Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs.40,000 crore bonds of National Bank for Agriculture and Rural Development (NABARD) and has reaffirmed its ratings on the long term bank facilities and outstanding debt instruments at 'CRISIL AAA/FAAA/Stable/CRISIL A1+’. CRISIL Ratings has also assigned its ‘CRISIL A1+’ rating to the short term bank facility.

 

CRISIL Ratings has also withdrawn its rating on bonds of Rs 9,109 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

The ratings reflect the expectation of continued strong support from the Government of India (GoI), given NABARD’s key public policy role in India’s agriculture sector. The ratings also factor in NABARD’s strong capitalisation, robust asset protection mechanisms, and adequate resource profile. These strengths are partially offset by the bank’s modest earnings.

 

Over the past five years, the loan book for NABARD has grown at a CAGR of 18% to reach Rs 602,290 crores as on March 31, 2021. The growth has been driven by a faster increase in direct loans which contributed to around 49% of the loan book as on March 31, 2021. The loan book declined in first six months of fiscal 2022 to reach at Rs 575,233 crore as on September 30, 202. However, the decline was a seasonal phenomenon as refinance activities and demand for the bank usually picks up in fourth quarter of every fiscal. The loan book is expected to grow in the near term as the bank plays a key public policy role that the institution plays in India’s agriculture sector and various Government initiatives/policies.

 

The asset quality metrics for NABARD remain comfortable with Gross non-performing assets (GNPA) and Net non-performing assets (NNPA) at 0.36% and 0.07% as of September 30, 2021 (0.21% and nil respectively as on March 31, 2021). There was an inching up seen as on March 31, 2020 compared to 0.04% and nil as on March 31, 2019 primarily due to slippage of one large ticket exposure. The asset quality was further impacted in the first half of fiscal 2022 due to slippage from another large ticket exposure. A large share of NABARD’s lending is towards borrowers with inherently weak credit risk profiles. Nevertheless, the institution has strong asset protection mechanisms to manage its credit risk exposure. To ensure robust asset quality, the eligibility criteria for refinance is linked to net NPAs for scheduled commercial banks (SCBs), State Cooperative Banks (STCBs), RRBs, and primary urban cooperative banks (PUCBs). A large proportion of NABARD’s advances are backed by guarantees from state governments or GoI. Additionally, NABARD has the option to request the Reserve Bank of India (RBI) to debit from the current account of borrowers in the instance of default. Finally, for most of the borrowers, NABARD is the only source of borrowing, and hence, repayment of loans to NABARD takes precedence over other obligations.

 

Further the capital position for NABARD remains strong NABARD’s as indicated by overall high capital adequacy ratio of 21.67% as on September 30, 2021 (18.8% as on March 31, 2021, and 21.2% as on March 31, 2020) and low asset related risks. NABARD’s capital position is also supported by regular infusion of capital by GoI and steady, albeit low, internal accrual. As per the NABARD (Amendment) Bill passed in April 2018, NABARD’s authorised capital was increased six fold to Rs 30,000 crore. GoI infused Rs 1000 crore in fiscal 2021 and Rs 2000 crore in fiscal 2022. For fiscal 2023, GoI has budgeted Rs 500 crore for capital infusion.

 

Nevertheless, the earnings profile remains modest driven by low gross spreads, owing to lending at mandated rates and increased dependence on borrowings at market rates. Further, credit costs have been controlled since the past 5 fiscals which has ranged between 0.04-0.37%. In the six months ended September 30, 2021, the earnings profile remained modest with RoA of 0.80% as compared to 0.73% for fiscal 2021.

Analytical Approach

CRISIL Ratings' ratings on NABARD continue to be centrally based on the support NABARD receives from GoI and the key public policy role that the institution plays in India’s agriculture sector. The ratings also factor in NABARD’s strong capitalization, robust asset protection mechanisms and adequate resource profile. These rating strengths are partially offset by the bank’s modest earning’s profile.

Key Rating Drivers & Detailed Description

Strengths:

*Expectation of continued strong support from GoI given NABARD’s key public policy role in India’s agriculture sector

NABARD is the apex financial institution that implements GoI’s policies on planning and credit dispensation to agricultural and rural sectors. It refinances the entire cooperative credit system and banks through short- and long-term loans to help facilitate the flow of agricultural credit. NABARD also plays a developmental role in strengthening the cooperative structure to evolve a sustainable rural financial system to enhance ground level credit flow to farmers and others in rural areas. Over the past few years, the role and scope of NABARD has been significantly enlarged by GoI. The institution has been entrusted with the management of various development funds including the Rural Infrastructure Development Fund (RIDF). GoI created RIDF in NABARD in fiscal 1996 with an initial corpus of Rs 2,000 crore. However, with allocation of Rs 29,763 crore for fiscal 2021 under RIDF XXVI, the cumulative sanction stood at Rs 409,063 crore as on March, 31, 2021. At present, the activities under RIDF include credit to the agricultural and related sectors, the social sector, and rural connectivity.

 

As on March 31, 2021, NABARD’s loan book stood at Rs 602,290 crore, up 25% from a year earlier and increasing at a compounded annual growth rate of 18% over the past five fiscals. The loan book is broadly divided into two segments: direct finance and refinance book. Direct finance (Rs 292,433 crore or 49% of the loan book at the end of fiscal 2021) includes direct transmission of loans to state government and other agencies for rural infrastructure development and/or loans to voluntary agencies/non-governmental organisations for development activities. It also includes direct loans to cooperative banks. Of the total direct loans, about 45% is towards loans under RIDF while 18% is towards Long Term Irrigation Fund (LTIF). On the other hand, refinance loans (Rs 309,755 crore or 51% of loans) include loans to state government commercial banks, State Cooperative Agriculture and Rural Development Banks (SCARDBs), and regional rural banks (RRBs) as refinance against the loans disbursed by them to the final borrowers. Of the total refinance loan book, about 64% is towards medium and long-term irrigation projects while 34% is towards production and marketing credit. In the past few years, the share of direct loans in the total loan portfolio has been rising steadily while that of refinance loans has been on a decline.

 

*Strong capitalisation and robust asset protection mechanisms

NABARD’s strong capitalisation is indicated by overall high capital adequacy ratio of 21.7% as on September 30, 2021 (18.8% as on March 31, 2021, and 21.2% as on March 31, 2020) and low asset related risks. NABARD’s capital position is also supported by regular infusion of capital by GoI and steady, albeit low, internal accrual. As per the NABARD (Amendment) Bill passed in April 2018, NABARD’s authorised capital was increased six fold to Rs 30,000 crore. GoI infused Rs 1000 crore in fiscal 2021 and Rs 2000 crore in fiscal 2022. For fiscal 2023, GoI has budgeted Rs 500 crore for capital infusion. The institution has a strong networth coverage for its non-performing assets (NPAs), because of low gross NPAs and robust asset protection mechanisms. As on September 30, 2021, gross NPAs accounted for 0.36% of its gross advances (0.21% as on March 31, 2021). The NPAs increased post fiscal 2019 due to high exposure to Reliance Commercial Finance which went bad in fiscal 2020. The NPAs were further impacted in first six months of fiscal 2022, due to exposure to SREI Equipment Finance. 

 

A large share of NABARD’s lending is towards borrowers with inherently weak credit risk profiles. Nevertheless, the institution has strong asset protection mechanisms to manage its credit risk exposure. To ensure robust asset quality, the eligibility criteria for refinance is linked to net NPAs of scheduled commercial banks (SCBs), State Cooperative Banks (STCBs), RRBs, and primary urban cooperative banks (PUCBs). A large proportion of NABARD’s advances are backed by guarantees from state governments or GoI. Additionally, NABARD has the option to request the Reserve Bank of India (RBI) to debit from the current account of borrowers in the instance of default. Finally, for most of the borrowers, NABARD is the only source of borrowing, and hence, repayment of loans to NABARD takes precedence over other obligations.

 

*Well diversified resource profile

NABARD’s resource profile is backed by support from GoI. As on September 30, 2021, NABARD’s total borrowings stood at Rs 537,521 crore of which 20% or Rs 110,022 crore was in the form of long-term borrowings (corporate bonds, Bhavishya Nirman bonds, tax free bonds, and term loans), and 13% comprised short-term borrowings (commercial paper, certificates of deposit, term money borrowings). Overall, the share of market borrowings stood at 34%.

 

NABARD has been recognised as the nodal agency to mobilise RIDF deposits from commercial banks; these deposits formed a significant portion of total borrowings at 25% as on September 30, 2021 (24% as on March 31, 2021, and 29% as on March 31, 2020). Overall, the priority sector lending (PSL) shortfall funds (RIDF, Warehousing, Infra, Food Processing Fund, Long Term Rural Credit [LRTC], Short-Term Cooperative Rural Credit [STCRC] Fund Deposits, and Short-Term Regional Rural Banks [RRB] Fund Deposits) together constituted 44% of total borrowings as on September 30, 2021.

 

The remaining 22% of borrowings were from GoI schemes. In fiscal 2021, the amount raised through GoI fully serviced bonds stood Rs 24,156 crore, up from Rs 19,127 crore in fiscal 2020 and Rs 18,427 crore in fiscal 2019. The purpose of these bonds to be raised by NABARD is to provide funding for Long-Term Irrigation Fund, Pradhan Mantri Aawas Yojna-Gramin (PMAY-G) and Swatch Bharat Mission-Gramin (SBM-G). These bonds will be fully serviced by GoI. Hence, a separate government guarantee is not required for issue of these bonds. In its analytical treatment, CRISIL has considered that NABARD will ensure bonds are serviced on time.

 

Furthermore, since fiscal 2009, GoI has been supporting NABARD’s resource profile by creating STCRC Fund and Short-Term RRB Credit Refinance Fund. However GoI’s fiscal management policies and financial reforms in the past few years have led to increase in the institution’s reliance on market borrowings, resulting in higher cost of borrowings. CRISIL believes NABARD will maintain an adequate resource profile supported by the steps taken by GoI to augment the institution’s funding profile. However, more sustainable long-term funding solutions need to be introduced to support NABARD over the medium term.

 

Weakness:

*Modest earnings

NABARD has low gross spreads, driven by lending at mandated rates and increased dependence on borrowings at market rates. The company reported a net profit of Rs 2,588 crore and total income (net of interest expense) of Rs 5,390 crore for the six months ended September 30, 2021, as against the net profit of Rs 4,320 crore and total income (net of interest expenses) of Rs 10,452 crore for the year ending March 31, 2021. NABARD’s operating cost stood at Rs 1,096 crore as on September 30, 2021 (Rs 2,121 crore as on March 31, 2021) and provisioning cost stood at Rs 825 crore as on the same date (Rs 2,249 crore as on March 31, 2021 and Rs 1400 crore as on March 31, 2020). The increase in provisioning costs was due to exposure towards Reliance Commercial Finance and SREI Equipment Finance which was fully provided for by the bank.

Liquidity: Superior

The asset liability management profile of NABARD had cumulative positive mismatches in all the buckets as of September 30, 2021. As on Dec 24, 2021, NABARD had cash and cash equivalents of Rs 48,651 crore, against which it had debt repayments of Rs 47,624 crore for the next 5 months.

Outlook: Stable

CRISIL believes NABARD will continue to receive strong funding and operational support from GoI and maintain its healthy capitalisation and competitive resource cost over the medium term. The asset protection mechanism available to NABARD is likely to continue.

Rating Sensitivity Factors

Downward Factors:

• Any change in support philosophy of Government of India or decrease in government shareholding directly or indirectly (through quasi government entities) below 51%.
• Any reduction in GoI’s commitment to the agricultural; and rural sectors, translating into likelihood of a decline in support to NABARD
• Sharp deterioration in the asset quality impacting the profitability and capital level of NABARD.

About the Company

Incorporated in 1982 under an Act of the Indian Parliament, National Bank for Agricultural and Rural Development (NABARD) is governed by the NABARD Act, 1981. The agency took over the agricultural credit functions of the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of RBI, and Agricultural Refinance and Development Corporation (ARDC). NABARD shares supervisory functions with RBI in respect of cooperative banks (other than urban and primary cooperative banks) and RRBs. Wholly owned by GoI, the bank is the apex refinancing agency providing short- and long-term refinance to state cooperative banks, RRBs, commercial banks, and other financial institutions approved by RBI to augment credit flow for production and investment purposes in the agriculture and rural sectors. It also plays a developmental role in strengthening the rural financial institutions.

Any other information: Not applicable