MICROCAPITAL STORY: SKS Microfinance Plans to Raise USD 104 Million in Rated Debt

SKS Microfinance, a Hyderbad-based microfinance institution (MFI), announced it plans to raise Rs. 500 Crore (USD 104 million) in rated debt products in order to satisfy customer loan demands. According to Dili Raj, Chief Financial Officer, the new debt will include bonds, commercial paper (CP), and securitization of receivables. Included in the total amount is the recent one-year, 10 percent USD 16 million bond issue reported in a recent MicroCapital story. Those bonds were listed on the Bombay Stock Exchange and fully subscribed by Standard Chartered Bank. In fiscal year 2009, SKS raised a total of Rs. 3,700 Crore (USD 767 million) in debt, of which Rs. 150 Crore (USD 31 million) was in bonds, CP, or securitizations. This fiscal year SKS plans to issue an incremental Rs. 5,000 Crore (USD 1 billion) in debt.

According to Raj accessing the capital markets is more advantageous for the MFI than the more traditional route of securing bank loans, “We are able to negotiate rates 100 – 150 basis points lower than a bank loan. Raising funds through these routes gives us a pricing advantage. It also opens up more investor avenues like foreign institutional investors, mutual funds and insurance companies.” As stated in the earlier MicroCapital story, Dilli Raj also believes that listing on the BSE enhances the MFI’s public accountability, transparency and corporate governance through increased public reporting.

So-called securitizations have become increasingly popular mechanisms for raising funds by MFIs. In most cases the transactions are actually loan assignments whereby future loan repayments are assigned to a bank by an MFI. The MFI receives the cash value of the loans upfront but at a slight discount – the cost of the financing. The loans remain on the MFI’s books and only the cash flows are transferred to the purchasing bank. Earlier this year, as reported in this MicroCapital story, SKS assigned loans to Yes Bank in the amount of USD 17.2 million. Securitizations such as those found in international capital markets in which pools of loans collateralize a whole new security and are actually warehoused by a third party, are difficult to implement in the microfinance sector. This is due to the unique aspects of microloans which include short maturities, origination risk resulting from the short maturities, the key role and risk of the MFI as servicer, and the lack of standardized ratings. In a step closer to a more typical capital market securitization, Equitas Microfinance issued Pass-Through Certificates (PTCs) this spring whereby the MFI issued rated certificates backed by microloan receivables. To read a MicroCapital story on this deal click here.

As reported in another MicroCapital story, SKS also recently issued USD 4.8 million of commercial paper (CP). CP is shorter-term financing than bonds, with maturity between one and 270 days. The notes are sold at a rate discounted from the face value, with the agreement that the issuer 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 issue CP at a reasonable rate.

SKS Microfinance was established in 1997. According to the MIX Market, the microfinance information clearinghouse, as of March 31, 2008, SKS had 1,629,474 active borrowers and a gross loan portfolio of USD 262 million. Total assets were USD 337 million, debt-to-equity was 5.4 times, ROE was 11.95 percent and ROA was 2.0 percent.

By Laura Anderson, Research Associate

Additional Resources:

The Economic Times: SKS Microfinance to raise Rs. 500 crore through a mix of debt instruments

SKS Microfinance: Home

MicroCapital Story: SKS Microfinance Raises Rs. 75 Crore (USD 15.8 million) Debt and Lists Bonds on Bombay Stock Exchange

Bombay Stock Exchange: Home

Standard Chartered Bank: Home

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

MicroCapital Story: Equitas Micro Finance Gets Transaction Securitized and Rated by CRISIL, Structured and Arranged by the Institute for Financial Management and Research

MicroCapital Story: SKS Microfinance, Share Microfin, and Equitas Microfinance Collaborate with Yes Bank to Securitize a Series of Micro-loans in India that Cumulatively Amount to USD 38.3 million.

“Securitization in Microfinance”, by Brad Swanson, Developing World Markets: June 2007.

The MIX Market: Home, SKS Profile