| Chaitanya Godavari Grameena Bank | ||
| Rating outlook revised to 'Positive'; Rating Reaffirmed | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the Perpetual Tier I bonds of Chaitanya Godavari Grameena Bank (CGGB) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL BBB+'.
Revision in outlook to ‘Positive’ factors in the improvement in profitability metrics, which has strengthened the capital position of the bank. Reported profit after tax (PAT) improved to Rs 162 crore with a return on assets (RoA) of 1.5% for fiscal 2022 as against a PAT of Rs 101 crore with an RoA of 1.2% for fiscal 2021. The improvement in profitability was driven by the trading income for priority sector lending certificates (which started from fiscal 2022), improvement in credit costs and improvement in cost of funding for the bank. Credit costs improved to 0.4% of average assets for fiscal 2022 from 0.8% for fiscal 2021. This has led to improvement in capital to risk weighted assets ratio (CRAR) to 13.7% as on March 31, 2022 from 12.4% as on March 31, 2022. Further, the advances of the bank witnessed a healthy growth of 18% in fiscal 2022 and reached Rs 7326 crore as on March 31, 2022 from Rs 6209 crore as on March 31, 2021. The resource profile remains stable, with the proportion of current accounts and saving accounts (CASA) deposits to overall deposits at 31% as on March 31, 2022
In line with the Reserve Bank of India’s (RBI's) measures to cope with the Covid-19 pandemic, CGGB had given moratorium to borrowers and collections declined during the initial months but improved thereafter. Intermittent lockdowns and localised restrictions amid the second wave of the pandemic had again impacted collections. While the same has improved subsequently, any change in the payment discipline of borrowers or subsequent waves may affect delinquency levels. Overall delinquencies in advances for the bank has remained stable. The gross stage 3 (GS3) assets improved to 0.9% as on March 31, 2022 (1.1% a year earlier). Under RBI’s August 2020 and May 2021 Resolution Frameworks for Covid-19-related Stress, CGGB had not invoked restructuring for any of the accounts.
The rating factors in steady performance with a track record of profitable operations, adequate asset quality, and benefits from the parentage and stakeholders. These strengths are partially offset by limited flexibility to raise capital and geographic concentration of operations. |
Analytical Approach CRISIL Ratings has considered the standalone business, financial and management risk profiles of CGGB |
Key Rating Drivers & Detailed Description Strengths: Track record of profitable operations The bank has had profitable operations since it started in 2006. In the five fiscals through 2022, PAT has witnessed a compound annual growth rate (CAGR) of 15%. The growth was supported by the consistent scale-up of operations with a stable operating margin and low credit cost. While profitability, including for other RRBs, has been constrained by pension liabilities since fiscal 2018, it is expected to improve once the bank finishes providing for it by fiscal 2023. Provisions for pension liabilities increased by Rs 25 crore in fiscal 2022, which, along with expenses related to branch expansion and other infrastructure, led to an increase in the operating expenses to 2.5% of average assets for fiscal 2022 as against 2.0% for fiscal 2021.
For fiscal 2022, PAT was Rs 162 crore with an RoA of 1.5% as against Rs 101 crore and 1.2% in fiscal 2021. The improvement in profitability has been supported by the improvement in credit costs of the bank. It improved to 0.4% of average assets for fiscal 2022 from 0.8% of average assets for fiscal 2021. Further, the bank, in line with other RRBs, received access to the E-kuber platform of RBI and started trading in PSLC from fiscal 2022. This income stood at 0.4% of average assets for fiscal 2022 and is expected to be a sustainable source of income.
Further, a stable resource profile has also supported profitability. The deposit base has had a steadily five-year CAGR of 13% and stood at Rs 7287 crore as on March 31, 2022. The bank benefits from its longstanding presence in its operational areas and strong customer connect – resulting in a granular and stable deposit franchise. This is reflected in the stable proportion of CASA deposits to overall deposits at 30-32% for the past few fiscals, though it is lower as compared with other RRBs. Furthermore, more than 90% of CASA deposits comprise of savings account deposits. The proportion of retail deposits (below Rs 1 crore) was also high and formed 75% of total deposits as on March 31, 2022. Further, the renewal rate of term deposits is more than 52%. Additionally, the top 20 depositors contributed around 7% of total deposits as on March 31, 2022, resulting in low concentration in depositor profile. A granular retail deposit franchise also supports the net interest margin. Cost of deposits has improved to 5.3% for fiscal 2022 from 5.9% for fiscal 2021. The resource profile is expected to remain steady over the medium term.
Adequate asset quality with granular loan book Loan book of CGGB is granular with top 20 advances forming around 0.84% of the total loan book as on March 31, 2022. For corporate exposure, the bank follows the RBI regulations on exposure norms, which restrict the lending limit to 15% of the net worth to any single borrower and 40% of the net worth for any group.
Asset quality parameters have witnessed an improvement over years, with gross non-performing assets (NPAs) gradually falling to 0.9% as on March 31, 2022, (1.12% as on March 31, 2021) from 1.1% as on March 31, 2021 and 3.6% as on March 31, 2016. Further, CGGB has not restructured any account as permitted by RBI under resolution framework for Covid-19-related stress.
As on March 31, 2022, more than 60% of the advances were towards Kisan Credit Cards and agriculture gold loans. The recognition of such exposures as an NPA is linked to the crop season as per RBI regulations. Hence, the recognition of NPAs may be beyond the typical 90+ days. Nevertheless, while gross NPAs have remained under control, the credit costs have also been low. The average credit cost (as a percentage of average assets) was 0.4% in the past five fiscals with the peak being at 0.8% for fiscal 2021.
Given the challenging macro-economic environment, asset quality performance will remain a monitorable.
Benefits from the parentage and stakeholders such as Sponsor Bank, National Bank for Agriculture and Rural Development (NABARD) and RBI RRBs, including CGGB, play a critical role in financial inclusion, providing banking services to the rural and semi-urban/unbanked areas. Further, they also implement central government-sponsored schemes in their operational areas. As per the RRB act, the sponsor bank and central government need to hold at least 51% of the shareholding in RRBs. For CGGB, as on March 31, 2022, 50% of the shares were owned by the central government, followed by Union Bank (35%).
These stakeholders also have representation on the board, with the central and state governments having the right to appoint two directors. RBI and NABARD also have representation on the board with one director each. All stakeholders provide guidance on strategic initiatives as well as operational aspects.
Further, Union Bank and NABARD closely monitor the overall, both operational and financial, performance and extend supervisory support periodically. Union Bank also provides technological and staff-related support and appoints the senior management, which includes deputation to CGGB. Regional offices of NABARD undertake monthly reviews on the performance of RRBs. NABARD, in consultation with Union Bank, sets yearly targets for the performance.
CGGB is expected to continue to benefit from the parentage and stakeholders.
Weakness: Capitalisation constrained by limited flexibility to raise capital Capitalisation has been supported by internal cash accrual. The bank has been profitable over the 15 years of operations (since the amalgamation of two banks). As per the regulations, RRBs follow Basel I norms and the minimum regulatory requirement for CRAR is 9%. Tier 1 and overall CRAR of the bank has improved to 12.60% and 13.68%, respectively, as on March 31, 2022 from 11.57% and 12.41%, respectively, as on March 31, 2021. The improvement in the capital ratios was driven by the healthy internal accruals of fiscal 2022 (Profit of Rs 162 crore with an RoA of 1.5%). Resultantly, The net worth of the bank increased to Rs 768 crore as on March 31, 2021 from Rs 606 crore as on March 31, 2021).
While capitalisation is adequate, there is no track record of raising external capital. The regulatory restrictions on shareholding constrains the ability to raise equity. While the act allows RRBs to go for an initial public offering subject to minimum shareholding of the central government and sponsor bank at 51%, none of the RRBs have so far raised capital through this route. The ability to bolster the capital position will remain a key rating sensitivity factor.
Geographic and segmental concentration in operations Operations of RRBs are concentrated in terms of geographic and sector presence. CGGB has a presence in only three districts, which exposes operations to risks related to political actions and natural calamities in the area of operations.
Further, most of the advances (more than 80% as on March 31, 2022) are towards agriculture and allied activities, the performance of which is heavily dependent on monsoons and susceptible to adverse credit behaviour of borrowers during waivers by the state government. Around 92% of the bank’s advances were towards priority sector loans as on March 31, 2022, against the minimum regulatory requirement of 75%. |
Liquidity : Strong As on March 31, 2022, investments in excess of the SLR (statutory liquidity ratio) were Rs 280 crore, which formed around 20% of the SLR requirement. The RBI has granted access to call money market to all RRBs. However, there is access to liquidity adjustment facility and minimum standing facility windows to select RRBs, based on operational and financial performance. CGGB is one of these select RRBs, but will be subject to annual supervision of operating performance. |
Outlook Positive CGGB should maintain a stable resource profile and adequate asset quality over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Bank CGGB is a regional rural bank (RRB) governed by the RRB Act of 1976. It is based in Guntur, Andhra Pradesh, and is sponsored by Union Bank of India (Union Bank). As on March 31, 2022, 50% of the shares were owned by the central government, followed by the Union Bank (35%) and the Government of Andhra Pradesh (15%). Operations are restricted to three districts of Andhra-Pradesh: Guntur, East Godavari and West Godavari. . CGGB was formed on March 1, 2006, with an amalgamation of the erstwhile Chaitanya Grameena Bank and erstwhile Godavari Grameena Bank as per the notification issued by the Government of India, Ministry of Finance, and the Department of Financial Services.
The bank operates in three districts of Andhra-Pradesh: Guntur, East Godavari and West Godavari. As on March 31, 2022, it had four regional offices, 230 branches and a business correspondent network of 249 touch points. All branches and banking outlets are linked via Core Banking Solution (CBS). Advances stood at Rs 7,326 crore as on March 31, 2022, with more than 80% of it towards Kisan Credit Cards, agriculture gold loans and loans to self-help groups.
PAT was Rs 162 crore with an RoA of 1.5% for fiscal 2022 as against Rs 101 crore and 1.2%, respectively, for fiscal 2021. |
Key Financial Indicators
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Any other information: The profitability of RRBs, including CGGB, is constrained by implementation of the Employees’ Pension Scheme as directed by the Supreme Court, wherein these banks have to provide for pension liabilities for its employees. CGGB has total pension liability of Rs 149 crore, allowed to be provided for over five years, out of which Rs 119 crore has been provided till fiscal 2022. The earnings should improve after provision for pension liability, which is expected by fiscal 2023.
Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Note on perpetual Tier I bonds Perpetual Tier I bonds raised by RRBs have lock-in clauses in line with RBI regulations. The factors that could trigger a default event for perpetual tier bond I include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of other instruments; this is because debt servicing on perpetual tier I instruments is far more sensitive to the bank's overall capital adequacy levels and profitability. |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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Criteria Details
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