Detailed Rationale

CRISIL Ratings has upgraded its rating on the Perpetual Tier I bonds of Chaitanya Godavari Grameena Bank (CGGB) to ‘CRISIL A-/Stable’ from ‘CRISIL BBB+/Positive’.

 

The upgrade is driven by improvement in the profitability of the bank, which has strengthened its capital position. The rating continues to reflect the bank’s track record of profitable operations, adequate asset quality, and benefits from strong parentage and stakeholders. These strengths are partially offset by limited flexibility to raise capital and geographic concentration in operations.

 

Reported profit after tax (PAT) rose to Rs 232 crore for fiscal 2023 and return on assets (RoA) to 1.9% from Rs 162 crore and 1.5%, respectively, for fiscal 2022. The improvement in profitability was driven by trading income from priority sector lending certificates (PSLC), which the bank started in fiscal 2022, improvement in credit cost from 0.4% of total assets in fiscal 2022 to 0.2% of total assets in fiscal 2023, and higher interest yield along with 22% growth in the loan book. As a result, capital to risk weighted assets ratio (CRAR) improved to 14.5% as on March 31, 2023, from 13.7% a year earlier. Advances were at Rs 9,023 crore as on March 31, 2023, as against Rs 7,393 crore as on March 31, 2022. The resource profile remains stable, with the proportion of current account and saving account (CASA) deposits in overall deposits at 30% as on March 31, 2023.

 

Under the August 2020 and May 2021 Resolution Frameworks for Covid-19-related Stress announced by the Reserve Bank of India (RBI), CGGB had restructured its accounts by extending moratorium of six months to its borrowers. Its restructured book stood at 13.8% as on March 31, 2023, against 36.3% a year earlier, and 98% of the restructured book is standard.

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

CGGB has been profitable since it started operations in 2006. PAT rose 3.5 times from Rs 66 crore in fiscal 2019 to Rs 232 crore in fiscal 2023, supported by steady ramp-up of operations with a stable operating margin and low credit cost. While profitability, similar to other regional rural banks (RRBs), has been constrained by pension liabilities since fiscal 2018, it is expected to improve as the bank finished providing for the same by fiscal 2023. Provisions for pension liabilities stood at Rs 29 crore in fiscal 2023, with the entire pension now fully provided for in fiscal 2023. Operating expenses as a percentage of average assets reduced to 2.3% for fiscal 2023 from 2.5% for fiscal 2022.

 

CGGB, in line with other RRBs, received access to the E-kuber platform of the RBI and started trading in PSLCs in fiscal 2022. Trading income from PSLCs, better credit costs, increased interest income and 22% growth in the loan book helped improve profitability. Credit cost, too, improved to 0.2% of average assets for fiscal 2023 from 0.4% for fiscal 2022. A stable resource profile improved the cost of funds from 5.9% in fiscal 2021 to 5.2% in fiscal 2023, which, in turn, helped increase net interest margin from 3.4% in fiscal 2021 to 3.6% in fiscal 2023. Additionally, the other income improved to 1.3% of average assets for fiscal 2023 and is expected to be a sustainable source of income.

 

The deposit base registered a five-year compound annual growth rate (CAGR) of 18% to Rs 8,558 crore as on March 31, 2023. The bank benefits from its longstanding presence in its operational areas and strong customer connect, resulting in a granular and stable deposit base. This is reflected in the stable proportion of CASA deposits in overall deposits, at 30-32% in the past few fiscals, albeit lower compared with other RRBs. Furthermore, more than 95% of CASA deposits comprise savings account deposits. The proportion of retail deposits remained high at 80% of total deposits as on March 31, 2023. Renewal rate of term deposits is more than 55%. The granular retail deposit base also supports the net interest margin. Cost of deposits improved to 5.3% for fiscal 2023 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

CGGB has a granular loan book with the top 20 advances comprising ~1% of the total loan book as on March 31, 2023. 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 improved over the years, with gross non-performing assets (NPAs) falling to 0.6% as on March 31, 2023, (0.9% as on March 31, 2022) from 1.1% as on March 31, 2021, and 3.6% as on March 31, 2016. During the same time periods CGGB had restructured loans as permitted by RBI under resolution framework for Covid-19-related stress. The current outstanding restructured book is 13.8% (98% of this book is standard) as on March 31, 2023.

 

As on March 31, 2023, more than 80% of the advances were towards agricultural and allied services. The recognition of such exposures as an NPA is linked to the crop season as per RBI regulations (for instance, the lending for a kharif crop will be classified as NPA after two years of overdue (that is, two crop seasons)). Hence, the recognition of NPA is beyond the typical 90+ days. That said, the 1-year and 2-year lagged gross NPAs have been low at 0.8% and 0.9%, respectively, as on March 31, 2023 (1.1% and 1.2%, respectively, a year earlier). The average credit cost (as a percentage of average assets) was benign at 0.4% in the past five fiscals and peaked at 0.8% in fiscal 2021.

 

Given the challenging macro-economic environment and the concentration in the bank’s loan book towards the agricultural segment, asset quality will remain a monitorable.

 

• Benefits from parentage and stakeholders such as Sponsor Bank and National Bank for Agriculture and Rural Development (NABARD)

RRBs, including CGGB, play a critical role in financial inclusion, providing banking services to the rural and semi-urban/unbanked areas. They also implement schemes sponsored by the central government in their operational areas. As per the RRB Act, the sponsor bank and central government together need to hold at least 51% of the shareholding in RRBs. For CGGB, as on March 31, 2023, 50% of the shares were owned by the central government, followed by the Union Bank of India (Union Bank), which holds 35%.

 

These stakeholders also have representation on the board, with the central and state governments having the right to appoint two directors. RBI and the National Bank for Agriculture and Rural Development (NABARD) also have representation on the board with one director each. All stakeholders provide guidance to CGGB on strategic initiatives as well as operational aspects.

 

Furthermore, Union Bank and NABARD closely monitor the performance of CGGB, including operational and financial performance, and extend supervisory support periodically. Union Bank provides technological and staff-related support and appoints the senior management of CGGB, including through deputation. The regional offices of NABARD review the performance of RRBs on a monthly basis. NABARD, in consultation with Union Bank, sets yearly performance targets for CGGB.

 

CGGB will continue to benefit from the parentage and supervision by stakeholders (NABARD and Union Bank of India)

 

Weaknesses:

• Capitalisation constrained by limited flexibility to raise capital

Capitalisation is supported primarily by internal cash accrual. The bank has been profitable over the past 15 years of operations (since the amalgamation of two banks). As per 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 13.6% and 14.5%, respectively, as on March 31, 2023. The ratios improved from 12.6% and 13.7%, respectively, as on March 31, 2022, because of healthy internal accrual during fiscal 2023. Resultantly, networth increased to Rs 1,000 crore as on March 31, 2023, from Rs 768 crore as on March 31, 2022.

 

While capitalisation is adequate, the bank has no track record of raising external capital. The regulatory restrictions on shareholding constrains the bank’s ability to raise equity. While RRBs are allowed to go for initial public offerings, subject to minimum 51% shareholding by the central government and the sponsor bank, no RRB has raised capital through this route so far.

 

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 geography and sectoral exposure, and face risks related to socio-political changes and natural calamities in their region. CGGB, for instance, has presence in only eight districts.

 

More than 80% of the advances of CGGB as on March 31, 2023, were towards agriculture and allied activities, which depend heavily on monsoon and the credit behaviour of borrowers during waivers by the state government. Around 90% of advances were towards priority sector loans as on March 31, 2023, against the minimum regulatory requirement of 75%.

Liquidity: Strong

As on March 31, 2023, investments in excess of the statutory liquidity ratio (SLR) were Rs 1,928 crore, over the minimum required SLR of Rs 1,402 crore. The RBI has granted access to call money market to all RRBs. However, only select RRBs have access to liquidity adjustment facility and minimum standing facility windows, based on operational and financial performance. CGGB is one of these select RRBs, but this is subject to annual supervision of operating performance.

Outlook: Stable

CGGB should maintain a stable resource profile and adequate asset quality over the medium term.

Rating Sensitivity factors

Upward factors

• Improvement in the scale of operations while maintaining asset quality on a sustained basis.
• Improvement in capital position with increase in buffer of more than 3% over the regulatory minimum on a sustained basis

 

Downward factors

• Weakening of capitalisation metrics
• Pressure on asset quality for a prolonged period with gross NPAs above 5% on a sustained basis, significantly impacting profitability

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, 2023, 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 eight districts of Andhra-Pradesh: Guntur, Bapatla, Palnadu, East Godavari, Kakinada, Dr. B R Ambedkar Konaseema, Eluru 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 eight districts of Andhra-Pradesh: Guntur, Bapatla, Palnadu, East Godavari, Kakinada, Dr. B R Ambedkar Konaseema, Eluru and West Godavari. As on March 31, 2023, it had four regional offices, 249 branches and a business correspondent network of 245 touch points. All branches and banking outlets are linked via core banking solution (CBS). Advances stood at Rs 9,023 crore as on March 31, 2023, with more than 80% of it towards Kisan Credit Cards, agriculture gold loans and loans to self-help groups.

 

PAT was Rs 232 crore with an RoA of 1.9% for fiscal 2023 as against 162 crore with an RoA of 1.5% for fiscal 2022

Key Financial Indicators

Particulars as on	Unit	Mar-2023	Mar-2022	Mar-2021
Total assets	Rs crore	13562	11350	9658
Total income (net of interest expense)	Rs crore	609	532	379
Profit after tax	Rs crore	232	162	101
Gross NPA	%	0.6	0.9	1.1
Overall CAR	%	14.5	13.7	12.4
RoA	%	1.9	1.5	1.2

 

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, which has been entirely provided for till fiscal 2023. The earnings should improve after fiscal 2023.

 

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 and profitability.

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Outstanding rating with outlook
NA	Perpetual Tier I Bonds*	NA	NA	NA	120	Complex	CRISIL A-/Stable

*Yet to be issued