KOCHI: A top official of Kerala Financial Corporation (KFC) has refuted recent media reports criticising the Corporation’s Rs 60.80 crore investment in non-convertible debentures (NCDs) issued by Reliance Commercial Finance Ltd (RCFL) in 2018.
The official described the allegations as “baseless and misleading,” asserting that the investment was a strategic move tied to enhancing the Corporation’s bond ratings, which was a basic requirement that helps in reducing the pricing.
“Media is making a mountain out of a molehill in this issue. KFC subscribed to Rs60.80 crore in RCFL NCDs as an unavoidable credit enhancement measure to support our bond issues. Over the past decade, KFC has successfully raised over Rs2,000 crore through bonds, and this step was part of that effort,” the official explained.
KFC’s standout recovery from RCFL
While nearly 20 major financial institutions, including NABARD, State Bank of India (SBI), and several other commercial banks, had exposure to RCFL, they accepted only 25 per cent recovery of their investments as part of a resolution process led by Bank of Baroda (B0B) under the guidance of Reserve Bank of India (RBI).
According to sources, while NABARD had an exposure to the tune of Rs1,100 crore, to RCFL, SBI’s was at about Rs300 crore.
KFC, however, opted out of the resolution process and negotiated a better deal. The Corporation has been offered 52 per cent of its Rs60.80 crore NCD investment and an additional 1 per cent annually over five years from the receivables of Authum Investment and Infrastructure Ltd., the NBFC that acquired RCFL and Reliance Home Finance Ltd later as part of the resolution process.
Fully provided, clean profit ahead
KFC clarified that it had already provisioned 100 per cent of the Rs60.8 crore investment in its books. “This means nothing from these NCDs currently sits on our balance sheet. Any future recoveries from Authum, whether through existing commitments or further negotiations, will directly add to our profit and loss (P&L) account as clean profit,” the official emphasised while talking to businessbenchmark.news.
The context behind the RCFL NCDs
The official also explained the rationale behind the investment in RCFL NCDs. In 2017-18, KFC was preparing to raise Rs250 crore through a bond issue but faced a roadblock due to its then A credit rating.
As the primary investors in KFC bonds are provident fund (PF) trusts, which can only invest in AA-rated papers, the Corporation had to undertake credit enhancement measures to secure the higher rating.
To achieve this, KFC established collateral amounting to 20 per cent of the bond size (Rs50 crore) and a six-month Debt Service Reserve Account (DSRA) at a rate of 8.69 per cent (Rs 10.8 crore), bringing the total to Rs60.8 crore.
“These measures were essential for KFC to access funds to support its lending requirements. Despite the challenges RCFL faced later due to the liquidity crisis induced by the failure of a couple of NBFCs – IL&FS, DHFL, etc, the decision was made in the best interests of the Corporation’s financial strategy at the time,” the official added.
Strategic recovery
Authum, the NBFC that acquired RCFL and RHFL, played a key role in ensuring some recovery for creditors after RCFL’s collapse during the liquidity crisis. KFC’s decision to negotiate independently rather than joining the broader resolution process has yielded better returns than most of RCFL’s other creditors.
