karnataka state financial corporation Management discussions

KARNATAKA STATE FINANCIAL CORPORATION ANNUAL REPORT 2007-2008 MANAGEMENT DISCUSSION AND ANALYSIS INDIAN ECONOMIC SCENARIO: During 2007-08, the Indian economy continued to expand at a good pace although there was some moderation in the growth momentum during the course of the year. As per the Central Statistical Organizations revised estimates, the Indian economy grew by 9 per cent. This growth rate in GDP in 2007-08 follows the all-time high growth of 9.6 per cent in 2006-07 and 9.4 per cent in 2005-06. This growth has meant a significant rise in the per capita income, which has grown from Rs.11,672 in 2003-04 to Rs. 24,321 in 2007-08. After a modest growth in crop output for several years, the Indian agriculture is reckoned to have rebound in 2007-08 with the foodgrain production surging by 10 million tonnes or 4.6 per cent to touch a new high of 227.32 million tonnes. The grain output in 2006-07 was 217.28 million tonnes. The increased agricultural production is attributed to favourable weather conditions, good rainfall with record output of major crops including wheat, rice, coarse cereals, pulses and oilseeds. The industrial production, as measured by the Index of Industrial Production (IIP) grew at 3 per cent in March 2008 compared to a robust 14.4 per cent growth in March 2007. As a result, the industrial production growth for the entire fiscal slipped to 8.1 per cent in 2007-08 from 11.6 per cent in 2006-07. However, owing to the comparatively healthy performance during the prior 11 months, the overall growth for the full year remained at over 8 percent. The industrial slowdown is largely because of the sharp drop in the growth of the manufacturing sector to 8.8 per cent from 12.5 per cent last fiscal. High inflation rate, spiraling crude oil and commodity prices adversely impacted the manufacturing sector. The services sector continued to be the major contributor to GDP growth and maintained its double-digit growth at 10.6 per cent during 2007-08 compared to 11.2 per cent in the previous year. During 2007-08 fiscal, the overall growth of infrastructure industries (crude petroleum, cement, electricity, coal, petroleum refinery products and finished steel) decelerated to 5.6 per cent as against 8.7 per cent in the previous year. Rising prices of industrial fuel and food products contributed heavily in pushing up inflation. Inflation based on wholesale price index touched 7.4 per cent at the end of March 2008 as compared to 5.9 per cent an year ago. On the external front, the value of countrys exports for the fiscal year 2007-08 amounted to $155.5 billion and the value of imports stood at $235.9 billion. With cumulative high export growth at 23 per cent and a higher import growth of 27 per cent, the countrys trade deficit stood at $ 80 billion. India received $24.57 billion foreign direct investments in 2007-08 and the sectors that attracted maximum FDI inflows include services, telecom, construction activities, computer software and hardware. KARNATAKAS ECONOMY: Karnataka is one of the top five industrialized states in the country. The overall real growth in GSDP in Karnataka for FY 08 is anticipated to be around 7 per cent. The year 2007-08 is the first year of the 11th plan period. The growth in Karnatakas GDP in agriculture is anticipated to be 4.4 per cent as against the all India revised estimates of 4.5 per cent. In industry and services sectors, the growth anticipated is 5 per cent and 8.7 per cent as against the all India growth rates of 8.1 per cent and 10.6 per cent respectively. Services sector continues to drive the economy in the State contributing 55.72 per cent to GSDP as compared to 25.16 per cent by the secondary sector and 19.13 per cent by the primary sector. The GSDP in real terms is likely to reach Rs.2,15,282.00 crore and the per capita GSDP in real terms, is likely to reach Rs. 39,576 in 2007-08 as against Rs. 25,085 in 2006-07. In 2007-08, the State Level Single Window Clearance Committee approved 728 projects with an investment of Rs.10,309.92 crore and the State High Level Clearance Committee has approved 108 projects with an investment of Rs.1,60,522.82 crore. 14,984 SSIs are registered during the year under review, involving an investment of Rs.1,126.56 crore and is expected to generate employment to 1,23,399 persons. Against this background, KSFC responded effectively to the growing and varied requirements of the industrial and services sectors in Karnataka. The Corporations efforts during 2007-08 were directed towards exploitation of the emerging growth opportunities, repositioning its business portfolio keeping the entrepreneurs needs in focus, strengthening of its fee - based activities, reducing NPA and broadbasing the resource mobilization. MAJOR INITIATIVES OF GOVT. OF KARNATAKA: * The Govt. of Karnataka under its Special One-Time Settlement scheme to help small borrowers of KSFC to come out of debt trap extended a monetary support of Rs.68 crores during the year 2007-08. * The Government has also assured a support of Rs.86 crores for settlement of NPAs of small borrowers of KSFC for the year 2008-09. * The Government infused equity of Rs.150 crores for improving the networth of the Corporation. * The Government also intervened in resolving the refinance facilities, which was temporarily held up on account of regulatory requirements. * A long-term restructuring plan was put in place to address issues relating to NPA reduction, improving networth and financial restructuring. MANAGEMENT OF NPAs One of the important functions of the recovery is managing the Non Performing Assets (NPAs). Appropriate and timely action is of utmost importance in tackling NPAs. The Corporation has introduced performance benchmarks for various areas in recovery, which include Quarter-wise and Element-wise recovery targets, Asset-wise collections, collection by sale of units, settlement through OTS etc. In addition to this, information on cases which are likely to slip from present asset status to a lower grade are generated every month and reviewed on a continuous basis in order to avoid any asset slipping further down. Similarly, information on cases where the asset status has already slipped are obtained every month and reviewed on a continuous basis to improve the asset portfolio by upgrading the status wherever possible by taking necessary follow-up steps. With stringent monitoring processes, the Corporation was able to not only bring down the NPA level but also arrest slippage of assets and improve recovery. CREDIT RISK ANALYSIS MODELS In order to improve the quality of in-house credit appraisal and mitigate credit risks, the Corporation on a study of various credit risk models of financial institutions/banks introduced Credit Risk Analysis Models. These models analyse risks involved in lending, such as financial risks, business risks, management risks, legal risks etc., and give clear perception about the project being financed. The model is under validation and a validated computer based model will be put in place in FY 09. ISO CERTIFICATION The Corporation obtained the ISO 9001:2000 renewed license during the year. M/s Bureau of Indian Standards renewed the certification for a further period of three years up to May 2010. Twelve Quality Internal Audits and six Management Review meetings as per the revised standards of ISO 9001:2000 were conducted during the year under review. All documents are updated, necessary revisions made in the Quality System Procedures with continual improvements in all the areas. The Quality System Procedures of new departments viz., Financial Services, Section-29 Cell and Infrastructure Development departments have been included in the Quality Manual QM-03. BIS auditors conducted Renewal and Surveillance audits during the year. Steps were initiated to conduct ISO awareness and Internal Audit Training programmes for a fresh batch of officers. COMPUTERISATION Steps were taken during the year for upgradation of IT infrastructure in the three major areas viz., hardware, software and networking, in-house. The entire upgradation project is expected to be completed in the next financial year. SANCTIONS: Sanctions during the year under various schemes touched Rs.368.15 crore covering 1,195 cases as against Rs.424.53 crore covering 1,326 cases during 2006-07. Cumulative sanctions reached Rs. 8,536.53 crore covering 1,59,225 cases as on 31.03.2008. FLOW OF ASSISTANCE: a) Assistance to small-scale enterprises: During the year, the Corporation sanctioned an amount of Rs.173.05 crore to 795 small-scale industries. Cumulative assistance to small-scale industrties at the end of March 2008 stood at Rs. 4,459.42 crore to 1,03,595 cases. b) Assistance to medium-scale enterprises: During the year, the Corporation extended financial assistance to 4 medium scale units amounting to Rs.14.65 crore. Cumulative assistance to this sector stood at Rs.830.13 crore to 1,642 cases. c) Assistance to transport: During the year, the Corporation extended financial assistance to 29 cases amounting to Rs.2.05 crore. The cumulative assistance to this sector stood at Rs.730.60 crore to 40,334 cases. d) Assistance to other sectors: Assistance to other sectors excluding SSIs, MSIs and Transport amounted to Rs.178.40 crore to 367 cases during the year. Cumulative assistance to other sectors stood at Rs.1,808.82 crore to 10,680 cases. HEAD OFFICE AND BRANCH OFFICE SANCTIONS: During the year, loan sanctioned by the head office amounted to Rs.133.77 crore to 57 cases compared to the previous years sanctions of Rs.184.57 crore to 73 cases. Loans sanctioned by the branch offices amounted to Rs.234.38 crore to 1,138 cases compared to Rs.239.96 crore to 1,253 cases in the previous year. INVESTMENT, VALUE OF OUTPUT AND EMPLOYMENT: The investment catalysed by the Corporation in 2007-08 is expected to be Rs.2,552.91 crore resulting in value of output of Rs.1,551.63 crore and generate employment to 7,430 persons. INDUSTRYWISE SANCTIONS: (Rs. in crore) Industry Amount % to the total 1 Hotel / Restaurants 161.54 43.88 2 Food 59.07 16.04 3 Non-metallic products 31.84 8.65 4 Engineering 27.27 7.41 5 Miscellaneous mfg. 21.55 5.85 6 Printing & Publishing 18.42 5.00 7 Industrial Estate 8.82 2.40 8 Chemicals 8.20 2.23 9 Textiles & Readymade Garments 7.37 2.00 10 Transport/Tpt. Equipment 6.45 1.75 11 Others 17.62 4.79 TOTAL 368.15 100 SIZEWISE SANCTIONS: (Rs. in crore) % to the total Sanctions No. Amt. No. Amt. 1 Up to Rs.10.00 lakhs 202 15.32 16.90 4.16 2 Above Rs.10.00 lakhs to Rs.45.00 lakhs 660 119.29 55.23 32.40 3 Above Rs.45.00 lakhs to Rs.150.00 lakhs 284 109.43 23.77 29.72 4 Above Rs.150.00 lakhs to Rs.300.00 lakhs 29 32.86 2.43 8.93 5 Above Rs.300.00 lakhs to Rs. 500.00 lakhs 8 23.55 0.67 6.40 6 Above Rs.500.00 lakhs 12 67.70 1.00 18.39 TOTAL 1,195 368.15 100.00 100.00 HIRE PURCHASE & FINANCIAL SERVICES: The Corporation opened 11 Nos. of Foreign Letters of Credit on behalf of the assisted units to the extent of Rs.10.06 crore. The income earned out of this activity is Rs.7.43 lakh during the year under review. DISBURSEMENTS: Disbursements made during the year 2007-08 touched Rs.303.13 crore as against Rs.310.39 crore disbursed during the year 2006-07. Cumulative disbursements reached Rs.6,829.53 crore as on 31.03.2008. RECOVERY: The total recovery during the year stood at Rs. 561.14 crore as compared to Rs.502.74 crore made in the previous year. Recovery in respect of loans was Rs.542.24 crore, Rs.0.30 crore in respect of hire purchase, Rs.1.80 crore in respect of leasing and Rs.16.80 crore in respect of financial services. The Corporation was able to keep up the tempo of recovery on account of systematic and concerted efforts put in, special emphasis laid on tackling chronic and major default cases, review of cases at regular intervals and series of consortium meetings held with the loanee units to sort out various problems. CASES UNDER SECTION 29 OF SFCs ACT: The Corporation had in its custody assets of 2,102 default units at the beginning of the financial year. During the year under review, assets of 163 units involving arrears of Rs. 269.10 crore were added. Assets of 709 units were returned / released / sold during the year. Assets of 343 units were transferred to DC/ DC transit. As at the end of March 2008, assets of 1,213 units involving arrears of Rs. 960.66 crore remained in the custody of the Corporation. Out of these, 1,058 are industrial units involving arrears of Rs. 925.95 crore and 155 transport cases involving arrears of Rs. 34.71 crore. Status of Repayment as on 31.03.2008 (Term Loans only) (Rs. In lakhs) PARTICULARS PRINCIPAL INTEREST TOTAL Arrears at the beginning of the year 10,187.56 41,962.97 52,150.53 Add: Demands during the year 2007-2008 26,394.29 8,183.44 34,577.73 Less: Rescheduling, funding & status change in the account 1,450.04 5418.21 6,868.25 Recoverable Amount A: 35,131.81 44,728.20 79,860.01 Less: Recoveries a) Against Arrears 15,607.31 6,017.33 21,624.64 b) Against Current 13,433,96 6,132.84 19,566.80 Total Recovery B: 29,041.27 12,150.17 41,191.44 Overdues as on 31.03.2008 (A-B) 6,090.54 32,578.03 38,668.57 01. Loan outstanding 1,23,162.16 02. % of overdues to loan outstanding 31.40 03. % of collected to collectable 51.58 04. % of current principal recovery to principal demand 50.89 05. % of current interest recovery to interest demand 74.94 NOTE: Amount outstanding and amount recoverable in respect of statutory notice issued cases, cases taken over under Sec. 29 of the SFCs Act, DC referred cases, Suit filed cases, PG invoked cases and BIFR cases are not included in the above statement. KPM(R) CASES: During the year, 12 certificates to Deputy Commissioners were issued for recovery of Rs. 5.60 crore. 1,655 units have been referred to DC for recovery of dues as at the end of March 2008. RESCHEDULING: Review of all default portfolio was made on a case to case basis and appropriate strategies adopted. During the year, the Corporation rescheduled the repayment of loan in respect of 222 units amounting to Rs.10.34 crore as against 398 units rescheduled amounting to Rs.16.38 crore during the previous year. FINANCIAL RESULTS: During the year under review, the Corporation generated a gross revenue of Rs.265.21 crore on cash basis as against Rs.195.71 crore in 2006-07, an increase by 35.51%. Working of the Corporation for the year resulted in an operating profit of Rs.31.66 crore as against Rs.17.32 crore in 2006-07, an increase of 82.70%. The net profit for the Corporation stood at Rs.62.17 crore compared to Rs.12.95 crore for the previous year. This increase in the net profit is a result of the support extended by the GoK towards settlement of NPAs in respect of small loans up to Rs.10 lakhs as also the concerted efforts of the Corporation. These measures resulted in higher interest recoveries and write back of NPA provision of Rs.55.29 crore. Apart from this, revenues were also augmented by the new fee-based activities introduced during the year. TREASURY ACTIVITY: The financial year 2007-08 was an year of challenge for the Corporation in terms of resource mobilization and the need for re-capitalization. The decision of the SIDBI in June 2007 to stop refinance to the Corporation because of the regulatory requirements of the Reserve Bank of India on the networth of the Corporation severely stressed the cash flows of the Corporation during the year. However, with the timely intervention of the Govt. of India, the Govt. of Karnataka, RBI and with the co-operation of the SIDBI, refinance was restored in February 2008. The state government also routed Rs.150 crore of its investment in Karnataka Neeravari Nigama Ltd., (Rs.120 crore) and Cauvery Neeravari Nigama Ltd., (Rs.30 crore) through the Corporation so as to broad base the equity of the Corporation. During the year, the investment of Industrial Development Bank of India in the Corporation as Equity Share Capital and Loan in Lieu of Capital, amounting to Rs.29.20 crore and Rs.9.17 crore respectively, were transferred in the name of Small Industries Development Bank of India. After restoration of refinance facility, the Corporation availed refinance of Rs. 106.00 crore, while repayment to SIDBI during the year was Rs.124.74 crore. The LoC outstanding of SIDBI which was at Rs. 875.68 crore as on 31.3.2007 came down to Rs. 856.94 crore by 31.3.2008. The interest cost on account of LoC also came down from Rs.76.56 crore for the year 2006-07 to Rs.72.70 crore for the year 2007-08. The Corporation availed a rebate of Rs.1.06 crore from SIDBI for prompt payment of principal and interest installments. The Corporation redeemed the bonds worth Rs. 66.40 crore during the year, thereby the outstanding of the bonds reduced from Rs.640.10 crore as on 31.3.2007 to Rs.573.71 crore as on 31.3.2008. The interest cost on bonds was marginally more at Rs.57.96 crore for the year 2007-08 compared to Rs.57.44 crore in 2006-07. The government guaranteed liability stood at Rs. 454.64 crore, comprising of Rs.454.27 crore on account of bonds and Rs.0.37 crore on account of fixed deposits. The Corporation remitted a sum of Rs.0.41 crore to the State treasury as guarantee commission. The total long-term liability of the Corporation which was at Rs.1571.30 crore at the beginning of the year, came down to Rs.1480.42 crore (excluding the subsidy bonds issued on behalf of the GoK) by the year end. The total interest and financial expenses reduced from Rs.141.11 crore for the year 2006-07 to Rs.136.34 crore for the year 2007-08. ASSET RECONSTRUCTION: The objective of the Asset Reconstruction department at head office is primarily to tackle the cases pooled after they are subjected to regular recovery process. These cases are addressed to bring down the NPA level by initiating second line of recovery action in the form of disposing the assets of the unit, filing miscellaneous petition against the guarantors to obtain decree, enforce the decree and bring attachment of the assets/property and identification of personal properties of the guarantors and bring them too for attachment through court. The Corporation has made progress in realising its objective of bringing the chronic default cases to a logical end inspite of several bottlenecks. During the year under review, a total amount of Rs. 1096.16 lakhs was recovered from the chronic default cases comprising Principal amount of Rs.641.00 lakhs and Interest of Rs.404.27 lakhs. Assets of 14 units were brought for sale involving a sale amount of Rs.507.00 lakhs of which an initial amount of Rs.256 lakhs is realised. The recovery from MR portfolio was Rs.131.17 lakhs which also contributed to the income of the Corporation. REHABILITATION OF SICK UNITS: The Sick Unit Monitoring Department is created for nursing of viable sick industries. The cumulative assistance as on 31.3.2008 since inception, under rehabilitation scheme (RSR) stood at Rs. 91.64 crores. The coverage of units under RSR scheme has reduced in recent years with the introduction of Debt Reconstruction Scheme (DRS) as most of the sick units opt for reliefs/concessions extended under DRS compared to RSR. Under the scheme, reliefs/ concessions such as reduction of interest in respect of cases carrying high rate of interest, rescheduling of principal dues and waiver of penal/compound interest to borrowers who cleared the interest dues on simple interest basis are extended. SPECIAL ONE TIME SETTLEMENT SCHEME OF GOK FOR SMALL AND TINY BORROWERS OF KSFC: With the advent of the era of liberalisation and economic reforms of Govt. of India, the SME sector, particularly, small scale units took the brunt of the economic challenges resulting in many of them going sick. Therefore, as a pro-active measure, the Corporation over the years has extended various reliefs and concessions to many SMEs in the form of one-time settlements. Small accounts still exist that need rehabilitation / honourable exit from their debt trap. To rescue these units from the debt trap, the Govt. of Karnataka came up with a special OTS scheme during 2007-08 for small and tiny KSFCs borrowers of loans up to Rs.10 lakhs. For this purpose, the state government extended budgetary support of Rs. 68 crores for the year 2007-08. Loans where the disbursed amount is Rs.10 lakhs and below and the account is NPA as on 1.4.2006 are eligible to be covered under the scheme. Under this scheme, the Corporation was able to settle nearly 6,000 loan accounts. This contributed substantially to the reduction of NPA level. OTHER FINANCIAL SERVICE ACTIVITIES: Strategic alliances entered into with different organisations- UTI, LIC of India, IFFCO-Tokio and IL&FS directed towards fee-based activities to augment income generation have started yielding results. - UTI Mutual fund products The Corporation has tied up with UTI for marketing of its mutual fund products. As a result of concerted efforts, the Corporation mobilised an impressive business of Rs.79.32 crore during the year against a target of Rs.12.75 crore and earned a commission of Rs.31.65 lakhs. - Insurance business The Corporation has a strategic tie up with IFFCO-Tokio and LIC of India for marketing of their general and life insurance products respectively. During the year, the Corporation got corporate agency license from Insurance Regulatory and Development Authority (IRDA) for marketing of life insurance products. Insurance training was imparted to selected staff and the Corporation mobilised a premium collection of Rs.1.03 crore during the year under review. Similarly, the Corporation made progress in its general insurance business and collected a premium of Rs.2.29 crore and commission of Rs.27 lakhs. - Monitoring of IPOs The Corporation is a recognised financial institution of SEBI for acting as Monitoring Agency for Public Issues exceeding Rs.500 crore. During the year, the Corporation took up the issue monitoring assignments of two more companies apart from the existing three companies and earned a revenue of Rs.21.00 lakhs under this activity. - Consulting Services The Corporation entered into an MoU with HDMC for providing technical valuation and certification of the works done by the contractors of HDMC. The Corporation executed the assignments provided by HDMC in this regard and is hopeful of getting similar assignments from BBMP, MMP etc. - SPV with IL&FS During the previous year the Corporation launched a Special Purpose Vehicle with IL&FS for taking up services such as project evaluation, business modelvalidation and similar customer centric financial services. During the year, the Corporation completed the registration of the company with registrar of companies in the name of M/s Karnataka enterprises Solutions Ltd (K-eSol Ltd). INFRASTRUCTURE DEVELOPMENT ACTIVITY: Infrastructure is an integral part of the services sector and plays a crucial role in the industrial development. With rapid growth of the economy in recent years, the importance and urgency of infrastructure development has increased. Recognizing this, the Corporation has taken up infrastructure development projects with public/private participation. The Corporation has been initially focussing on identifying valuable lands in the prime localities in and around Bangalore city owned by various government departments/ governmental agencies/registered societies/trusts etc., exploring suitable infrastructure development on joint venture basis. In respect of such joint venture projects, the Corporation takes care of all the financial tie-ups for development of these properties. The expected income out of different revenue models will be shared with the owners of the properties in appropriate ratio on mutually agreeable terms after studying economics/viability. The proposed joint venture projects will be of world class and state-of- art- technology. It could be IT park, shopping mall, commercial complex, SEZ, etc., depending upon the location of the property and commercial potentiality of the place. This new activity will ensure sustained cash flow for the concerned owner of the property as well for KSFC by way of rentals and other earnings which will be mutually beneficial to both the institutions. A separate infrastructure development department created for this purpose is fully functional. The identified joint venture proposals are in various stages of processing. It is expected that the efforts will fructify into credible joint ventures for implementation during 2008-09. The Corporation has been allotted 10 acres land in Harohalli industrial area and 25 acres of land in Mysore by the State Level Window Clearance Committee. It is proposed to develop IT/BT/SME parks in these lands. The concerned industrial areas are in various stages of acquisition/development by KIADB. The possession of these lands is likely to be given by KIADB during 2008-09. Further, there is also a move for development of Steel Park in about 200 acres land in Koppal district as a joint venture project with KIADB. The viability study of this proposal is in progress. MOFPI SCHEME : The Ministry of Food Processing Industries (MOFPI) has enlisted KSFC as one of the FIs for implementing the scheme of sanctioning grant/subsidy in the form of financial assistance to food processing industries. KSFC can now receive application for grant process and sanction the same through the e- portal. The corporation has received applications from 33 units across its BOs as of year 08, seeking MOFPI grant amounting to Rs.389.92 lakhs. After processing, the eligible amount of Rs.334.57 lakhs was sanctioned to 32 units. RTI ACT: The central government has brought into force the Right to Information Act during 2005. Accordingly the State Govt. has directed the Corporation to adopt the rules. In compliance, the Corporation has followed the said directions. As required render the Act, Public Information officers & Appellate Authorities have been appointed and a circular has been issued. All the relevant information required under the Act are made available on KSFC website. PUBLIC GRIEVANCE CELL: Public grievances are promptly addressed and effective measures are envisaged for their speedy disposal at branch, zonal and head office levels. This apart, Public Grievance Redressal Committee is in place at head office for on the spot settlement of complaints/ grievances pertaining to both branch and head office issues. Over the last few years, there is substantial drop in the number of complaints received by the Public Grievance Cell as the operations of the Corporation are fine-tuned to be consistent with the transparency act of the state government.