Kinara Capital hit by NBFC stress: Breaches loan terms, plans stressed asset sale

Credit cost volatility could impede re-rating of the valuation multiples.

Nuveen Global-backed MSME lender Kinara Capital is grappling with financial challenges as it seeks to sell some of its stressed assets while working through Rs 1,772 crore in breached financial covenants related to its borrowings.

“As of 31 December 2024, the company has breached certain financial covenants, primarily due to elevated GNPAs, profitability, and etc., with an outstanding principal of Rs 1,772 crore (out of Rs 2,245 crore of total outstanding principal),” according to filings seen by Moneycontrol.

“Some of the lenders have taken action but have not called back any loan. The company is continuing to pursue waivers with the remaining lenders,” it added.

Kinara Capital's financial strain is part of a broader stress in the NBFC sector, particularly those engaged in unsecured MSME lending. The Reserve Bank of India (RBI) has tightened its stance on unsecured lending, including personal, business, and credit card loans since last 18 months.

Simultaneously, rising interest rates since last year have weakened borrowers’ repayment capacities, leading to higher delinquencies.

Higher GNPA, covenant breach

Kinara Capital’s financial disclosures indicate that the breach was due to a “rise in delinquencies and higher-than-average leverage” within certain customer segments.

As of June 30, 2024, the company’s borrowing profile consisted of 29% debentures from foreign portfolio investors (FPIs), followed by external commercial borrowings (ECBs) at 28%, loans from NBFCs and financial institutions at 25%, term loans from banks at 16%, and alternative investment funds (AIFs) at 2%.

“In Q3 FY24, we identified early warning signals of rising delinquencies and higher-than-average leverage within certain customer segments. In response, we implemented proactive measures in FY25, tightening our underwriting standards to ensure new disbursements aligned with higher credit quality criteria. This strategic shift led to a stagnant loan book over the last 15 months, affecting the denominator in our GNPA calculations,” Kinara CFO Aiswarya Ravi said in a written response to Moneycontrol queries.

While this move was aimed at strengthening the company’s portfolio in the long run, it caused a temporary spike in the Gross Non-Performing Asset (GNPA) ratio, further impacting financial metrics.

After years of profitability, Kinara reported a loss of Rs 150 crore for the nine months ending December 2024.

The company attributed this loss primarily to higher credit costs resulting from increased write-offs due to stress in its portfolio. While some lenders have increased scrutiny, Kinara stated that no lender has imposed borrowing restrictions or requested additional collateral. The company has secured waivers for 38% of the breached debt and is in talks to obtain further relief.

Founded by Hardika Shah in 2011, Kinara Capital primarily serves traders and small manufacturers, a segment that remains largely underserved, according to ICRA. The company’s major shareholders include Nuveen, Gaja Capital, Michael & Susan Dell Foundation (MSDF), Patamar Capital, Gawa Capital, Triple Jump, and British International Investment (BII).

Kinara provides loans for asset purchases and working capital, with tenures ranging from 6 months to 72 months and ticket sizes between Rs 50,000 and Rs 40 lakh. Currently, around 6% of its borrowers are new to credit, and 81% of its loan book is unsecured as of June 2024. It operates in six states—Karnataka, Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh, and Telangana—with its headquarters in Bengaluru.

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Stressed asset sale

To address its financial difficulties, Kinara is actively considering selling stressed assets but has not disclosed specific details. The company fully wrote off Rs 123.12 crore in bad loans and confirmed that a portion of this will be included in the distressed asset sale.

However, it does not plan to restructure these loans.

“The details regarding the value and percentage of NPAs being considered for sale, the potential buyers, and the expected recovery amount are confidential at this stage. We will be in a position to share this information once the transaction is concluded,” Kinara confirmed to Moneycontrol.

The company also emphasised that raising capital remains a key part of its financial strategy.

“Currently, the company maintains an adequate Capital to Risk-Weighted Assets Ratio (CRAR) to sustain its planned expansion. However, as part of our long-term strategy, we will consider bolstering capital in the future to further strengthen our balance sheet and support onward growth.”

Sectoral impact 

Kinara’s struggles reflect broader challenges in the NBFC sector. Recently, microfinancier Spandana Sphoorty Financial reported a second consecutive quarterly loss due to high credit costs, breaching financial covenants. IndoStar Capital Finance is auctioning Rs 356.78 crore in stressed loans, inviting counter bids from ARCs by August 26.

Two years since whip on unsecured loans, which banks are toeing the regulatory line?

Fitch Ratings notes that while India’s household debt remains low at 42.9% of GDP (June 2024), unsecured loans comprised 52% of new bad retail loans in H1 FY25. Nearly half of borrowers with unsecured loans also hold secured loans, increasing default risks. The sector’s unsecured bad-loan ratio stood at 1.7%, versus 1.2% overall.

Fitch warns that continued stress in unsecured lending could further impact asset quality and ratings.