Rating Rationale

Strengths
* Steady improvement in scale of operations and a stable credit risk profile:
The strong credit risk profile of the employer of the society's members is a critical factor that enhances the stability and sustainability of employee cooperative societies (ECS) such as RECCS. A stable employer makes uninterrupted and timely payment of salaries to employees, which in turn ensures timely recovery of dues. In the case of RECCS, the employer is Indian Railways, a department of the Central government. Thus, the society is likely to maintain its stable credit risk profile, which will help sustain growth in its scale of operations in the long term. Although growth moderated to 12% in fiscal 2020 against 14% in the previous fiscal, the medium term growth prospects for the society remain intact. The portfolio has more than doubled over the last five years to Rs 2,108 crore as on March 31, 2020, from Rs 888 crore as on March 31, 2015.

* Healthy asset quality:
The healthy asset quality is supported by low delinquencies. This is common in ECS, as the borrower base is well known: employees of the society and salaried borrowers. Recovery of loans is made at the time of disbursement of the salary. For RECCS, portfolio at risk greater than 30+ days past due (dpd) has also been low, that is, 0.3-0.6% for the past four years. However, the ultimate losses have been close to nil. Delinquencies are expected to remain at the current level over the medium term, supported by stringent underwriting norms and recovery mechanisms.

* Adequate capitalisation for the current scale of operations:
The society collects compulsory monthly thrift deposits from its members, who have to contribute 10% of the general loan amount towards the share capital; this ensures minimum capital adequacy of at least 10%. Indian Railways deducts loan dues and thrift deposits from the salary of the members and remits this to the society. The absolute corpus was adequate and gearing low at Rs 397 crore and 4.2 times, respectively, as on March 31, 2020. Networth has been growing steadily, with increase in members and steady internal cash accrual. The society is likely to remain adequately capitalised over the medium term.

Weaknesses
* Limited flexibility in liquidity:
The society, unlike deposit-taking NBFCs, does not maintain statutory liquidity. In addition, it has no systemic support in case of liquidity stress. Therefore, a surge in withdrawal of deposits could lead to severe pressure on liquidity. However, in order to meet such exigencies, RECCS proposes to maintain funds of around Rs 50 crore at any point in time in the form an undrawn bank limit. There were unutilised bank lines of around Rs 144.5 crore as on March 31, 2020.

* Risks emerging from heightened regulatory oversight:
Currently, ECS are not under the ambit of RBI regulations and are, therefore, not subject to RBI's stringent prudential norms applicable to other public deposit-raising entities, such as banks and NBFCs. However, ECS are likely to come under increased regulatory oversight over the medium term. Since RECCS does not accept any term deposits, it may not face any major difficulties in this aspect.