Kerala Financial Corporation (KFC), which became the first State financial corporation to adopt a base rate regime over the prime lending rate (PLR), wants to ultimately settle for a marginal cost of funds-based lending rate (MCLR).

The change in the rate structure is the first step in its bid to reinvent itself and be on par with banks, said Sanjeev Kaushik, Chairman and Managing Director. Alongside, it would launch a drive to clean up its balance sheet and revamp the credit policy.

Hit on profits

Kaushik told BusinessLine that the board has already approved a base rate of 9.5 per cent from June 1 this year. “The base rate is calculated based on our cost of funds. Because we borrow from the markets and banks, we take a mark-up and pass that on as the lending rate,” said Kaushik. For KFC, the base rate is a slight mark-up on its cost of funds of 9 per cent.

Lowering the rate from 14.5 per cent to 9.5 per cent has implications for its profitability. “This would also bring down the interest income. So, our profits may take a hit during the next one to two years.”

But lending at 14 to 16 per cent is not a sustainable proposition, either. KFC needs to be competitive, and has to get good business to stay in contention.

Public deposits

The ultimate target is the MCLR system popularised by commercial banks, said Kaushik. Financial institutions raising funds at a low rate are able to pass on the same at an incremental cost to their customers.

“That can happen only when you’ve a public deposit scheme. We don’t have the CASA (current accounts, savings accounts). But nothing prevents KFC from having public deposits or a public bonds scheme.”

“If I want to float a retail bonds scheme or a retail deposit scheme, I can do that. But in order to do that, I need to first set my house in order. I need to arrest my NPAs, increase my balance sheet, and get a reasonably good rating.”

“Currently, KFC has been able to get a AA rating for its bonds from BrickWork. We want Crisil and others to do the rating for us.”

Reduction in NPAs

The next big step is reduction in NPAs. KFC has ₹500 crore-worth of NPAs. The reported figure is about 8.5 per cent gross. The overall performance has been good during the last financial year.

“We have collected ₹930 crore in recovery, an all-time record. We’ve almost doubled our new business sanctions to ₹700 crore from ₹350 crore in 2016-17.

While the total outstanding business has to grow, good business proposals need to be sanctioned; at the same time, recoveries have to happen and NPAs must come down.

Since accounts written off (D-category) also get removed from the balance sheet, any recovery here would straight away get reflected in the income. It is with this objective that KFC has proposed a loan settlement adalat here next month.

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