Bank) Directions, 1998.

2. Provisioning norms shall be applicable as prescribed in the Non-Banking Financial Companies

Prudential Norms (Reserve Bank) Directions, 1998.

3. All Accounting Standards and Guidance Notes issued by ICAI are applicable including for

valuation of investments and other assets as also assets acquired in satisfaction of debt. However,

market value in respect of quoted investments and break-up/fair value.

Spandana Annual Report 2007-08 79

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5. Break-up of Investments :

Current Investments

1. Quoted :

(i) Shares : (a) Equity

(b) Preference

(ii) Debentures and Bonds

(iii) Units of mutual funds

(iv) Government Securities - -

(v) Others (please specify) - -

2. Unquoted :

(i) Shares : (a) Equity 142 -

(b) Preference - -

(ii) Debentures and bonds - -

(iii) Units of mutual funds - -

(iv) Government Securities - -

(v) Others (please specify) - -

Long Term investments

1. Quoted :

(i) Shares : (a) Equity

(b) Preference

(ii) Debentures and Bonds - -

(iii) Units of mutual funds - -

(iv) Government Securities - -

(v) Others (please specify) - -

2. Unquoted : - -

i) Shares : (a) Equity - -

(b) Preference - -

(ii) Debentures and bonds - -

(iii) Units of mutual funds - -

(iv) Government Securities - -

v) Others (please specify) - -

(6) Borrower group-wise classification of all leased assets,

stock-on -hire and loans and advances :

Please see Note 2 below

Category Amount net of provisions

Secured Unsecured Total

1. Related Parties**

(a) Subsidiaries - - -

(b) Companies in the same guoup - - -

(c) Other related parties - - -

2. Other than related parties - - -

Total - - -

(7) Investor group-wise classification of all investments

(current and long term) in shares and securities

(both quoted and unquoted) :

Please see note 3 below

Category Market value/ Book Value Break-up or (Net of

fair value or NAV Provisions)1. Related Parties**

(a) Subsidiaries 142 121

(b) Companies in the same guoup - -

(c) Other related parties - -

2. Other than related parties - -

Total

**As per Accounting Standard of ICAI (Please see Note 3)

(8) Other information

Particulars Amount

(i) Gross Non-Performing Assests

(a) Related parties - -

(b) Other than related parties - -

(ii) Net Non-Performing Assests

(a) Related parties - -

(b) Other than related parties - -

(iii) Assests acquired in satisfaction of debt - -

Notes :

1. As defined in pararaph 2(1)(xii) of the Non-Banking Financial Companies acceptance of Public

Deposits (Reserve Bank) Directions, 1998.

2. Provisioning norms shall be applicable as prescribed in the Non-Banking Financial Companies

Prudential Norms (Reserve Bank) Directions, 1998.

3. All Accounting Standards and Guidance Notes issued by ICAI are applicable including for

valuation of investments and other assets as also assets acquired in satisfaction of debt. However,

market value in respect of quoted investments and break-up/fair value.

Spandana Annual Report 2007-08 79

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Spandana Annual Report 2007-08 81

BOARD PROFILE

PROFILES

Mrs. Padmaja Reddy Gangireddy, Managing Director

Mrs. Padmaja Reddy is a graduate in Communication & Journalism and Post Graduate in Business

Administration. She has over a decade of work experience in microfinance and development sector. She is the

Founding Managing Director of Spandana Sphoorty Financial Limited. She has pursued several courses,

including a microfinance course at Naropa University, U.S.A, Credit and Micro Enterprise Development Training

from Durham University Business School, U.K and Market Research for Micro Finance in Uganda. She has built

one of India's leading microfinance organizations, famed for its efficiency, size and productivity, and has been

instrumental in establishing benchmarks for the industry.

Mr. M.V. Narendra Prasad, Whole Time Director

Mr. Narendra Prasad M.V. is a Graduate in Commerce and has gained a deep insight into the microfinance sector

through hands on experience at Spandana. He is the Chief Financial Officer and Director of the Company.

Dr. Rajiv B. Lall, Director

Dr. Lall has over two decades of experience with Warburg Pincus, Morgan Stanley, the World Bank and Asian

Development Bank. He is Managing Director and Chief Executive Officer of Infrastructure Development Finance

Corporation. He did his Ph.D in Economics from Columbia University, and his areas of expertise include Private

Equity /Venture Capital, International Capital Markets, trade & industrial policy issues and project finance.

SPANDANA SPHOORTY FINANCIAL LIMITED(Formerly Spandana Sphoorty Innovative Financial Services Limited)

ADDITIONAL INFORMATION UNDER PART IV OF SCHEDULE VI TO THE COMPANIES ACT, 1956

Balance Sheet abstract and General Business Profile

I. Registration Details Registration No 0 1 - 4 0 6 4 8 State Code 0 1

II. Capital raised during the year (Amount in Rs. Thousands)

Public Issued Rights Issue

NIL NIL

Bonus Issue Private Placement

NIL 3 4 7 2 4 0

III. Position of Mobilisation and Deployment of Funds (Amount in Rs. Thousand)

Total Liabilities Total Assets

5 8 1 2 6 8 0 5 8 1 2 6 8 0

Sources of Funds

Paid-up Capital Reserves and Surplus

4 3 3 5 5 0 4 5 0 3 6 5

Secured Loans Unsecured Loans

4 7 2 5 9 5 3 2 0 0 0 0 0

Application of Funds

Net Fixed Assets Investments

3 7 9 4 4 1 4 2 4 5

Net Current Assets Misc. Expenditure

5 7 6 0 3 8 9 1 0 0

Accumulated Losses

N I L

IV. Performance of Company (Amount in Rs. Thousands)

Turnover Total Expenditure

1 2 7 4 4 9 6 8 1 4 8 4 9

+ - Profit/Loss before Tax + - Profit/Loss after tax

+ 4 5 9 6 4 7 + 2 7 0 6 3 9

Earning per Share in Rs. Dividend rate %

2 8 0 0

V. Generic Names of Three Principal Products/Services of Company (as per monetary terms)Item Code No. N A(ITC Code)

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Spandana Annual Report 2007-08 81

BOARD PROFILE

PROFILES

Mrs. Padmaja Reddy Gangireddy, Managing Director

Mrs. Padmaja Reddy is a graduate in Communication & Journalism and Post Graduate in Business

Administration. She has over a decade of work experience in microfinance and development sector. She is the

Founding Managing Director of Spandana Sphoorty Financial Limited. She has pursued several courses,

including a microfinance course at Naropa University, U.S.A, Credit and Micro Enterprise Development Training

from Durham University Business School, U.K and Market Research for Micro Finance in Uganda. She has built

one of India's leading microfinance organizations, famed for its efficiency, size and productivity, and has been

instrumental in establishing benchmarks for the industry.

Mr. M.V. Narendra Prasad, Whole Time Director

Mr. Narendra Prasad M.V. is a Graduate in Commerce and has gained a deep insight into the microfinance sector

through hands on experience at Spandana. He is the Chief Financial Officer and Director of the Company.

Dr. Rajiv B. Lall, Director

Dr. Lall has over two decades of experience with Warburg Pincus, Morgan Stanley, the World Bank and Asian

Development Bank. He is Managing Director and Chief Executive Officer of Infrastructure Development Finance

Corporation. He did his Ph.D in Economics from Columbia University, and his areas of expertise include Private

Equity /Venture Capital, International Capital Markets, trade & industrial policy issues and project finance.

SPANDANA SPHOORTY FINANCIAL LIMITED(Formerly Spandana Sphoorty Innovative Financial Services Limited)

ADDITIONAL INFORMATION UNDER PART IV OF SCHEDULE VI TO THE COMPANIES ACT, 1956

Balance Sheet abstract and General Business Profile

I. Registration Details Registration No 0 1 - 4 0 6 4 8 State Code 0 1

II. Capital raised during the year (Amount in Rs. Thousands)

Public Issued Rights Issue

NIL NIL

Bonus Issue Private Placement

NIL 3 4 7 2 4 0

III. Position of Mobilisation and Deployment of Funds (Amount in Rs. Thousand)

Total Liabilities Total Assets

5 8 1 2 6 8 0 5 8 1 2 6 8 0

Sources of Funds

Paid-up Capital Reserves and Surplus

4 3 3 5 5 0 4 5 0 3 6 5

Secured Loans Unsecured Loans

4 7 2 5 9 5 3 2 0 0 0 0 0

Application of Funds

Net Fixed Assets Investments

3 7 9 4 4 1 4 2 4 5

Net Current Assets Misc. Expenditure

5 7 6 0 3 8 9 1 0 0

Accumulated Losses

N I L

IV. Performance of Company (Amount in Rs. Thousands)

Turnover Total Expenditure

1 2 7 4 4 9 6 8 1 4 8 4 9

+ - Profit/Loss before Tax + - Profit/Loss after tax

+ 4 5 9 6 4 7 + 2 7 0 6 3 9

Earning per Share in Rs. Dividend rate %

2 8 0 0

V. Generic Names of Three Principal Products/Services of Company (as per monetary terms)Item Code No. N A(ITC Code)

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COMMITTEES

Mr. Dilip Kothari, Director

He is the founder and Managing Director of JM India Private Equity Fund and he has over 23 years of experience

in the global financial services industry, having spent 10 years in the USA and over 12 years in Asia. Prior to JM

Financial, Mr. Kothari was Managing Director Olympus Capital Holdings one of Asia's leading private equity

firms. In the past he has held positions as Head of Consumer Banking, Singapore, HSBC, and Head of Credit Policy

and Risk Management, Citibank, Asia. He started his career with Citibank, where he had held various senior

management positions in the consumer banking division, based in the USA. Mr. Kothari has a Master Degree in

Finance from the Kansas State University, USA.

Mr. Harinder Sawhney, Director

He is the Director of JM Financial Investment Managers Limited. He is Post Graduate in Business Administration,

with two decades experience in investment banking globally.

Mr. Krishna Prasad T., Director

He is Deputy General Manager of ICICI Bank Limited. He is a Post Graduate in Business Administration and has

over 14 years of banking experience.

Mr. Raman Madhavan Nair, Director

His career began with the RBI, after which worked for IDBI and has served SIDBI for the last 2 decades. Through

working with these three national level institutions, Mr. Nair gained valuable experience in the appraisal of large

industrial and service sector projects, as well as developing an expertise in Development Banking . His stint with

SIDBI during the last one and a half decades has provided him with an understanding of the needs and potential

of the under-developed regions of the country, and more so of the SSI sector in general, by virtue of his postings

in the North-Eastern, Eastern and Northern regions. Mr. Nair has a variety of experience handling large, medium

and small scale service sector projects. His present mission is to build the capacity of the MF institutions to

upscale their MF activities to Micro Enterprises, thus creating not only income generating avenues for the poor

but also rural employment and overall rural economic growth.

Mr. Rahul Gupta, Independent Director

He is a chief operating officer and chief financial officer of Citibank – Global Consumer Group, Singapore. He has

three decades of Banking experience in a number of positions globally. He did his Masters in Business

Administration at University of South California, Los Angeles, USA and Bachelor of Engineering in electronics at

Birla Institute Technology & Science.

Dr. Venkateswara Reddy G., Independent Director

He is a Professor in Cardiology, as has specialized in Cardiology. He has been associated with the Company since

its inception.

Mr. Y.S.N.Murty, Independent Director

He is a Fellow Member of Institute of Chartered Accountants of India. He is a practicing Chartered Accountant

and has a keen acumen for internal audit and statutory audits in various sectors particularly in financial services

sector.

Committee Name Members

Executive Committee Mrs. Padmaja Reddy Gangireddy

Mr. M.V. Narendra Prasad

Dr. Venkateswara Reddy G.

Remuneration Committee Mrs. Padmaja Reddy Gangireddy

Mr. M.V. Narendra Prasad

Mr. Harinder Sawhney

Mr. Krishna Prasad T.

Nomination committee Mrs. Padmaja Reddy Gangireddy

Mr. Dilip Kothari

Dr. Rajiv B. Lall

Asset Liability Management Committee Mrs. Padmaja Reddy Gangireddy

Dr. Rajiv B. Lall

Mr. Harinder Sawhney

Mr. M.V. Narendra Prasad

Mr. Karthik Kolluri

Risk Management Committee Mrs. Padmaja Reddy Gangireddy

Dr. Rajiv B. Lall

Mr. Dilip Kothari

Mr. Krishna Prasad T.

Audit Committee Mrs. Padmaja Reddy Gangireddy

Dr. Rajiv B. Lall

Mr. Harinder Sawhney

Mr. Y.S.N.Murty

Spandana Annual Report 2007-08 83

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COMMITTEES

Mr. Dilip Kothari, Director

He is the founder and Managing Director of JM India Private Equity Fund and he has over 23 years of experience

in the global financial services industry, having spent 10 years in the USA and over 12 years in Asia. Prior to JM

Financial, Mr. Kothari was Managing Director Olympus Capital Holdings one of Asia's leading private equity

firms. In the past he has held positions as Head of Consumer Banking, Singapore, HSBC, and Head of Credit Policy

and Risk Management, Citibank, Asia. He started his career with Citibank, where he had held various senior

management positions in the consumer banking division, based in the USA. Mr. Kothari has a Master Degree in

Finance from the Kansas State University, USA.

Mr. Harinder Sawhney, Director

He is the Director of JM Financial Investment Managers Limited. He is Post Graduate in Business Administration,

with two decades experience in investment banking globally.

Mr. Krishna Prasad T., Director

He is Deputy General Manager of ICICI Bank Limited. He is a Post Graduate in Business Administration and has

over 14 years of banking experience.

Mr. Raman Madhavan Nair, Director

His career began with the RBI, after which worked for IDBI and has served SIDBI for the last 2 decades. Through

working with these three national level institutions, Mr. Nair gained valuable experience in the appraisal of large

industrial and service sector projects, as well as developing an expertise in Development Banking . His stint with

SIDBI during the last one and a half decades has provided him with an understanding of the needs and potential

of the under-developed regions of the country, and more so of the SSI sector in general, by virtue of his postings

in the North-Eastern, Eastern and Northern regions. Mr. Nair has a variety of experience handling large, medium

and small scale service sector projects. His present mission is to build the capacity of the MF institutions to

upscale their MF activities to Micro Enterprises, thus creating not only income generating avenues for the poor

but also rural employment and overall rural economic growth.

Mr. Rahul Gupta, Independent Director

He is a chief operating officer and chief financial officer of Citibank – Global Consumer Group, Singapore. He has

three decades of Banking experience in a number of positions globally. He did his Masters in Business

Administration at University of South California, Los Angeles, USA and Bachelor of Engineering in electronics at

Birla Institute Technology & Science.

Dr. Venkateswara Reddy G., Independent Director

He is a Professor in Cardiology, as has specialized in Cardiology. He has been associated with the Company since

its inception.

Mr. Y.S.N.Murty, Independent Director

He is a Fellow Member of Institute of Chartered Accountants of India. He is a practicing Chartered Accountant

and has a keen acumen for internal audit and statutory audits in various sectors particularly in financial services

sector.

Committee Name Members

Executive Committee Mrs. Padmaja Reddy Gangireddy

Mr. M.V. Narendra Prasad

Dr. Venkateswara Reddy G.

Remuneration Committee Mrs. Padmaja Reddy Gangireddy

Mr. M.V. Narendra Prasad

Mr. Harinder Sawhney

Mr. Krishna Prasad T.

Nomination committee Mrs. Padmaja Reddy Gangireddy

Mr. Dilip Kothari

Dr. Rajiv B. Lall

Asset Liability Management Committee Mrs. Padmaja Reddy Gangireddy

Dr. Rajiv B. Lall

Mr. Harinder Sawhney

Mr. M.V. Narendra Prasad

Mr. Karthik Kolluri

Risk Management Committee Mrs. Padmaja Reddy Gangireddy

Dr. Rajiv B. Lall

Mr. Dilip Kothari

Mr. Krishna Prasad T.

Audit Committee Mrs. Padmaja Reddy Gangireddy

Dr. Rajiv B. Lall

Mr. Harinder Sawhney

Mr. Y.S.N.Murty

Spandana Annual Report 2007-08 83

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Spanda a p oo ty n c al td.n S h r Fi an i L

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