Rating Rationale
October 12, 2018 | Mumbai
National Cooperative Development Corporation
'CRISIL AA/Stable' assigned to bond
 
Rating Action
Rs.500 Crore Bond CRISIL AA/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its CRISIL AA/Stable to bonds of Rs 500 crore of National Cooperative Development Corporation (NCDC). CRISIL's rating on NCDC factors in the expectation of support from Government of India (GoI), as it is an apex financial and development institution exclusively formed under the Ministry of Agriculture to support cooperative sector in India. The rating also factors in NCDC's demonstrated track record in maintaining moderate asset quality metrics, adequate resource profile and comfortable profitability. These rating strengths, however, are partially offset by inherently weak credit risk profile of the borrowers, regional and sectoral client concentration in advances and lack of strong regulatory oversight.

Key Rating Drivers & Detailed Description
Strengths
* Expectation of support from GoI given NCDC's role in promotion and financing of India's cooperative sector
Wholly owned by GoI, the New Delhi based NCDC is a statutory organization incorporated in 1963 under the National Cooperative Development Act, 1962 (NCDC Act). NCDC has been formed with the objective of planning and implementation of programmes for economic development of cooperatives involved in the agricultural sector. Since inception, the NCDC Act has undergone two amendments (in 1974 and 2002) thereby broadening the scope of its activities to include areas such as areas such as fishery, poultry, dairy, handloom, livestock, cottage and village industries, handicrafts etc.
 
NCDC also acts as a nodal agency to route Central Government subsidy under the various schemes of National Horticulture Board (NHB), Department of Agriculture and Cooperation (DoAC), Ministry of Food Processing Industries (MFPI), Agriculture and Process Food Products Export Development Authority (APEDA), Ministry of Textile, Sugar Development Fund (SDF) etc. The management of NCDC includes high-profile officials from GoI, state governments and state cooperatives. The management comprises General Council (GC) with 51 members and the Board of Management (BoM) with 12 members who are nominated by the central government. Also, the Union Minister for Agriculture is the President of General Council and the Secretary in the Ministry of Agriculture is the chairperson of BoM.
 
In addition, NCDC works with the Central government in formulating policies for the cooperative sector and in implementing the government's plans for the sector. According to the NCDC Act, 1962, the corporation is entitled to receive grants from GoI to meet its administrative expenditure, but it is not availing this facility. In view of the statutory nature of the establishment and the organization's strategic importance in the development of cooperative sector CRISIL believes, the government support would be forthcoming to NCDC, whenever needed.
 
* Moderate asset quality
NCDC has been able to sustain a long track record in maintaining robust asset quality, thanks to its stringent credit underwriting norms supported by adequate collection mechanism. End fiscal 2018 NCDC reported gross non-performing assets (GNPA) of 0.7% and nil net NPA (GNPA and NNPA of 0.8% and nil respectively end fiscal 2017). This is due to the fact that NCDC follows conservative provisioning norms and provides 100% provision coverage against substandard assets. The NPA norms followed by NCDC are less stringent as compared to the Reserve Bank of India's stipulation for banks and NBFCs. wherein NCDC recognizes advances as NPA when the interest and principal are overdue 180 days and 365 days respectively as against 90 day norm for banks and NBFCs. About 85% of loans is extended to organizations in the cooperative sector. Credit quality in cooperative sector is generally weak. However, NCDC has been able to maintain superior asset quality based on careful selection of borrowers. This is reflected in the high collection efficiency of 98.7% in fiscal 2018, 99.7% in fiscal 2017 and 99.98% in fiscal 2016). CRISIL, therefore, believes NCDC will continue to have sound asset quality over the medium term.
 
* Adequate resource profile backed by competitive borrowing costs
As NCDC is wholly owned by GoI, it enjoys the benefit of raising funds from banks and money markets at very competitive costs. The organization's borrowing profile largely comprises loans and from banks and commercial paper issuance that together form 97% of borrowings end fiscal 2018 followed by bonds issued by NCDC (2%) and loans from National Scheduled Tribes Finance and Development Corporation (NSTFDC) under the ministry of tribal affairs forming the remaining 1%. As a result, NCDC's cost of borrowing remained low at 6.8% end fiscal 2018.
 
* Comfortable profitability metrics
NCDC's profitability metrics have remained healthy over the last few years backed by competitive borrowing costs leading to better margins, low credit costs and controlled operating cost efficiency.  End fiscal 2018, NCDC reported net profit of Rs 318 crore, more than double from last year driven by strong growth in top line revenues coupled with provision reversals. In the last couple of years, NCDC's RoA has been on an improving trend. End fiscal 2018, the RoA stood at 2.43% as against 1.6% reported last year. Also, NCDC benefits from its lean organizational structure with operating expenses remaining largely unchanged during the year leading to cost to income ratio at a low of 15%.  Opex as a percentage of average total assets for stood at a low of 0.5% and 0.7% in fiscal 2018 and fiscal 2017 respectively. In addition, NCDC has made 100% provisions for its NPAs, thus the future profitability is protected from likely impact arising from current delinquencies.
 
Weakness
* Exposure to inherently vulnerable borrower segments
Owing to its role to support institutions in the cooperative sector, NCDC lends to inherently risky borrowers such as district cooperative credit banks and cooperative societies. While the organization has been able to have low delinquencies, the asset-side risks remain high because of the weak operating and financial parameters of the borrowing institutions. Therefore, NCDC's ability to sustain the asset quality on a long term basis is a key monitorable.
 
* Significant regional, sectoral, and customer concentration
NCDC is exposed to high level of sectoral and client concentration risks. For instance, NCDC's exposure to processing industry (sugar and others) stood at 26% of the loan portfolio as on March 31, 2018. Also, borrower wise concentration remains high with the largest borrower constituting about a fifth of the book.  Although NCDC does not have any single borrower exposure limits, it has been working on reducing the regional and sectoral concentration risks by diversifying its operations and the organization's ability to reduce the concentration risks remains a key monitorable.
 
* Lack of strong regulatory oversight:
As NCDC is a public financial institution formed and operating directly under Ministry of Agriculture, it is not regulated by the Reserve Bank of India (RBI). Therefore, NCDC is not subjected to strong regulatory oversight including applicability of prudential norms and regulatory inspection.  Although NCDC is following certain norms like asset classification, though in a diluted form, other critical norms including single party exposure is not followed.  Lack of strong regulatory oversight exposes NCDC to risks that well regulated lending organizations are protected from.
Outlook: Stable

CRISIL expects NCDC to continue to receive strong support from GoI.  Additionally, CRISIL expects NCDC to maintain moderate asset quality and comfortable profitability.  The rating outlook may be revised to 'Positive' if in CRISIL's opinion, there is significant increase in focus of GoI towards cooperative sector translating into increased support to NCDC. Conversely, the rating outlook may be revised to 'Negative' if, in CRISIL's opinion, there is reduced focus of GoI in cooperative sector translating to a decline in expected support from GoI or deterioration in asset quality or capitalization or profitability metrics. 

About the Company

National Cooperative Development Corporation (NCDC) is a statutory organization that was established in March 1963 under the NCDC Act of 1962 on the recommendations of All India Rural Credit Survey Committee. The organization was formed for the economic development of cooperatives that are engaged in agriculture and allied activities. NCDC also assists central and state governments in planning and promoting programmes for cooperative development and formulation of five year/annual plans. Its operations are broad based and it provides financial assistance to different types of cooperatives either through state government or directly. As a public financial institution, it is involved in providing financial assistance to cooperatives involved in production, processing, marketing, storage, export and import of agricultural produce, food stuff, livestock, cottage and village industries, handicrafts, rural crafts and certain notified commodities and other services that are based on cooperative principles. Headquartered out of New Delhi, NCDC has 18 regional offices.

As on fiscal year ending March 2018, the total advances stood at Rs 14,962 crore, up 41% compared to previous fiscal. Of the total loan book, 84% is contributed by in cooperative societies including district cooperative banks while the remaining 16% is towards state governments and its departments.  As on March 31, 2018, NCDC's net own funds stood at Rs 2,428 crore.  The gearing, though up from last year, remains manageable at 5.2 times as on March 31, 2018 (up from 4.04 times as on March 31, 2017). NCDC maintains adequate liquidity buffers with with the high share of sanction but un-utilized bank lines of Rs. 13,975 crore (or 52% of total sanctioned loans) as on March 31, 2018

Key Financial Indicators
As on/for the period ended March 31 Unit 2018 2017
Total assets Rs crore 15,417 10,820
Total income (net of interest expense) Rs crore 502 362
Profit after tax Rs crore 318 156
Capital adequacy ratio % NA NA
Gross NPA % 0.7 0.8
Adjusted gearing Times 5.2 4.0
Return on assets % 2.4 1.6

Status of non cooperation with previous CRA: Not applicable

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue Size
 (Rs Cr)
Rating Assigned
with Outlook
NA Bonds^ NA NA NA 500 CRISIL AA/Stable
^Rated and unutilized
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  500.00
12-10-18 
CRISIL AA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating Criteria for Banks and Financial Institutions
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support

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