The Pakistan Credit Rating Agency Limited
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Muhammad Azmat Shaheen

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PACRA downgrades the instrument rating of Khushali Microfinance Bank Limited | PPTFC PKR 1.5bln | Jun-22

Rating Type Debt Instrument
(30-Jan-23 )
(14-Dec-22 )
Action Downgrade Maintain
Long Term BB A-
Short Term - -
Outlook Developing Negative
Rating Watch Yes Yes

Amidst Covid-19 impact, the Bank’s GLP witnessed a declining trend. Asset quality was impaired significantly, as the deferred book to total GLP was sizeable. Furthermore, considering the devastation of the massive flood, since Jul'22 the NPLs of the bank are expected to increase significantly, due to which the profitability of the Bank came under pressure. This has resulted in the erosion of the Bank's Capital Adequacy Ratio, which the Bank is required to maintain at 15%. The Bank to supplement its CAR, issued Tier-II and Tier-I TFCs. Apart from this, the Bank is also seeking equity support from the sponsors in proportion to their existing shareholding amongst them. The management has drawn a revival plan to mitigate the risk impact and steer the Bank onto the road of self-sustainability. The key elements are i) Capital injection plan - an amount of PKR 5bln is sought under the right issue ii) An investment opportunity teaser for the international investor is prepared and the responsibility to make it happen is being given to a capable firm iii) Five-year strategic plan has been approved by the Bank and finally, iv) CAR (Including CET-I) is being monitored and projected on a monthly basis. The term of the TFC (Tier-I) requires that as per the Lock in Clause, neither profit nor principal, will be payable if such payments will result in a shortfall in the bank's MCR/CAR or cause an increase in the shortfall. Revision in the rating of Tier-I instrument takes note of the lock-in clause just invoked and that debt repayment on this Tier-I instrument could not be made, as per the term of the signed agreement. Management’s commitment to recouping the asset health and consolidating the Bank's position within the stipulated time is an acute necessity. The assigned rating is taking into account the management plans to recapitalize the bank and strengthen the CAR as well as liquidity profile.
The ratings are dependent upon the out-turn of management’s plans to steer the risk profile of the bank towards an improved trajectory. Timely sponsor support is imperative. The ratings would also monitor the impact of technological advancement on the operational and risk efficacy of the Bank and reflect the need to oversee the risk profile of the Bank against unavoidable challenges.

About the Entity
Khushhali Microfinance Bank Limited ("KMBL" or the "Bank") incorporated in 2000 with proclamation of Khushhali Ordinance by Government of Pakistan and subsequently, transformed into a public limited company in 2008. With its headquarters in Islamabad and a total network of 240 footprint across Pakistan, KMBL operates under the supervision of State Bank of Pakistan. KBML is owned by United Bank Limited (30%), Rural Impulse Fund (24%), Responsibility Global MF (20%), Shore cap II Limited (14%), ASN-NOVIB (10%) and Bank AL-Habib (2%).

About the Instrument
KMBL issued Rated, Privately Placed Listed/ DSLR, Unsecured, Subordinated, Tier I Term Finance Certificates (TFC) of up to PKR 1,500mln to contribute towards the bank’s Tier I capital for complying with the Capital Adequacy Ratio (CAR) requirement prescribed by the SBP for Microfinance Banks. The instrument is perpetual. However, call option exists. The profit will be payable semi-annually, with the rate of 6MK+4%. The instrument is subordinated to the payment of principal and profit to all other claims except common shares.

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