MICROCAPITAL STORY: Indian SKS Microfinance Issues Bonds and Commercial Notes, and Announces a $963.6m Borrowing Plan to Finance Rapid Growth

Hyderabad-based SKS Microfinance announced that it aims to raise one-tenth of its USD 963.6 million borrowing plan for the next fiscal year through USD 96.4 million worth of securitization deals with financial institutions. The announcement was made shortly after SKS sold USD 4.8 million non-convertible debentures (NCD) with YES Bank and generated another USD 4.8 million through the issuance of commercial paper (CP). Last month, SKS solidified a USD 38.5 million securitization deal with India’s second largest bank, the Industrial Credit and Investment Corporation of India (ICICI). These deals come as SKS strives to finance a loan portfolio that is growing at one of the fastest rates among microfinance institutions (MFIs) in the world.

Indian YES Bank fully subscribed SKS’ USD 4.8 million issuance of non-convertible debentures (NCD). NCDs are issued for a fixed maturity, usually years after issuance. Unlike convertible debentures, no part of NCDs can be converted into equity. NCDs typically earn a higher interest rate than convertible debentures. The NCDs purchased by YES Bank will mature in one year and carry an annual interest rate of 10.5 percent. After SKS’ NCD deal with YES Bank, SKS Chief Executive Officer (CEO) Mr. Suresh Gurumani said, “SKS is the only MFI in the country to raise funds through non-Convertible Debenture.”

SKS also issued USD 4.8 million of commercial paper (CP). CP is a shorter-term fund raising strategy than NCDs, having tenure of between one and 270 days. CP is often used by corporations or banks to meet debt obligations. Promissory notes are sold at a rate discounted from the face value, with the agreement that the issuing bank or corporation will pay the face value on a fixed maturation date. Since the notes are not backed by any form of collateral, generally only institutions with very strong credit ratings are able to sell CPs at a reasonable rate. According to this Business Standard article, SKS is the first MFI to raise funds in this manner.

In February, SKS finalized a noteworthy USD 38.5 million securitization deal with ICICI. Under the agreement, SKS will deliver ICICI-owned microloans ranging from USD 183 to over USD 3854 to unbanked Indian families. Microloan securitization is a process in which MFIs package and sell pools of productive microloan assets as bonds to investors at a discounted rate. The term-length of the ICICI deal is not specified. Securitization of loans (such as mortgages) is generally a longer-term fund raising strategy than CP, with terms lasting years. However, because microloans mature quickly (usually within a year), several generations of microloans must be incorporated into a long-term securitization deal, adding to complexity, cost, and risk. MicroCapital outlined the process in the Paper Wrap-Up of “Securitization in Microfinance.” Generally, only banks will buy securities from MFIs. However, according to Vikram Akula, SKS founder, chairperson and former CEO, SKS has considered selling securities to mutual funds as well.

Launched in 1998, SKS reported 3.6 million borrowers across 18 Indian states in February 2009, and it aims to reach 8 million by 2010. SKS has loaned over USD 1.2 billion since its founding, and currently has USD 431 million outstanding. SKS Chief Financial Officer (CFO) revealed that the microfinance bank expects to disburse a total USD 867.2 million loans this fiscal year alone, and increase its outstanding loan portfolio to USD 481.8 million. Next fiscal year, it plans to disburse a total of USD 1.69 billion with an outstanding portfolio of USD 963.6 million.

In 2008, MicroCapital reported on SKS third and fourth round of equity sales, in which the MFI raised USD 30 million and USD 75.4 million respectively. The total equity capital of the company at present is USD 120.2 million. According to the MIX Market, the microfinance information clearinghouse, in March 2008 SKS reported total assets of USD 336.9 million, a debt to equity ratio of 5.36, a return on assets of 2.0 percent, and a return on equity of 11.95 percent. MicroCapital reported in the past that the management of the rapidly growing Indian MFI has mused at the possibility of an eventual public offering.