The Pakistan Credit Rating Agency Limited
Press Release


Muhammad Azmat Shaheen

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PACRA revises the Debt Instrument Rating of Khushhali Microfinance Bank Limited | PPTFC | PKR 1.5bln | Jun-22

Rating Type Debt Instrument
(19-Jul-23 )
(30-Jan-23 )
Action Downgrade Downgrade
Long Term B- BB
Short Term - -
Outlook Negative Developing
Rating Watch Yes Yes

The lingering impact of Covid-19 along with the impact of the floods in Jul’22, the portfolio credit quality has been impacted severely and the financial risk profile of the Bank has weakened. The recoveries may take time and are uncertain. The weakening of the financial profile has led to a negative bottom line, along with weak asset quality indicators that have placed the CAR below the minimum regulatory requirement and are accordingly recognized in the ratings. The Bank issued the PPTFC-Tier I, amounting to PKR 1,500mln to strengthen the capital adequacy in Aug’22. In view of the declining CAR, the lock-in clause is being invoked on Tier-I instrument of the Bank, preventing any debt repayments for the period the said clause remains in place. The unpaid markup payments were due in a) Dec'22 and b) Jun'23 with next payment falling in Dec'23. The Bank’s management plan to recapitalize the bank, however, is constrained by the availability of required confirmed approvals of the same. In the absence of equity support or payments guarantee from existing sponsors, the TFCs are mandatorily required to be converted into common equity as per the loss absorbency clause of the investor's agreement.
On the financial profile side, as of Mar'23, the net investment of the Bank stood at PKR 11.5bln and net advances clocked at PKR 86.2bln (Dec'22: PKR 14.2bln & PKR 86.1bln). The deposit base declined to PKR 96.5bln (Dec'22: PKR 111.8bln) as the Bank reduced the top 20 concentration to 17% (Dec'22: 26%). Repo borrowings escalated to PKR 9.1bln (Dec'22: PKR 2.2bln). During 1QCY23, gross income earned by the Bank stood at PKR 2.2bln (1QCY22: PKR 2.1bln). The quarter ended with a bottom-line loss of PKR 749mln (1QCY22: PKR -707mln & CY22: loss of PKR 3.1bln). As of Jun'23, the CAR of the Bank was below the regulatory limit.
Considering the given scenario, PACRA is revising the rating of the Tier-I instrument from "BB" (double B) to "B-" (Single B Minus) which denotes capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
The strengthening of the capital adequacy as well as the liquidity of the bank is important for the sustenance and review of ratings. Management’s commitment to recouping the asset health and consolidating the Bank's position within the stipulated time is an acute necessity.

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. 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 of PKR 1,500mln with semi-annual profit payable at 6MK+4% to contribute towards the bank’s Tier I capital to support the Capital Adequacy. The instrument is subordinated to the payment of principal and profit to all other claims except common shares.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.