Rating Rationale
July 30, 2019 | Mumbai
Karnataka State Financial Corporation
Rating Reaffirmed 
 
Rating Action
Rs.235 Crore  8.58% Bonds*^ CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.250 Crore  9.19% Bonds*^ CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.200 Crore  9.08% Bonds*# CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.200 Crore  9.24% Bonds*# CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.100 Crore  8.6% Bonds* CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.123 Crore  8.39% Bonds* CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.77 Crore  8.23% Bonds* CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.100 Crore  9.23% Bonds* CRISIL AA-(SO)/Stable (Withdrawn)
Rs.100 Crore  9.49% Bonds* CRISIL AA-(SO)/Stable (Reaffirmed)
Rs.35.8 Crore  7.45% Bonds*  CRISIL AA-(SO)/Stable (Withdrawn)
Rs.100 Crore  7.64% Bonds* CRISIL AA-(SO)/Stable (Withdrawn)
Rs.100 Crore  8.39% Bonds* CRISIL AA-(SO)/Stable (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
* Amount outstanding as on March 31, 2015.
^ These are non-convertible bonds.
# The trustee for this issuance has been changed from State Bank of Hyderabad to SBI CAPS.
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-(SO)/Stable' rating on the debt instruments of Karnataka State Financial Corporation (KSFC).
 
CRISIL has withdrawn its ratings on the bonds of Rs 335.8 crore as the bonds are fully redeemed and have received independent confirmation. The withdrawal is in line with CRISIL's policy
 
The rating continues to reflect the unconditional and irrevocable guarantee from the Government of Karnataka (GoK), and a trustee-administered payment mechanism for the bonds. The rating, therefore, reflects the credit risk profile of GoK. The debt servicing of the bonds are through a budgetary allocation along with a long T-structure of T-30 days, ensuring adequate time for funding the bond servicing account.
 
GoK has healthy economic management, a superior financial risk profile, and a robust tertiary sector.  These strengths are partially offset by dependence on rains for irrigation, thus requiring larger state support during a weak monsoon.

Analytical Approach

For arriving at the rating, CRISIL has applied its criteria on rating instruments backed by guarantees. 

Key Rating Drivers & Detailed Description
Strengths:
* Healthy economic management by Government of Karnataka
The government is committed to maintaining fiscal discipline, superior tax collection, and healthy liquidity management. The budgeted gross fiscal deficit has consistently remained below 3% of the gross state domestic product (GSDP) for several years. The own tax collection record has also been solid at 6.5-7.5% of the GSDP over the three fiscals through 2018. The government has not resorted to any borrowings under ways and means advances since fiscal 2008, indicating healthy liquidity management.
 
* Superior financial risk profile of Government of Karnataka
The deficit and debt coverage indicators are healthy. The state has consistently maintained revenue surplus. Further, it is self-reliant in revenue sources, with own tax revenue + own non-tax revenue at around 62% of revenue receipts. Revenue surplus has increased to around Rs 4500 crore in fiscal 2018 (accounts) as compared to around Rs 1500 crore over the past two fiscals.
 
Revenue expenditure is expected to increase due to implementation of the pay commission and the farm loan waiver. While revenue mobilisation measures including hike in petrol and diesel taxes should mitigate the impact of the rising expenditure, revenue surplus would still get curtailed. Despite increase in revenue expenditure, GoK is expected to generate revenue surplus, though subdued, over the medium term. Indebtedness is moderate, with the debt-plus-guarantees-to-GSDP ratio at 19.3% and interest-to-revenue receipts ratio at 9.6% in fiscal 2018. While debt-plus-guarantees-to-GSDP ratio is expected to rise on account of capital outlay needs given the lower revenue surplus, it should remain well below the prudential norms of 25% over the next few fiscals.
 
* Healthy economic structure of Government of Karnataka
The robust tertiary sector (share in GSDP at 67%, against all India average of 57%) supported by the position as the information technology hub of India, is the main driver of economic growth for Karnataka. Nominal GSDP has had a healthy compound annual growth rate of 12.5% over fiscals 2014-18. That's partly offset by the support required by the primary sector, especially agriculture, which is mainly rain-fed. The government has allocated around 25% of total budget i.e. Rs 47,000 crore in fiscal 2020 towards agriculture and allied activities. Total farm loan waivers released by January 2019 was Rs 5,450 crore and around Rs 12,700 crore is budgeted towards farm loan waiver in 2020.
 
Weakness:
* Government of Karnataka's dependence on monsoon for irrigation; moderate socio-economic indicators
A poor monsoon could negatively impact the state's agriculture output with only 34% of the cropped area irrigated. The state is taking steps to reduce the vulnerability to monsoons by investing in irrigation. For example, the Ramthal project, the largest drip irrigation project in Asia, became operational in early 2018. Also, irrigation-related expenditure has always had a major share in the developmental capital outlay. The irrigation capital outlay has increased to Rs 12,244 crore in fiscal 2019 (revised estimates), against Rs 10,391 crore in the previous fiscal (accounts).
 
Moreover, socio-economic indicators of the state are moderate. Literacy rate is 75% (national average is 74%); the maternal mortality rate is 108 per 1,00,000 births (130); 21% of the population is below the poverty line (22%); and the Human Development Index rank is 12 amongst Indian states. This would necessitate higher social sector expenditure to sustain going forward.
Liquidity

KSFC maintains adequate liquidity in the form of cash and bank balance of Rs 42 crore as on March 31, 2019. Total repayments in fiscal 2020 of around Rs 223 crores will be met from borrower repayments and other income.

Outlook: Stable

CRISIL believes GoK will maintain its healthy economic management and financial risk profile over the medium term. The outlook may be revised to 'Positive' if there is an improvement in both deficit and debt coverage indicators. The outlook may be revised to 'Negative' in case of any significant adverse impact on state finances over the medium term.

About the Company

KSFC was established to provide financial assistance for setting up industrial units in Karnataka. For fiscal 2019, profit after tax (PAT) was Rs 9.5 crore on gross income of Rs 373.4 crore, against PAT of Rs 25.5 crore on gross income of Rs 296.5 crore for fiscal 2018.

Key Financial Indicators - Government of Karnataka- reported financials
Particulars Unit 2018^ 2017^
Revenue Receipts Rs. Cr. 1,47,000 1,33,214
Revenue Surplus Rs. Cr. 4,517 1,293
Gross Fiscal Deficit Rs. Cr 31,105 28,692
GFD/GSDP % 2.37 2.57
Debt*+Guarantees/GSDP % 19.2 17.1
RR/Interest Times 10.38 10.84
*CRISIL adjusted debt
^Accounts

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs Cr)		 Rating Assigned
with Outlook
INE549F08533 Bonds*^ 26-Dec-14 8.58% 26-Dec-20 235.0 CRISIL AA-(SO)/Stable
INE549F08525 Bonds*^ 01-Sep-14 9.19% 1-Sep-24 250.0 CRISIL AA-(SO)/Stable
INE549F08517 Bonds*# 04-Feb-13 9.08% 04-Feb-25 200.0 CRISIL AA-(SO)/Stable
INE549F08509 Bonds*# 18-Oct-12 9.24% 18-Oct-24 200.0 CRISIL AA-(SO)/Stable
INE549F08475 Bonds * 25-Jan-11 8.6% 25-Jan-22 100.0 CRISIL AA-(SO)/Stable
INE549F08459 Bonds* 27-Jan-10 8.23% 27-Jan-20 77.0 CRISIL AA-(SO)/Stable
INE549F08491 Bonds* 02-Jan-12 9.49% 02-Jan-23 100.0 CRISIL AA-(SO)/Stable
INE549F08467 Bonds* 24-Jun-10 8.39% 24-Jun-20 123.0 CRISIL AA-(SO)/Stable
* Amount outstanding as on March 31, 2015.
# Trustee for this issuance has been changed from State Bank of Hyderabad to SBI CAPS.
^ These are non-convertible bonds.
 
Annexure - Details of Rating Withdrawn
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs Cr)
INE549F09051 Bonds 13-Feb-09 8.39% 13-Feb-19 100.0
INE549F08483 Bonds 02-Jan-12 9.23% 02-Jan-19 100.0
INE549F08434 Bonds 28-Jan-06 7.45% 28-Jan-16 35.80
INE549F08442 Bonds 28-Jan-06 7.64% 28-Jan-18 100.0
 
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  800.00
30-07-19  		CRISIL AA-(SO)/Stable      16-10-18  CRISIL AA-(SO)/Stable      22-12-16  CRISIL AA-(SO)/Stable  CRISIL AA-(SO)/Stable 
            02-01-18  CRISIL AA-(SO)/Stable           
Non Convertible Bonds  LT  485.00
30-07-19  		CRISIL AA-(SO)/Stable      16-10-18  CRISIL AA-(SO)/Stable      22-12-16  CRISIL AA-(SO)/Stable  CRISIL AA-(SO)/Stable 
            02-01-18  CRISIL AA-(SO)/Stable           
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating Criteria for State Governments
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Understanding CRISILs Ratings and Rating Scales

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Vinay Rajani
Media Relations
CRISIL Limited
D: +91 22 3342 1835
M: +91 91 676 42913
B: +91 22 3342 3000
vinay.rajani@ext-crisil.com

 Subodh Rai
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
subodh.rai@crisil.com

Manish Kumar Gupta
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
manish.gupta@crisil.com

Sagar Nadkarni
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 8431
Sagar.Nadkarni@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL