Rating Rationale
July 31, 2020 | Mumbai
Karnataka State Financial Corporation
Rating Reaffirmed
 
Rating Action
Rs.235 Crore  8.58% Bonds*^ CRISIL AA-(CE)/Stable (Reaffirmed)
Rs.250 Crore  9.19% Bonds*^ CRISIL AA-(CE)/Stable (Reaffirmed)
Rs.200 Crore  9.08% Bonds*# CRISIL AA-(CE)/Stable (Reaffirmed)
Rs.200 Crore  9.24% Bonds*# CRISIL AA-(CE)/Stable (Reaffirmed)
Rs.100 Crore  8.6% Bonds* CRISIL AA-(CE)/Stable (Reaffirmed)
Rs.100 Crore  9.49% Bonds* CRISIL AA-(CE)/Stable (Reaffirmed)
Rs.123 Crore  8.39% Bonds* CRISIL AA-(CE)/Stable (Withdrawn)
Rs.77 Crore  8.23% Bonds* CRISIL AA-(CE)/Stable (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Amount outstanding as on March 31, 2019.
^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-(CE)/Stable' rating on the bonds of Karnataka State Financial Corporation (KSFC).
 
CRISIL has withdrawn its ratings on the bonds of Rs 200 crore as the bonds are fully redeemed and upon receival of confirmation by the trustee. 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. KSFC has been adhering to T-30 structure for bonds except in a couple of instances where fund infusion in the escrow account witnessed delays of ~10 days due to administrative issues, which the corporation assured will be well monitored going forward.
 
GoK has healthy economic management, a superior financial risk profile, and a robust tertiary sector.  These strengths are partially offset by moderate socio-economic indicators and 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 GoK:
The state government is committed to ensuring fiscal discipline with healthy liquidity management. The state has revenue surplus through a combination of good tax efforts and prudent expenditure. Gross fiscal deficit has consistently remained below 3% of the gross state domestic product (GSDP) since 2011. Borrowings are mainly to fund capital outlays, thereby ensuring moderate debt levels over the years. The state government has not resorted to any borrowing under the ways and means advances till April 2020, indicating healthy liquidity management.
 
* Financial risk profile of GoK remains comfortable:
The state is self-reliant in terms of revenue with its own tax and non-tax revenues forming around 61% of the receipts. Revenue in fiscal 2020 (revised estimates) however witnessed a decline of 2.5% from the budget estimates mainly on account of lower devolutions from the Centre. While the state's goods and services tax (GST) collections were also subdued in fiscal 2020, any shortfall in it is being compensated by the central government through higher GST compensation. They continue to exhibit strong control over its committed expenditure (salaries, interest and pension), which is around 40% of revenue expenditure and is significantly lower compared to other states and, thereby, flexibility to increase spending in key focus areas such as education, irrigation and other agricultural activities. The state has maintained revenue surplus of Rs 285 crore for fiscal 2020 (revised estimates), which is in-line with budget estimates.
 
The borrowings by the state are mainly used to fund productive capital outlays mainly across irrigation and development of roads and bridges. The gross fiscal deficit as a percentage of GSDP is expected to remain at 2.3% based on fiscal 2020 revised estimates, well below the Fiscal Responsibility and Budget Management recommended limits. Subsequently, debt-plus-guarantees-to-GSDP remains moderate at 20.5%, which is marginally higher than historical levels.
 
For fiscal 2021, revenue receipts will be lower because of reduction in the state government's share in central taxes to 3.646% as recommended by the Fifteenth Finance Commission, compared to 4.713% recommended for previous fiscals. In addition, tax revenue for the state (accounts for about 58% of revenue receipts), including state GST, state excise, sales tax, stamps and registration duties, and motor vehicle tax, will be lower because of the nation-wide lockdown. On the other side, allocations for expenditure, especially in social sectors such as health, sanitation, drinking water, and subsidised distribution of food are expected to go up.
 
* Healthy economic structure of the state government:
The robust tertiary sector accounts for 64% of GSDP, against all-India average of 55%. It is supported by Bengaluru's position as the information technology hub of India, and is the main driver of economic growth for Karnataka. Nominal GSDP has recorded a healthy compound annual growth rate of 12.9% over fiscals 2016-2020.
 
Weakness:
* Dependence of the state government on monsoon for irrigation; moderate socio-economic indicators:
A poor monsoon could negatively impact the state's agricultural output, with only 34% of the cropped area being irrigated. The state is taking steps to reduce its vulnerability to the monsoon by investing in irrigation projects. Capital outlays towards irrigation has been increasing with 40% of capital outlays budgeted in fiscal 2021 towards various irrigation and flood control projects, against 35% in fiscal 2020 (revised estimates).
 
Moreover, socio-economic indicators are moderate. Literacy rate is 75% (national average is 74%); the maternal mortality rate is 108 per 100,000 births (national average is 130); 21% of the population is below the poverty line (national average is 22%); and the Human Development Index rank is 19 among Indian states and union territories. This would necessitate higher social sector expenditure to improve social parameters.
Liquidity Strong

KSFC maintained adequate liquidity in the form of cash and bank balance of around Rs 230 crore as on March 31, 2020. Total repayments in fiscal 2021 of around Rs 400 crore will be met from internal accruals.

Outlook: Stable

CRISIL believes the state government will maintain its healthy economic management and financial risk profile over the medium term.

Rating Sensitivity factors
Upward factors:
* Improvement in socio-economic indicators of the state and,
* Sustained revenue surplus, coupled with fiscal deficit below 3.0% of GSDP
 
Downward factors:
* Consistent increase in fiscal deficit beyond 3.0% of GSDP.
* Non adherence to T-30 structure on a consistent basis
Adequacy of credit enhancement structure

The guarantee provided by the state government is unconditional, irrevocable, and covers the entire rated amount for bonds. Trustee-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligation for bonds.

Unsupported ratings:  CRISIL BBB

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

The corporation has strong capitalisation parameters with networth and gearing of Rs 1,071 crore and 1.5 times, respectively, as on March 31, 2020 as against Rs 992 crore and 1.3 times, respectively, a year ago. The networth coverage for net non-performing assets (NPAs) of the corporation stood comfortable at 9.8 times as on March 31, 2020 improving from 8.6 times a year ago on account of improvement in networth and decline in NPAs. The corporation receives yearly capital infusion from the state government. Over the past five years, KSFC has received capital infusion of Rs 393 crore.
 
The rating is constrained by exposure to weak borrower profile. Majority of the loans are for project creation by micro small and medium enterprises (MSMEs) and thus are susceptible to the risks attached to newer entities. KSFC's GNPA though improved to 9.6% as on March 31, 2020 from 12.0% a year ago remains elevated.
 
The ratings reflect adequate capitalisation and comfortable resource profile. These strengths are offset by modest asset quality.

About the Company

KSFC was established to provide financial assistance for setting up industrial units in Karnataka. For fiscal 2020, profit after tax was Rs 31.4 crore on gross income of Rs 358.8 crore as against Rs 9.5 crore and Rs 373.5 crore, respectively, for fiscal 2019.

Key Financial Indicators - Government of Karnataka- reported financials
Particulars Unit 2019^ 2018^
Revenue receipts Rs crore 1,64,979 1,47,000
Revenue surplus Rs crore (679) 4,517
Gross fiscal deficit Rs crore 38,437 31,105
GFD/GSDP % 2.5% 2.37
Debt*+Guarantees/GSDP % 20.0% 19.2
RR/Interest Times 10.7 10.6
*CRISIL adjusted debt
^Accounts
 
Key Financial Indicators
Particulars (As on/ for the period ended March 31) Unit 2020^^ 2019
Total assets Rs crore 2,849 2,432
Total income Rs crore 331 301
PAT Rs crore 31 10
GNPA % 9.6 12.0
Return on assets % 1.2 0.4
Networth/NNPA Times 9.8 8.6
^^Provisional
List of covenants

The material covenants of the instruments are as follows:

  1. At least 30 calendar days prior to the forthcoming due date for interest and/ or principal (T-30), KSFC shall credit the requisite funds in the Trust and Retention Account (TRA) for servicing the bondholders on the forthcoming due date ('T') and communicate it to the trustee.
  2. The funds credited to TRA may be put as short-term Fixed Deposit (FD), only with banks having rating equivalent to AA from any SEBI approved credit rating agency, with a lien on the FD in favour of the Trustee. At least five days prior to the due date, the amount invested in FD shall be transferred to the TRA and the interest earned thereon will be credited to the current account of KSFC. After making payment to the bond holders, any amount lying in the credit of TRA may be withdrawn by KSFC.
  3. In case KSFC does not deposit the funds into TRA at least 30 calendar days prior to forthcoming due date (T-30), KSFC shall communicate, in writing to the Finance Department GoK with a request to provide to the TRA, indicating the forthcoming due date and amount payable to bondholders with a copy marked to trustee and the credit rating agency.
  4. In case KSFC fails to intimate GoK as required by the above points, the trustee shall intimate GoK at least 25 calendar days prior to forthcoming due date (T-25).
  5. In the event that GoK fails to ensure funds in the TRA at least 7 business days prior to the due date (T-7), the trustee shall invoke the guarantee issued by the GoK on T-7 and inform credit rating agency about the same.
  6. On invocation of the guarantee, GoK will deposit the necessary funds to the TRA at least 3 days prior to the due date (T-3).
  7. The KSFC will ensure this payment on the due date (T Day) by way of RTGS/NEFT/Funds Transfer. Wherever such facilities are not available, Cheques/DDs will be dispatched to the investors at least 5 days prior to the due date (T-5).

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs crore)		 Complexity level Rating assigned
with outlook
INE549F08533 Bonds*^ 26-Dec-14 8.58% 26-Dec-20 235.0 Simple CRISIL AA-(CE)/Stable
INE549F08525 Bonds*^ 01-Sep-14 9.19% 1-Sep-24 250.0 Complex CRISIL AA-(CE)/Stable
INE549F08517 Bonds*# 04-Feb-13 9.08% 04-Feb-25 200.0 Complex CRISIL AA-(CE)/Stable
INE549F08509 Bonds*# 18-Oct-12 9.24% 18-Oct-24 200.0 Simple CRISIL AA-(CE)/Stable
INE549F08475 Bonds * 25-Jan-11 8.6% 25-Jan-22 100.0 Complex CRISIL AA-(CE)/Stable
INE549F08491 Bonds* 02-Jan-12 9.49% 02-Jan-23 100.0 Simple CRISIL AA-(CE)/Stable
*Amount outstanding as on March 31, 2019.
^These are non-convertible bonds
#The trustee for this issuance has been changed from State Bank of Hyderabad to SBI CAPS.
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs crore)		 Complexity levels
INE549F08467 Bonds* 24-Jun-10 8.39% 24-Jun-20 123.0 Complex
INE549F08459 Bonds* 27-Jan-10 8.23% 27-Jan-20 77.0 Complex
*Amount outstanding as on March 31, 2019
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  600.00
31-07-20  		CRISIL AA-(CE)/Stable      07-09-19  CRISIL AA-(CE)/Stable  16-10-18  CRISIL AA-(SO)/Stable      CRISIL AA-(SO)/Stable 
            30-07-19  CRISIL AA-(SO)/Stable  02-01-18  CRISIL AA-(SO)/Stable       
Non Convertible Bonds  LT  485.00
31-07-20  		CRISIL AA-(CE)/Stable      07-09-19  CRISIL AA-(CE)/Stable  16-10-18  CRISIL AA-(SO)/Stable      CRISIL AA-(SO)/Stable 
            30-07-19  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

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

Ankit Hakhu
Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
ankit.hakhu@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