Rating Rationale
June 26, 2023 | Mumbai
Karnataka State Financial Corporation
Rating reaffirmed at 'CRISIL AA- (CE) / Stable'
 
Rating Action
Rs.175 Crore (Reduced from Rs.250 Crore) Non Convertible BondsCRISIL AA- (CE) /Stable (Reaffirmed)
Rs.200 Crore BondCRISIL AA- (CE) /Stable (Reaffirmed)
Rs.100 Crore (Reduced from Rs.200 Crore) BondCRISIL AA- (CE) /Stable (Reaffirmed)
Rs.50 Crore BondCRISIL AA- (CE) /Stable (Withdrawn)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-(CE)/Stable' rating on the bonds of Karnataka State Financial Corporation (KSFC).

 

CRISIL Ratings has withdrawn its rating on bonds of Rs 225 crore as these are fully or partially redeemed. This has been confirmed with the trustees. The withdrawal is in line with the CRISIL Ratings policy.

  

The rating continues to reflect the unconditional and irrevocable guarantee from the Government of Karnataka and a trustee-administered payment mechanism for the bonds. Therefore, the rating reflects the credit risk profile of the Karnataka government. KSFC is adhering to the T-30 structure for bonds and funds are credited to the escrow account as per the structure and payment is on timely basis.

 

The Karnataka government has healthy economic management, superior financial risk profile and 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 Ratings has applied its criteria on rating instruments backed by guarantees.

Key Rating Drivers & Detailed Description

Strengths:

Healthy economic management by the Government of Karnataka:

The state government is committed to ensuring fiscal discipline with healthy liquidity management. The state had revenue deficit in fiscal 2021 as tax collection was impacted by the Covid-19 pandemic. Gross fiscal deficit (GFD) has consistently remained below prudential limits. Borrowings are mainly to fund capital outlays, ensuring moderate debt. The state government has not resorted to any borrowing under ways and means advances till March 2022, indicating healthy liquidity management.

 

Financial risk profile of the Government of Karnataka remains comfortable:

The state is self-reliant in terms of revenue, with its own tax and non-tax revenue forming over 65% of the receipts. Revenue grew ~6% in fiscal 2023 over a high base of fiscal 2022 and goods and services tax (GST) compensation period expiring in June 2022. Revenue grew 24% in fiscal 2022 on a low base of fiscal 2021 because of better tax revenue and GST compensation loans provided by the central government.

 

The state government continues to have strong control over committed expenditure (salaries, interest and pension), which is around 35% of revenue expenditure and is lower compared with other states. The revenue surplus increased significantly in fiscal 2023 (CAG provisionals) to around Rs 21,689 crore compared to Rs 4,337 in fiscal 2022 (accounts) due to GST compensation loans of Rs ~18,000 crore provided by the central government. Consequently, GFD as a percentage of gross state domestic product (GSDP) improved from 2.4% in fiscal 2021 to 1.7% in fiscal 2022, which was within the limits recommended by Fiscal Responsibility and Budget Management norms. Debt-plus-guarantees-to-GSDP ratio also improved to 24.7% in fiscal 2023 compared to 25% in fiscal 2022. Capital outlays witnessed 19% year-on-year growth in fiscal 2023. The profile of revenue expenditure will be monitorable over the medium term.

 

Healthy economic structure of the state government:

The robust tertiary sector accounts for around 64% of GSDP, against all-India average of 55%. This is supported by Bengaluru’s position as the information technology hub of India and is the main driver of economic growth in Karnataka. Nominal GSDP grew at a healthy compound annual growth rate of 10.2% over fiscals 2017 to 2022. However, the growth trajectory was impacted in fiscal 2021 due to the pandemic.

 

Weaknesses:

Dependence of the state government on the monsoon for irrigation; modest 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 vulnerability to the monsoon by investing in irrigation projects. The capital outlay towards irrigation has been 35-40% of the total capital outlay indicating the significance of irrigation infrastructure for the state.

 

Moreover, socio-economic indicators are modest. Literacy rate is 75% (national average is 74%); the maternal mortality rate is 108 per 1,00,000 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 12 among Indian states. 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 103 crore as on March 31, 2023. The liquidity cover for the three months was 4 times.

Outlook: Stable

CRISIL Ratings 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
  • Indebtedness below 20% of GSDP on sustained basis

 

Downward factors:

  • Indebtedness above 28-30% of GSDP on sustained basis
  • Non adherence to the T-30 structure for bonds

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. The state government supports KSFC through equity infusion and interest rate subsidy through budgetary allocation. KSFC meets its debt obligation through its own resources. Even the quantum of KSFC’s debt guaranteed is less than 1% of the revenue receipts of the Karnataka government. Also, CRISIL Ratings factors in the overall guarantees provided by the state government while assessing its credit profile. Even in case of stress situation faced by the borrower, CRISIL Ratings believes the Karnataka government will service the guaranteed debt in a timely manner.

Unsupported ratings  CRISIL BBB

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with Securities and Exchange Board of India’s (SEBI's) circular dated June 13, 2019.

Key drivers for unsupported ratings

The corporation has strong capitalisation parameters with networth and gearing of Rs 1,320 crore and 0.6 time, respectively, as on March 31, 2023, against Rs 1,275 crore and 0.6 time, respectively, in the previous fiscal.

 

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 are susceptible to the risks attached to newer entities.

 

The rating reflects 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 2023, profit after tax was Rs 83 crore on gross income of Rs 355 crore, against Rs 66 crore and Rs 359 crore, respectively, for fiscal 2022.

Key Financial Indicators

KSFC - standalone reported financials

Particulars

Unit

2023

2022

Total assets

Rs crore

2,422

2,639

Total income

Rs crore

355

359

Profit after tax

Rs crore

83

66

Gross NPA

%

6.4

6.5

Gearing

Times

0.6

0.6

 

Government of Karnataka- reported financials

Particulars

Unit

2022
(CAG Provisionals)

2021

(Accounts)

2020

(Accounts)

Revenue receipts

Rs crore

1,939,51

1,56,716

1,75,443

Revenue surplus

Rs crore

5,245

19,337

(1,185)

Gross fiscal deficit

Rs crore

60,072

67,143

38,211

GFD/GSDP

%

2.2

3.9

2.3

Debt*+Guarantees/GSDP

%

23.8

24.3

22.3

RR/Interest

Times

9.5

7.7

9.5

*CRISIL-adjusted debt

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 the 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 the TRA at least 30 calendar days prior to forthcoming due date (T-30), KSFC shall communicate in writing to the Finance Department of the Government of Karnataka with a request to provide to the TRA, indicating the forthcoming due date and amount payable to bondholders with a copy marked to the trustee and the credit rating agency.
  4. In case KSFC fails to intimate the Karnataka government as required by the above points, the trustee shall intimate the state government at least 25 calendar days prior to forthcoming due date (T-25).
  5. In the event that the Karnataka government fails to ensure funds in the TRA at least seven business days prior to the due date (T-7), the trustee shall invoke the guarantee issued by the state government on T-7 and inform the credit rating agency about the same.
  6. On invocation of the guarantee, the Karnataka government will deposit the necessary funds to the TRA at least three 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/demand drafts will be dispatched to the investors at least five days prior to the due date (T-5).

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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 crore)		 Complexity 
levels		 Rating assigned
with outlook
INE549F08525 Bonds 1-Sep-14 9.19% 1-Sep-24 175 Complex CRISIL AA- (CE) /Stable
INE549F08517 Bonds 4-Feb-13 9.08% 4-Feb-25 100 Complex CRISIL AA- (CE) /Stable
INE549F08509 Bonds 18-Oct-12 9.24% 18-Oct-24 200 Complex CRISIL AA- (CE) /Stable

 

Annexure - Details of rating withdrawn

ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Complexity 
levels		 Rating assigned
with outlook
INE549F08491 Bonds 2-Jan-12 9.49% 2-Jan-23 100 Complex Withdrawn
INE549F08517 Bonds 4-Feb-13 9.08% 4-Feb-25 50 Complex Withdrawn
INE549F08525 Bonds 1-Sep-14 9.19% 1-Sep-24 75 Complex Withdrawn
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond LT 300.0 CRISIL AA- (CE) /Stable   -- 30-06-22 CRISIL AA- (CE) /Stable 30-07-21 CRISIL AA- (CE) /Stable 31-07-20 CRISIL AA- (CE) /Stable CRISIL AA- (CE) /Stable
Non Convertible Bonds LT 175.0 CRISIL AA- (CE) /Stable   -- 30-06-22 CRISIL AA- (CE) /Stable 30-07-21 CRISIL AA- (CE) /Stable 31-07-20 CRISIL AA- (CE) /Stable CRISIL AA- (CE) /Stable
All amounts are in Rs.Cr.

   

Criteria Details
Links to related criteria
Criteria for rating instruments backed by guarantees
Rating Criteria for Banks and Financial Institutions
Meaning and applicability of SO and CE symbol
Understanding CRISILs Ratings and Rating Scales
Rating Criteria for State Governments

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