KSFC: Where small business dreams find funding

In 2016, Infosys co-founder N R Narayana Murthy said at the inauguration of Invest Karnataka 2016: “In 1983, when all multinational banks, including Citibank and Bank of America, refused to give us a loan of Rs 50 lakh, it was KSSIDC and KSFC, with its extraordinary officers — K S Murthy, Rudra Dev, and B S Patil — approved the required loan in a week.”

Murthy, then a first-generation entrepreneur with a dream in his heart but no financial backup, availed Rs 25 lakh as loan from the Karnataka State Finance Corporation (KSFC). Today, Infosys is a $12 billion company having employed overs 2 lakh engineers.

Infosys is not alone — the state-owned development finance institution has funded many other success stories such as Reva Electric Car Company Pvt Ltd (which is now a part of Mahindra Group), Biocon, Suprajit Engineering and Sansera Engineering among others.

Backbone of SMEs

KSFC was incorporated by the erstwhile State of Mysore in 1959, under Section 3 (1) of the State Financial Corporations Act, 1951, which mandates extending financial assistance to entrepreneurs for setting up tiny, small and medium scale industrial units in the state with a special focus to industrially backward areas. It was launched with an authorised share capital of Rs 2 crore. The central government supported the corporation through provision for bonds. Many central financial institutions like IDBI refinanced up to 80% of the loans. In 2004, Small Industries Development Bank of India (SIDBI) took over this role when IDBI stopped refinancing SFCs, in its intention to become a full-fledged bank.

Ekroop Caur, Managing Director, KSFC, says the Corporation is meant to be functioning like any other bank, “but in fair terms to entrepreneurs so that they are able to invest”.

KSFC’s success includes stories from engineering, healthcare, hospitality, printing and publishing, and other fields. “Contribution of KSFC to the development of industries in Karnataka is immense,” says B S Patil, former chief secretary, the government of Karnataka, who was also the managing director of KSFC between 1982-87.

KSFC, which had just two branches initially, later spread across Karnataka and has 32 branches currently.

Of the total loan disbursed since inception (Rs 13,229 crore), 45% (Rs 5,943) has been disbursed in backward districts.

Roller-coaster journey

The journey of KSFC has been on a roller-coaster. In 2002-03, its gross non-performing assets (NPAs) peaked to 66.79% but now down to 11.95%. Net NPA, at the end of August, stands at 6.09%, down from 57.63% in 2002-03.

KSFC funded first-generation entrepreneurs who came up with new technologies and ideas. “Whenever the technology failed, KSFC suffered. When the technology was proven in the market, they have done well,” says Patil. Recession in individual sectors also affected KSFC.

Bad management, also, in certain periods has proved costly. “Funds have been allotted without proper appraisal and sufficient precautions, without market study, without application of mind,” he explains.

Policy changes also have affected KSFC negatively. All SFCs in India took a hit when the recommendations of the Narasimhan Committee on banking reforms were implemented, and banks started lending to MSMEs at an interest of 9% while SFCs were lending at 14%. KSFC had to restructure itself to survive.

KSFC seems to be giving a long rope to its defaulters. In fact, loans worth Rs 72.2 crore have been written off in the year 2018-19. The CAG report for 2018 points out lacunae in one-time settlement (OTS) schemes, KSFC’s practices in contravention to RBI rules while provisioning for NPAs, extending undue favour of waivers to defaulters, lack of pre-audit for OTS approvals.

KSFC, on its part, tries to balance the show with a credit risk rating system. External ratings evaluate the borrowers for all loans above Rs 1.5 crore, based on the project report. The internal rating system values the track record and financial performance.

The Corporation has made 100% NPA provision for the borrowers who default beyond the period of nine quarters, up to 18 quarters, to create enough NPA reserves, which, in turn, has impacted its bottom line.

The current status

Many government-assisted schemes launched in recent years offer interest subvention of 10% for many sectors, which is used to set off the difference between borrowing and the lending rate. KSFC borrows at 14% interest and lends it at 4% for projects up to Rs 10 crore for SC/STs and up to Rs 2 crore for women. Another scheme introduced last year for SMEs gives loans up to Rs 5 crore at 4% interest. The balance 10% interest is borne by the state government.

Today, KSFC can’t raise funds from the market, as fixed deposit mobilisation is limited by RBI regulations.

The state government gave a guarantee for mobilising private bonds, but new investment guidelines of 2016 prohibited this too, closing all routes of fund mobilisation from the bond market.

Ultimately, equity by the state government and the guarantee given by the state government to banks help KSFC survive. Recently, the state government provided funds Rs 600 crore to KSFC.

The last few years, especially 2014-15 to 2017-18, have been bad for small scale industries, due to government policies, demonetisation and GST, which impacted KSFC too. However, 2018-19 was better, with the disbursement of Rs 666 crore and recovery of Rs 736 crore. The corporations earning also ended in black at Rs 13 crore.

As of March 3, 2019, the state government held 91.9% stake in the company, while the remainder was controlled by SIDBI.

“Our portfolio today is Rs 2,100 crore. We are working on increasing that and reducing NPAs. We are also going for structural changes inside KSFC and hoping for things to pick up,” says Ekroop.