Detailed rationale:

CRISIL Ratings has downgraded its rating on the bank guarantee facility of Apna Sahakari Bank Ltd (Apna Bank) to ‘CRISIL A4’ from ‘CRISIL A4+’. The rating action is primarily on account of further weakening in asset quality metrics and the subsequent impact on the overall capital position and earnings profile of the bank.

 

The annual report for fiscal 2020 was released on December 30, 2020, post completion of the annual general meeting. As per the financial results, Apna Bank had classified certain stressed accounts as non-performing accounts (NPA) in fiscal 2020 which were not recognised in earlier years. The gross NPA of the bank increased to 13.2% as on March 31, 2020, from 5.6% as on March 31, 2019. The stressed assets stood at 19.7% (includes gross NPAs, security receipts and restructured advances) as on March 31, 2020, against 14.1 % as on March 31, 2019. Additionally, as per the statutory auditor’s report, the bank had recognised some of its NPAs under the ‘substandard’ category while considering the duration of these assets. However, the auditor suggested the bank to reclassify them under the ‘doubtful’ category. This revised time categorisation attracted higher provisioning. As per the auditor’s report, the total provisioning requirement stood at Rs 128.2 crore, against which the bank made provisions of Rs 72.2 crore (representing shortfall of Rs 56 crore) during fiscal 2020. This shortfall adjusted in the profit and loss account would have led to total loss of Rs 54.8 crore in fiscal 2020, against reported profit of Rs 1.2 crore for the same period.

 

The impact of higher provisioning was visible on the capital position of the bank. As per the unaudited off site surveillance (OSS) statement (submitted by the management to the Reserve Bank of India [RBI] before completion of statutory audit), the capital adequacy ratio (CAR) of the bank stood at 10.3% as on March 31, 2020, and 9.2% as on September 30, 2020. However, CRISIL Ratings notes that these ratios exclude the incremental provisioning of Rs 56 crore post audit since the statutory audit was finalised only by November-December 2020. After factoring in additional provisioning, the overall CAR (as per the annual report) stood at 7.91% as on March 31, 2020 (11.3% as on March 31, 2019), against the minimum requirement of 9% as stipulated by the RBI. Furthermore, as per the estimation of CRISIL Ratings, the overall adjusted CAR of the bank is expected to be lower at 5.4% as on September 30, 2020 (considering the additional provisioning impact).

 

Nevertheless, the management has taken few stringent steps to improve and restore their capital adequacy to the regulatory minimum. Being a co-operative bank, the primary source of capital is through members and the bank is exploring the route to raise capital. Apart from this, the bank has also taken steps to improve its accretions by reducing interest costs offered on deposits and also curtailing its operating expenditure. Furthermore, the bank merged six of its branches with larger branches in the same location and also closed down non-operational ATMs. Previously, the bank’s policy was to take capital of 2.5% for secured loans or 5% for unsecured loans, subject to a cap of Rs 5 lakh. The bank has removed this cap for any incremental lending. Furthermore, the bank is actively looking at raising capital from depositors and staff. Nevertheless, CRISIL Ratings believes that given the bank is operating in a co-operative structure, capital raising will remain a challenge. CRISIL Ratings also believes that the bank may have to reconsider its growth plans in order to restore the CAR to above the regulatory minimum.

 

The bank’s resource profile remains adequate with current account/savings account (CASA) ratio of 26% as on September 30, 2020. The overall cost of borrowing for the bank stood at 6.2% during the first half of fiscal 2021 as compared to 6.4% for fiscal 2020. Nevertheless, the bank has fair concentration within its deposit base with the top 10 depositors accounting for 7.2% of total deposits as on September 30, 2020. Therefore, the ability of the bank to hold on to its deposit base will also remain a key monitorable. In terms of liquidity, the bank has been maintaining statutory liquidity ratio (SLR) in line with applicable RBI regulations. As of December 30, 2020, the bank had excess SLR of 1.6%. Apart from regular SLR requirement, the bank has also placed funds in the form of fixed deposits with scheduled commercial banks. The bank guarantee facility that is rated by CRISIL Ratings has also been backed by 100% collateral in the form of fixed deposits with six scheduled commercial banks and one scheduled co-operative bank.

Key Rating Drivers & Detailed Description

Weaknesses

Weak asset quality

The gross NPAs of the bank had increased to 13.2% as on March 31, 2020, from 5.6% as on March 31, 2019. The deterioration in asset quality was primarily on account of recognition of certain stressed accounts in fiscal 2020. Additionally, as per the auditor’s report, the bank had recognised some of its assets under the ‘substandard’ category while considering the duration these assets. However, the auditor suggested the bank to reclassify them under the ‘doubtful’ category. This revised asset recognition attracted higher provisioning. As per the auditor’s report, the total provisioning requirement stood at Rs 128.2 crore, against which the bank made provisions of Rs 72.2 crore (representing shortfall of Rs 56 crore) during fiscal 2020. Furthermore, the overall stressed asset of the bank remained high at 19.7% as on September 2020, increasing from 15.4% as on September 2019. These numbers of stressed assets are expected to increase further on account of new restructuring which will be happening because of the impact of the Covid-19 pandemic and subsequent lockdowns. Therefore, looking at the current position, CRISIL Ratings believes the bank’s asset quality will continue to remain weak unless the bank is able to get huge recoveries from its top stressed accounts.

 

Deterioration in the capital position

Higher provisioning requirement and limited ability of the bank to absorb the same, resulted in sharp deterioration in the capital position. The overall CAR (as per the annual report of the bank) stood at 7.91% (11.3% as on March 2019), against the minimum requirement stipulated by RBI of 9%. Furthermore, as per the estimation of CRISIL Ratings, the overall CAR of the bank is expected to reduce further to 5.4% as on September 30, 2020 (considering the additional provisioning impact). Nevertheless, the management has taken few stringent steps to improve and restore their capital adequacy to the regulatory minimum. Being a co-operative bank, the primary source of capital is through members and the bank is exploring this route to raise capital. Apart from this, the bank has also taken steps to improve its accretions by reducing interest costs offered on deposits and also curtailing its operating expenditure. Furthermore, the bank also merged six of its branches with larger branches in the same location and also closed down non-operational ATMs. Previously, the bank’s policy was to take capital of 2.5% for the secured loan amount or 5% for unsecured loan amount or Rs 5 lakh, whichever is lower. The bank has removed this policy and has started accepting capital at 2.5% for secured loans or 5% for unsecured loans for any incremental lending. Furthermore, the bank is actively looking at raising capital from depositors and staff. However, CRISIL Ratings believes that given the bank is operating in a co-operative structure, capital raising will remain a challenge. CRISIL Ratings also believes that the bank may have to reconsider its growth plans in order to restore the CAR to above regulatory minimum requirement.

 

Strength

Adequate resource profile

The bank had outstanding deposits of Rs 3,689 crore as on September 30, 2020, remaining flat from around Rs 3,724 crore as on March 31, 2020. The bank’s resource profile remains adequate with CASA ratio of 26% as on September 30, 2020. The overall cost of borrowing for the bank stood at 6.2% for the first half of fiscal 2021, as compared to 6.4% for fiscal 2020. The bank wants to reduce the cost of borrowing and has reduced rates on fixed deposits to 6.5% from 7-7.5% earlier. Furthermore, the bank plans to close the bulk deposits which are expected to lead to reduction in cost of deposits over the medium term.

Liquidity: Stretched

The bank had excess SLR of 1.6% as on December 30, 2020, along with further fixed deposits of Rs 95 crore and unutilised overdraft facility of Rs 20 crore as on December 30, 2020. However, the bank’s liquidity is exposed to risk of redemptions from top 10 depositors which comprise 6-8% of the overall deposit base. Any high-level redemptions from these deposit holders is a key monitorable

Rating Sensitivity factors

Upward factors

• Capital adequacy improving to above 9.5%
• Asset quality improving with gross NPAs reducing to less than 7% and weak assets declining below 15%

 

Downward factors

• Delay in servicing of debt

About the bank

Apna Bank is a Mumbai-based, multistate, scheduled cooperative bank, established in March 1968. The bank is part of the Apna group, which was established in 1948 by labour leaders and activists with a socialist ideology from the textile-mill-dominated Naigaon locality in Mumbai. The group operates in two segments: retail sale of grocery and medicines through Apna Bazar, and a consumer co-operative society and banking organisation through Apna Bank. Since 2008, the bank has acquired three cooperative banks, expanding its network to 85 branches across Mumbai, Thane, Ratnagiri, Sindhudurg, Sangli, Nashik, Pune and Kolhapur districts of Maharashtra, and one branch in Goa.

Key Financial Indicators

As on March 31, Unit Sep 20* 2020 2019 Total assets Rs crore 4278 4299 4053 Total income Rs crore 132 358 335 Profit after tax (PAT) Rs crore -30.9 1.2@ 18 Gross NPA % 13.2# 13.2 6.1 Overall capital adequacy ratio  % NA 7.9 11.3 Return on assets % -1.4 0.0$ 0.4

*as per Off Site Surveillance statement (OSS) which are unaudited

@ excludes loss due to shortfall in NPA provisioning of Rs 56 crore. Adjusting for same, the loss stands at Rs 54.8 crore for fiscal 2020 (as against PAT of Rs 1.2 crore)

$ROA including loss of Rs 54.8 crore stood at negative 1.3% for fiscal 2020

Any other information: Not applicable

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Bank guarantee*	NA	NA	NA	115	NA	CRISIL A4