BRAC Lanka Finance in Rs.1.3bn cash call to fund micro-lending

BRAC Lanka Finance PLC, a LOLC group company specialised in microfinance, last week announced a rights issue in the proportion of 5 new shares for every 4 held at an issue price of Rs.10 a share to raise Rs.1.32 billion in equity capital, a stock exchange filing said. 
The company has called for an extraordinary general meeting on April 7, 2017 to obtain shareholder approval but this makes little sense as 99.76 percent stake or 105.5 million shares of BRAC Lanka is held by Commercial Leasing & Finance PLC, another LOLC group company. 
The balance 0.24 percent stake or 253, 518 shares are held by 38 other shareholders. 
The raising of equity is immediately required as the company is nearing the regulatory minimum of its core-capital adequacy. 

Also the company’s capital buffers fall short of the required minimum core capital level to operate its 76 branches. 
As of January 31, 2017 the company had a risk weighted capital adequacy ratio of 10.28 percent whereas the regulatory minimum is 10 percent. 
Further, the existing core capital of Rs.1.2 billion is said to be sufficient to operate only 30 branches and the Central Bank has given an ultimatum till the end of the second quarter of 2017 to either raise capital or close down the balance branches. 
“The enhancement of the capital will allow the company to open further locations. This increase will facilitate the company growing the lending portfolio and will also facilitate raising more deposits. This will enable the company to maintain the optimum funding mix,” the filing said. 
As of December 31, 2016, BRAC Lanka had an asset base of Rs.13.4 billion and a lending book of little under Rs.12 billion. 
For the nine months ended December 31, 2016 the company made a net profit of Rs.195.7 million, down 32 percent during the year. 
Although the company has leasing and hire purchase and term loans, BRAC Lanka thrives mainly on micro lending. 
The company is highly optimistic that it could disburse the rights issue funds within a quarter since the raising of the funds. This is based on its past performance. 
But the sector analysts say replicating of past performance may not be possible in the future because the macroeconomic conditions have drastically turned hostile against fresh lending. 
They further caution of a possible bubble-like scenario in the microfinance sector because there were instances where one family borrowed from multiple micro lenders and used new borrowings to settle earlier debt.
This could trigger a contagion effect in the sector if the borrower is denied of fresh borrowing because their repayment capacity is highly contingent on their disposable income, which is increasingly getting squeezed amid tough fiscal and monetary conditions.