Ownership and Support from Government of Karnataka:
KSFC is a state finance corporation established under the SFC Act, 1951. Around 95.91 percent shareholding is held by Government of Karnataka followed by 4.06 percent held by SIDBI and balance is held by banks and financial institutions, as on December 31, 2022. The primary objective of KSFC is to provide loans for establishment of new industries and expansion, modernization, diversification of existing industries in the state of Karnataka. It also has various entrepreneurial schemes to support various entrepreneurs. The board of KSFC primarily comprises representation from Government of Karnataka. The Board of Directors comprises of 4 bureaucrats appointed by the Government of Karnataka and the others representing SIDBI, LIC of India, Apex Bank and a Chartered Accountant.
KSFC’s loan portfolio stood at Rs. 2045.23 Cr as on December 31, 2022 as against Rs. 2100.15 Cr. as on March 31, 2022 and Rs. 2187.91 Cr as on March 31, 2021. KSFC’s funding profile is supported by the State Government’s moral obligation to provide on- going support for growth and development of the state and also in times of distress.

Acuité believes, support from GoK is critical to the rating and thus, the credit profile of Karnataka state is a key rating sensitivity. 

Comfortable Capitalisation levels; improving Profitability

KSFC has received continuous support from Government of Karnataka, as seen through equity infusion in FY 2020 (Rs.100 Cr), FY 2021 (Rs.100 Cr.) and another Rs. 54.60 Cr in 2022. The corporation’s capitalization levels remained comfortable at 49.58 percent as on September 30, 2022 as compared to 42.53 percent in FY2022 and 38.30 percent in FY2021. The corporation’s funding mix comprises of equity contribution from its shareholders primarily GoK, Bonds and bank borrowings. Of the overall outstanding borrowings, Bonds comprise of ~Rs 625 Cr and bank borrowings comprise of ~Rs 306.31 Cr as on December 31, 2022.   All of the above borrowings (except for a term loan facility) are guaranteed by GoK. The ownership by the GoK enables KSFC to borrow at fine pricing from various banks and institutions. KSFC has been able to maintain gearing at lower levels at 1.02 times in FY2022 as against 1.43 times in FY2021. Overall Profitability of the company was improved in FY2022, where PAT stood at Rs. 66.61 Cr as compared to Rs. 42.90 crore in FY2021.Further the PAT improved to Rs 81.45 Cr during 9MFY23. This also led to improvement in ROAA which stood at 2.78 percent in FY22 against 1.75 percent in FY21. Annualized ROAA for 9MFY23 stood at 4.56 percent.
 
Acuité believes that the corporation will continue to benefit from strong financial and managerial support from the State Government on an on-going basis over the medium term.

Moderate Asset Quality
The corporation’s GNPA deteriorated to 7.79 percent as on December 31, 2022 as compared to 6.49 percent as on March 31, 2022, the corresponding NNPA levels stood at 5.17 percent and 4.74 percent respectively. The provision coverage ratio of KSFC stood at 35.50 percent during 9MFY23. However, additional slippages were noticed in FY2022, where GNPA and NNPA stood at 6.49 percent and 4.74 percent. The outstanding loan of restructured accounts as of December 31, 2022 was Rs. 534.32 crores which constitutes 26.13 percent of the loan portfolio outstanding during the same period. As on December 31, 2022, the Top 20 NPA accounts constitute ~41 percent of the Gross NPA. KSFC’s ability to avoid slippages remains a key monitorable.

Decline in AUM
KSFC’s AUM declined due to lower disbursements during 9MFY23 and FY2022, the AUM stood at Rs. 2045.23 Cr and Rs. 2100.15 Cr resepectively. The corporation lends majority of its loans to the MSME Sector and disbursements had decreased by ~11% to Rs. 386.46 Cr as on March 31, 2022 from Rs. 432.96 crore in FY2021. Further, the disbursement stood at Rs 300.20 Cr during 9MFY23.

Acuité believes that KSFC ability to grow a healthy loan portfolio while effectively containing asset quality stress will be a key rating sensitivity.