Rating Rationale
October 25, 2023 | Mumbai
Aurangabad Divisional Life Insurance Employees Co-Operative Credit Society Limited
Rating reaffirmed at 'CRISIL BBB-/Stable'
 
Rating Action
Total Bank Loan Facilities RatedRs.20 Crore
Long Term RatingCRISIL BBB-/Stable (Reaffirmed)
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 reaffirmed its 'CRISIL BBB-/Stable' rating on the bank loan facility of Aurangabad Divisional Life Insurance Employees Co-operative Credit Society Ltd (Aurangabad Divisional LIC Society).

 

The rating continues to reflect the stable and sustainable credit risk profiles of the members, healthy asset quality, and moderate capitalisation. These strengths are partially offset by limited financial flexibility and exposure to risks related to potential heightened regulatory oversight.

Analytical Approach

For arriving at its rating, CRISIL Ratings has considered the standalone business and financial risk profiles of Aurangabad Divisional LIC Society.

Key Rating Drivers & Detailed Description

Strengths:

  • Stable and sustainable credit risk profile: Credit risk profile is steady since all of the members are employed with LIC, which ensures timely recovery of dues from borrowers’ salaries. A stable employer makes uninterrupted and timely payment of salaries, which guarantees timely recovery of dues from members of the ECS. Stable growth in the business of the employer ensures growth in the number of employees as well as regular and timely increments to them, which feed membership and deposit growth. External stakeholders, particularly lenders, derive significant comfort from the robust credit risk profile of the employer.

 

  • Moderate capitalization: The society is adequately capitalised for the current and future scale of operations. Networth was Rs 15.5 crore and gearing 3.6 times as on March 31, 2023 (Rs 14.7 crore and 3.5 times, respectively, as on March 31, 2022).  It is mandatory for society members to contribute Rs 500 per month towards share capital. As per the policy, the quantum of loan to be sanctioned to a member is based on the cumulative amount contributed as share capital by the member; loan sanctioned is 10 times the cumulative share capital contributed by a member. The member also has to contribute 10% of the loan amount towards share capital, which provides sufficient cushion for capitalisation and helps maintain capital adequacy of at least 10%. Absence of restrictions on withdrawal of memberships can make the share capital susceptible to volatility. Nevertheless, the society has not had any such instance since inception and is expected to be sustained over the medium term.

 

  • Healthy asset quality: Asset quality of the society is strong due to robust recovery mechanisms. The GNPA for the past seven years has remained nil. The dues are recovered at the time of disbursement of salaries to the members, which enables timely recovery. The Aurangabad Divisional LIC Society also has recourse to bonus, leave encashment, provident fund (PF) and gratuity of the borrower to recover dues, which are cleared by the LIC office only after it receives clearance from the society. The loan sanctioned is normally lower than PF and gratuity amounts. Also, the advances can be recovered from guarantors. However, till date, the society has never had to recover dues from bonus, PF, gratuity or guarantors.

 

Weaknesses:

  • Weak resource profile: The society has limited flexibility in raising resources or capital because of regulations and the operating structure. It is highly dependent on raising deposits from members as this is the only funding source. Given the high dependence on fixed deposits, a surge in withdrawal could lead to stretched liquidity. However, liquidity is strong in a business-as-usual scenario. Moreover, the society maintains liquidity in the form of un-availed cash credit facility and has the flexibility to decrease flow of disbursements in case of a liquidity crunch. In view of its critical nature, liquidity will remain a key monitorable.

 

  • Risks emerging from potentially heightened regulatory oversight: The ECSs are likely to be subject to heightened regulatory control. Currently, they are not under the ambit of the RBI and are, therefore, not subject to the nodal body’s stringent prudential norms, which are applicable to banks and NBFCs. Several ECSs raise deposits repayable on demand, though only from their members. In the past, the RBI has observed gaps in the regulation of cooperative societies. CRISIL Rating, however, understands that on August 9, 2023, ‘Ministry of Co-operation’ has proposed draft prudential norms for particularly for Multi State Cooperative Societies who are in lending business. If the regulator brings ECSs under its ambit, they could be subject to stricter prudential norms, inter alia, on capital adequacy, asset classification and income recognition. In addition, if income tax is made applicable on the profits earned by ECSs, it will hamper build-up of capital. Similarly, applying tax deducted at source provisions on ECSs in respect of interest payment on deposits will significantly impact their deposit growth.

Liquidity: Adequate

The society, unlike deposit taking NBFCs, does not have any statutory requirement to maintain liquidity separately. 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. Nevertheless, the society has internal measures to manage liquidity. Society maintains investment in both recurring deposit and fixed deposit for liquidity purpose. As per the regulatory norms, it invests around 25% of the reported profits as liquid funds on regular basis. It also has CC facility which could be utilized as and when needed and helps in managing the liquidity and it maintains funds in the form of unutilized bank lines.

Outlook: Stable

CRISIL Ratings believes Aurangabad Divisional LIC Society will maintain its stable and sustainable credit risk profile apart from healthy asset quality and moderate capitalisation levels, over the medium term.

Rating Sensitivity factors

Upward factors:

  • Improvement in scale of operations with portfolio growing to over Rs 100 crore with average growth rate maintained at 20% and gearing remaining below 3.5 times
  • Improvement in the profitability with return on assets increasing and maintained at over 3.0% on a steady state basis

 

Downward factors:

  • Decline in the number of members to below 1,500
  • Weakening of asset quality with GNPAs increasing to over 1%
  • Adjusted gearing increasing to over 5 times

About the Company

Aurangabad Divisional LIC Society, set up in 1991, caters to the employees of LIC working in the districts of Aurangabad, Nanded, and Nashik (all in Maharashtra). The society is governed by the Maharashtra Co-operatives Act, 1960. Based on a member’s eligibility, Aurangabad Divisional LIC Society lends up to Rs 50 lakh. The members compulsorily contribute Rs 500 every month towards the share capital. The society also collects fixed deposits (main funding source), and monthly thrift deposits (though not mandatory for members; also share of such deposit is minimal). As in the case of every employee co-operative society, loan dues and deposits are deducted by LIC from the member’s salary.

Key Financial Indicators

As of March 31, /during fiscal 2023

Unit

2023

2022

2021

Total assets

Rs crore

76.3

70.0

62.9

Total income

Rs crore

7.0

5.7

6.1

Profit after tax

Rs crore

2.1

1.7

2.0

GNPA

%

Nil

Nil

Nil

Gearing

Times

3.6

3.5

3.5

Return on assets

%

2.9

2.6

3.2

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Long Term Bank Facility NA NA NA 20 NA CRISIL BBB-/Stable
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 20.0 CRISIL BBB-/Stable   -- 27-07-22 CRISIL BBB-/Stable 28-05-21 CRISIL BBB-/Stable 07-02-20 CRISIL BBB-/Stable CRISIL BBB-/Stable
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Long Term Bank Facility 20 CRISIL BBB-/Stable
Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies

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