September 12, 2024

Kinara Capital Private Limited: Ratings reaffirmed; outlook revised to Stable

Summary of rating action

Previous Rated Current Rated

Instrument* Amount Amount Rating Action
(Rs. crore) (Rs. crore)
[ICRA]BBB (Stable); Reaffirmed and outlook revised
NCD programme 74.37 74.37
to Stable from Positive
CP programme 60.00 60.00 [ICRA]A3+; Reaffirmed
[ICRA]BBB (Stable); Reaffirmed and outlook revised
Long-term fund based – Term loan 114.60 114.60
to Stable from Positive
Short-term fund based – Term loan 25.00 25.00 [ICRA]A3+; Reaffirmed

Total 273.97 273.97

*Instrument details are provided in Annexure I

Rationale
The revision in the outlook to Stable factors in the weaker-than-expected asset quality and the consequent pressure on Kinara
Capital Private Limited’s (Kinara) earnings profile in FY2024 and Q1 FY2025. The capital profile is adequate at present. However,
considering the near-term impact on earnings coupled with the envisaged growth in the assets under management (AUM), it
would be critical to raise commensurate capital to maintain sufficient buffers. ICRA notes that the company’s capital
requirement is sizeable in relation to its current net worth. Kinara would need to raise capital in the next 12-18 months,
considering the subdued internal capital generation expected in the near term.

Kinara has been observing higher stress in certain regions and segmental exposures in its AUM in recent quarters, with the 90+
days past due (dpd)1 increasing to 6.9% as of June 30, 2024 (4.6% as of March 31, 2024) from 3.3% as of March 31, 2023 and
the 0+dpd increasing to 15.0% as of June 30, 2024 (10.7% as of March 31, 2024) from 6.3% as of March 31, 2023. The company
had also undertaken accelerated write-offs in Q1 FY2025, resulting in elevated credit costs. Consequently, it reported a loss of
-0.6% (as percentage of average managed assets) in Q1 FY2025 vis-à-vis the net profit of 1.6% in FY2024 (net profit of 1.6% in
FY2023). The company is cautious regarding disbursements in the impacted segments/regions and is focusing on bringing the
asset quality under control over the next 1-2 quarters. In line with this, Kinara is strengthening its credit and portfolio
monitoring framework and collections infrastructure further. Its ability to sustainably improve the performance of its portfolio
quality would be a monitorable. ICRA, however, notes that close to 31% of the AUM in June 2024 is protected by a credit
guarantee cover, up from 15% in June 2023.

The ratings also take into consideration Kinara’s track record of operations in the micro, small, and medium enterprises
(MSME)/small business lending segment. The ratings continue to take cognisance of the company’s geographically
concentrated operations with the top 3 states accounting for 71% of the portfolio as of June 30, 2024 (71% as of March 31,
2024).

1 Dpd numbers are reported net of CGTMSE claims received

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 Key rating drivers and their description

Credit strengths

Track record of operations in MSME segment – Kinara has an established track record of around 12 years in the MSME
segment, having commenced operations in FY2011. It provides loans to small businesses for asset purchase and working capital
requirements. As of June 2024, Kinara had a presence in 6 states with 133 branches.

Kinara’s AUM increased by 28% year-on-year (YoY) to Rs. 3,173 crore in FY2024, though it declined slightly in Q1 FY2025 to Rs.
3,189 crore as of June 2024, given the slowdown in disbursements. The off-balance sheet portfolio (includes co-lending and
assigned exposures) accounted for 37% of the overall AUM. ICRA notes that Kinara envisages to reach an AUM of ~Rs. 4,000
crore by March 2025. The AUM is largely concentrated in the southern states with the top 3 states – Tamil Nadu, Karnataka,
Andhra Pradesh – accounting for around 71% of the portfolio as of June 30, 2024 (71% as of March 31, 2024).

Kinara has an experienced management team 2, which has enabled it to continuously improve its lending and monitoring
systems that are crucial for its AUM growth, given the borrower profile. The company, however, faces attrition at the field
level, which has impacted collections and incremental disbursements in recent quarters. In view of the asset quality concerns,
Kinara is tightening its underwriting criteria and is adding more guardrails on exposures to vulnerable sectors and geographies.

Adequate capital profile for the near term – Kinara, with a reported gearing of 2.9 times and a managed gearing of 4.5 times
(adjusted gearing3 of 3.4 times) as of March 2024, is adequately capitalised for its current scale of operations. In FY2023, the
company had raised substantial equity of Rs. 405.8 crore in two tranches (Rs. 208.1 crore in April 2022 and Rs. 197.7 crore in
September 2022), strengthening its capital profile. Accordingly, its net worth stood at Rs. 729.5 crore as of June 2024 (Rs. 736.4
crore as of March 2024) vis-à-vis Rs. 245.3 crore as of March 2022. The capital-to-risk weighted assets ratio (CRAR) was
adequate at 27.0% as of June 2024 (27.6% as of March 2024). The company would be required to raise considerable capital
over the next 12-18 months, in relation to its current net worth, to maintain adequate capital buffer considering its growth
plans.

Credit challenges

Asset quality under pressure – Kinara’s gross stage 3 (GS3) assets increased to 6.6% as of June 30, 2024 (5.6% as of March 31,
2024) from 5.6% as of March 31, 2023. Softer bucket delinquencies also increased with the 0+dpd standing at 15.0% as of June
30, 2024 (10.7% as of March 31, 2023) vis-à-vis 6.3% as of March 31, 2023. ICRA notes that the company has been observing
asset quality stress over the last few quarters in its exposures to certain segments/regions as well as in its higher ticket size
portfolio. Impact on collections because of employee attrition is also being witnessed. As a result, Kinara had to undertake
higher write-offs in FY2024 and Q1 FY2025. Overall, the write-offs increased to Rs. 123.3 crore in FY2024 {3.9% of the AUM
and 6.1% of gross carrying asset (GCA)} from Rs. 74.2 crore in FY2023 (3.0% of the AUM and 4.5% of GCA); Kinara also wrote
off around Rs. 46 crore in Q1 FY2025.

Kinara’s customers are usually traders (62% in June 2024) and small manufacturers (34%), a largely underserved and unserved
segment, which is susceptible to economic shocks. The company usually provides loans for asset purchase and working capital
requirements, with tenures of 6 months to 72 months and ticket sizes in the range of Rs. 50,000 to Rs. 40 lakh. The share of
borrowers who are new to credit is currently around 6%. Further, Kinara largely operates in the unsecured lending segment,
with the share of unsecured loans at around 81% as of June 2024 (87% as of March 2023). ICRA notes the inherent risk in the

2
The Chief Operating Officer (COO), Mr. Thirunavukkarasu, recently resigned from the company; at present, Kinara has appointed separate
heads for sales and collections, who will report to the Chief Executive Officer
3 Adjusted gearing = (On-book borrowing)/(Net worth – First loss given default extended for co-lending exposure)

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 portfolio given the unsecured nature of the loans, the moderate credit profile of the borrowers and the modest seasoning of
the loans due to strong AUM growth.

ICRA notes that about 31% of Kinara’s portfolio, as of June 30, 2024, was covered under various guarantee schemes of Credit
Guarantee Fund for Micro Units (CGFMU), Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Emergency
Credit Line Guarantee Scheme (ECLGS), etc. Adjusting for the portfolio covered under these schemes, the net non-performing
advances (NPAs on AUM basis) stood at 3.9% as of June 2024 (2.9% as of March 2024 and 2.2% as of March 2023). The company
had recovered Rs. 38.6 crore during FY2021-FY2024 from the guarantee schemes.

In view of the asset quality concerns and to expand its coverage under the CGFMU scheme, the company had reduced the
average ticket size of the loans to Rs. 8 lakh (including partnerships) from Rs. 11 lakh as of March 2023. Further, it has taken
steps to improve its collection processes by introducing new collection interventions, outsourcing harder bucket delinquencies
to collection agencies, etc.

Subdued profitability – Kinara reported a modest loss in Q1 FY2025 vis-à-vis a profit of 1.6% (percentage of AMA) in FY2024
as well as FY2023, predominantly due to higher credit costs. The credit cost increased to 4.9% in Q1 FY2025 (4.8% in FY2024)
from 3.5% in FY2023, owing to the elevated write-off of Rs. 123.3 crore in FY2024 (Rs. 46 crore in Q1 FY2025), given the stress
observed in its portfolio. Kinara’s operating cost remained elevated at 4.7% in FY2024, though it was lower than 6.2% in
FY2023. Operating costs could witness some increase in the near term as incremental changes are being implemented for the
sales and collections teams in response to the asset quality stress.

Kinara has been increasing the share of higher interest rate loans over the last two years. Loans with an interest rate of more
than 30% accounted for 24.3% of the portfolio as of March 2024 compared to 17.8% as of March 2023 (2.7% as of March
2020), supporting its yields and interest margins. Further, the company has booked sizable gains from its co-lending portfolio,
which has also supported the interest margins.

The steps taken by the company to enhance its portfolio quality and manage the operating efficiency, while focusing on
smaller-ticket loans, would be key for improving its earnings profile. Further, Kinara’s ability to improve its liability profile,
through further diversification of its lenders, and obtain funds at competitive rates would remain crucial from an earnings
perspective.

Liquidity position: Adequate

Kinara had unencumbered cash and liquid investments of ~Rs. 672.6 crore as of June 30, 2024. The company is also expected
to have collections of Rs. 1,143.2 crore between July 2024 and December 2024. As such, its liquidity position is projected to be
adequate for meeting the scheduled debt repayments (including interest) of Rs. 848 crore during July-December 2024.

Kinara’s lender profile, as on June 30, 2024, comprised debentures from foreign portfolio investors (FPIs; 29% of the total
borrowings), followed by external commercial borrowings (ECBs), non-banking financial companies (NBFCs)/financial
institutions, term loans from banks, and alternative investment funds (AIFs) at 28%, 25%, 16% and 2%, respectively. ICRA notes
that the company was in breach of some financial covenants with its lenders and has received temporary relaxation from a
few lenders for the same.

Rating sensitivities

Positive factors – A sustained improvement in the profitability indicators and funding profile while scaling up the AUM would
be a positive factor.

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 Negative factors – Pressure on the company's ratings could arise if there is further deterioration in its asset quality or earnings
profile. Sustained weakening of the capitalisation metrics (managed gearing exceeding 5 times on a continued basis) would
also exert pressure on the ratings.

Analytical approach

Analytical Approach Comments

Applicable rating methodologies Rating Methodology for Non-banking Finance Companies
Parent/Group support Not applicable
Consolidation/Standalone The ratings are based on the standalone financial statements of the company

About the company

Kinara Capital Private Limited is a non-deposit taking NBFC, incorporated in 1996. The current promoters acquired the
company in September 2011 and commenced lending operations in November 2011. It provides secured (hypothecation of
machinery) and unsecured term loans as well as working capital facilities. Currently, the company operates in six states, namely
Karnataka, Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh and Telangana, with its head office in Bengaluru. As on March
31, 2024, Kinara had 133 branches with an AUM of Rs. 3,173.24 crore (AUM of Rs. 3,189.3 crore as of June 30, 2024).

Key financial indicators (audited)

Kinara Capital Private Limited FY2023 FY2024 Q1 FY2025

Total income 491.6 722.6 174.3
Profit after tax 41.2 62.2 (6.8)
Total managed assets 3,435.0 4,305.9 4,443.5
Return on managed assets 1.6% 1.6% -0.6%
Adjusted gearing (times) 2.8 3.4 3.7
Managed gearing (times) 3.7 4.5 4.8
Gross stage 3 5.6% 5.6% 6.6%
CRAR 32.0% 27.6% 27.0%
Source: Company, ICRA Research; All ratios as per ICRA’s calculations; Amount in Rs. crore

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 Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years

Current (FY2025) Chronology of rating history for the past 3 years
FY2024 FY2023 FY2022
Amount Rated
Instrument Type 12-Sep-2024 Date Rating Date Rating Date Rating
(Rs Crore)
Short term-term
Short Term 25.00 [ICRA]A3+ 15-SEP-2023 [ICRA]A3+ 22-JUL-2022 [ICRA]A3+ 09-NOV-2021 [ICRA]A3
loan-fund based
- - 28-SEP-2022 [ICRA]A3+ - -
Long term-term [ICRA]BBB [ICRA]BBB-
Long Term 114.60 [ICRA]BBB (Stable) 15-SEP-2023 22-JUL-2022 [ICRA]BBB (Stable) 19-APR-2021
loan-fund based (Positive) (Negative)
[ICRA]BBB-
- - 28-SEP-2022 [ICRA]BBB (Stable) 06-JUL-2021
(Negative)
[ICRA]BBB-
- - - - 09-NOV-2021
(Negative)
CP programme Short Term 60.00 [ICRA]A3+ 15-SEP-2023 [ICRA]A3+ 22-JUL-2022 [ICRA]A3+ 19-APR-2021 [ICRA]A3
- - 28-SEP-2022 [ICRA]A3+ 06-JUL-2021 [ICRA]A3
- - - - 09-NOV-2021 [ICRA]A3
[ICRA]BBB [ICRA]BBB-
NCD programme Long Term 74.37 [ICRA]BBB (Stable) 15-SEP-2023 22-JUL-2022 [ICRA]BBB (Stable) 19-APR-2021
(Positive) (Negative)
[ICRA]BBB-
- - 28-SEP-2022 [ICRA]BBB (Stable) 06-JUL-2021
(Negative)
[ICRA]BBB-
- - - - 09-NOV-2021
(Negative)

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 Complexity level of the rated instruments

Instrument Complexity Indicator

NCD programme Simple
CP programme Very Simple
Long-term fund based – Term loan Simple
Short-term fund based – Term loan Simple

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analysing an entity's financial, business, industry risks or
complexity related to the structural, transactional or legal aspects. Details on the complexity levels of the instruments are
available on ICRA’s website: Click Here

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 Annexure I: Instrument details
Amount
Date of Coupon Current Rating and
ISIN Instrument Name Maturity Rated
Issuance Rate Outlook
(Rs. crore)
INE200W07290 NCD programme Sep 07, 2022 11.75% Mar 07, 2028 69.52 [ICRA]BBB (Stable)
Unallocated NCD programme NA NA NA 4.85 [ICRA]BBB (Stable)
Unallocated CP programme NA NA NA 60.00 [ICRA]A3+
- Jul 29, 2022 NA Feb 15, 2025 43.89 [ICRA]BBB (Stable)
Long-term fund based – Term
to to
loan
Jun 30, 2023 Aug 31, 2025
Unallocated Long-term fund based – Term NA NA NA 70.71 [ICRA]BBB (Stable)
loan
Unallocated Short-term fund based – Term NA NA NA 25.00 [ICRA]A3+
loan
Source: Company

Please click here to view details of lender-wise facilities rated by ICRA

Annexure II: List of entities considered for consolidated analysis

Not Applicable

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 ANALYST CONTACTS
Karthik Srinivasan A M Karthik
+91 22 6114 3444 +91 44 4596 4308
karthiks@icraindia.com a.karthik@icraindia.com

R Srinivasan Ajay Bathija

+91 44 4596 4315 +91 22 6114 3448
r.srinivasan@icraindia.com
ajay.bathija@icraindia.com

RELATIONSHIP CONTACT
L. Shivakumar
+91 22 6114 3406
shivakumar@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

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