Rationale

 The ratings factor in Sakthi Finance Limited's (SFL) experience in the retail financing business and its established franchise, which has evolved over the last six decades of its operations. The ratings are, however, constrained by SFL's geographically concentrated operations, the highly competitive business environment, and its subdued profitability indicators. SFL's capitalisation profile is adequate with a gearing of 6.4 times (provisional) in December 2020 vis-à-vis 6.8 times in March 2019 on the back of a capital infusion in March 2020. While the portfolio growth would remain muted in the current fiscal, considering SFL's subdued internal generation, ICRA notes that its capital would have to be augmented to support growth. ICRA also notes the company's plan to raise about Rs. 25.00-crore equity from its promoters in H2 FY2022 to maintain the leverage at around 5-6 times over the medium term. SFL's ability to maintain good loan collections would be crucial from an asset quality and earnings perspective in the near term as the curtailment in economic activities on account of the Covid-19 pandemic and the recent surge in infection rates leading to localised restrictions are expected to impact borrower-level cash flows. SFL's 90+ days past due (dpd) as of March 2021 stood at 5.0% (provisional) vis-à-vis 5.2% in March 2020 (5.1% in March 2019). Its liquidity profile is currently adequate; however, it would be crucial for the company to diversify its funding profile to support portfolio growth while maintaining its liquidity profile. ICRA notes that the sub-debt raised by the company via a private placement with retail/high net worth individual (HNI) investors in the recent past, with an outstanding of Rs. 234 crore as of December 2020, was observed to be not in adherence to the Reserve Bank of India's (RBI) guidelines on raising money via private placement by a non-banking financial company (NBFC) and SFL has made its representation to RBI on the above matter. SFL's capital adequacy stood at ~19% (provisional) as of March 2021 if the discounted value of the above-mentioned sub-debt is not considered under Tier II. Further, if the outstanding sub-debt is treated as public deposits, the company would breach the deposit cap of 1.5 times of the net owned funds (NOF) and would also have to augment its statutory liquid assets. While SFL has made its representation to the RBI on the above matter and has also requested for forbearance, it had stopped taking fresh deposits since H2 FY2021. Any adverse development regarding the above, including restrictions on the renewal of existing deposits, requirement to increase liquid assets, etc, could impact the company's liquidity. SFL is planning to raise about Rs. 100 crore through the public issuance of debentures (with a greenshoe option of an additional Rs. 100 crore) in May 2021, which is expected to support its liquidity position. The promoters are also expected to provide support, if required, by infusing liquidity or equity