Rationale

The reaffirmation of the ratings takes into consideration 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 6.3 times as of December 2021 (provisional; 6.2 times as of March 2021). ICRA notes that the company has deferred its previously stated plan of raising Rs. 25 crore of equity, given the modest portfolio growth and adequate liquidity in the near team. SFL's 90+ days past due (dpd) stood at 5.0% (provisional) as of December 2021 similar to March 2021 levels. 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 up to FY2020 via a private placement to retail/high-net-worth individual (HNI) investors (Rs. 234 crore outstanding as of December 2021) was not in adherence to the Reserve Bank of India's (RBI) guidelines1 . While SFL has made its representation to the RBI on this matter and has also requested forbearance, it hasstopped taking fresh deposits since H2 FY2021 and stopped renewals since April 2021. SFL's capital adequacy stood at 20.2% (provisional) as of December 2021 without considering the aforementioned sub-debt as Tier II capital. Further, if the outstanding sub-debt is treated as public deposits, the company would be in breach of the cap on deposits at 1.5 times of the net owned funds (NOF) and would also have to augment its statutory liquid assets. Any adverse development regarding the above, including the requirement to increase liquid assets, etc, could impact the company's liquidity. SFL is planning to raise about Rs. 50 crore through the public issuance of debentures (with a greenshoe option of an additional Rs. 50 crore) in May 2022, which is expected to support its liquidity position. The promoters are also expected to provide support, if required, by infusing liquidity or equity.