KOCHI: Capital levels are well above regulatory requirements, the loan book has shrunk, whereas the asset quality has deteriorated – this sums up the recent financial journey of Kerala Financial Corporation (KFC).
KFC loan book contracted in the first half of FY26 even as asset quality indicators weakened, contrasting with a further strengthening of its capital position, according to the latest rating rationale released by Brickwork Ratings.
The state-owned financial institution’s assets under management declined to Rs7,810 crore as of September 30, 2025, from Rs8,012 crore at the end of FY25, reflecting a sequential moderation in outstanding loans despite management’s focus on recovery and fresh disbursements.
Asset quality, meanwhile, showed visible stress in reported numbers. Gross non-performing assets (NPA) rose to 4.18 per cent as of end-September from 2.67 per cent at the close of FY25, while net NPAs increased to 1.89 per cent from 0.61 per cent over the same period.
Brickwork noted that the NPA spike partly reflects the methodology followed in interim financials, where only minimum regulatory provisions are made and technical write-offs are deferred, resulting in temporarily elevated NPA ratios.
Even so, the deterioration stands out against the backdrop of an improving balance sheet in the previous year, when both gross and net NPAs had declined on a full-year basis.
Capital adequacy strong
In contrast to the asset quality movement, capital adequacy strengthened further. KFC’s capital-to-risk weighted assets ratio rose to 30.78 per cent as of September 2025, up from 28.65 per cent at the end of FY25 and well above the 15 per cent regulatory requirement.
Net worth also improved to Rs1,424 crore by the end of September, aided by capital infusion and retained earnings.
Analysts point out that the robust capital position is supported not only by fresh capital but also by the composition of the loan book, which includes a meaningful exposure to state-linked and government-supported entities.
Such exposures typically carry lower perceived risk, contributing to stronger capital metrics. businessbenchmark.news had earlier reported that loans backed by state guarantees and government agencies account for a sizeable share of KFC’s outstanding portfolio, even as the corporation’s statutory mandate centres on promoting MSME-led industrialisation.
Profitability indicators, however, showed improvement. Net profit rose to Rs98.16 crore in FY25 from Rs74.04 crore in FY24, aided by higher total income and the absence of fresh provisions during the year.
In the first half of FY26, profits continued to grow on the back of rising interest income and higher other income, although interest expenses also increased, reflecting higher borrowings.
Brickwork retained a ‘AA/Stable’ rating on KFC’s non-convertible debentures, citing strong government ownership, adequate liquidity and comfortable capitalisation, while flagging asset quality management amid portfolio growth as a key monitorable going forward.
