Press Release National Co-operative Development Corporation

1 Press Release National Co-operative Development Corporation October 12, 2018. Ratings Amount 1. Facilities Rating Rating Action (Rs. crore). Long /Short-term bank 20,000 CARE AA; Stable/CARE A1+ Assigned Facilities (Rs. Twenty thousand crores only) (Double A; Outlook: Stable/. A One Plus). Long term Bonds 500 CARE AA; Stable Assigned (Rs. Five hundred crores only) (Double A; Outlook: Stable). Commercial Paper 1,888 CARE A1+ Assigned (Rs. One thousand eight hundred (A One Plus). and eighty eight crores only). Details of instruments/facilities in Annexure-1. Detailed Rationale & Key Rating Drivers The rating assigned to the instruments/ bank facilities of NCDC factors in sovereign ownership of NCDC (wholly owned by the Government of India (GoI) and the strategic role played by NCDC as the nodal agency for promoting Co-operative sector in India.)

2 The rating also derives strength from NCDC's established track record, NCDC's strong financial flexibility &. diversified funding profile as reflected in its ability to raise funding from banking channel at very competitive interest rates, comfortable liquidity profile, healthy asset quality and stable profitability. The rating strengths are, however, partly offset by limited regulatory supervision as NCDC is not registered as NBFC with the Reserve bank of India (RBI) and hence does not come under the regulatory purview of RBI, NCDC's high credit concentration risk as RBI's exposure norms are not applicable to NCDC, concentration of the loan book to the Co-operative sector, high exposure to sugar sector which is cyclical in nature, increasing gearing levels with high growth in loan book over last two years and increasing interest rate risk as part of NCDC's lending is at fixed rate of interest for longer tenure while most of its borrowings are either floating rate or shorter tenure.

3 Going forward, the sovereign support of GoI and the ability of the Corporation to profitably grow its loan book while maintaining asset quality and comfortable capital structure (gearing level), would be the key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Sovereign Ownership and role as nodal agency in promoting Co-operative sector National Cooperative Development Corporation (NCDC) was established by an Act of Parliament in 1963 as a Statutory Corporation under the Ministry of Agriculture & Farmers Welfare. NCDC is wholly owned by GoI and plays a critical role for promotion and Development of cooperative sector in the country by providing funding to cooperative sector (cooperative societies, cooperative banks etc.) and to state governments for investments / lending in cooperative sector.

4 Also, GoI's various schemes and subsidies to the cooperative sector are routed through NCDC. During FY18, NCDC. received subsidies from GoI of crore for passing on the same to borrowers in cooperative sector. NCDC is also a nodal agency for managing GOI's Sugar Development Fund (SDF) for the cooperative sector. NCDC's management vests in 51 members General Council which includes representatives from Central Govt., State Government, Marketing Federations and Co-operatives. The Council is headed by Union Minister for Agriculture. The day to day operations are managed by a 12 member Board of Management . The Chairperson of Board of Management is the Secretary, Department of Agriculture, Cooperation & Farmers Welfare, Ministry for Agriculture and Farmers Welfare. Managing Director of NCDC is Mr. Sundeep Kumar Nayak (IAS); Managing Director of NCDC is appointed by GoI.

5 Long track record and healthy growth in loan book NCDC has long track record in providing lending to the cooperative sector. NCDC's loan book has grown by 26% in FY17. and further by 42% in FY18 to ,962 crore as on March 31, 2018 from ,578 crore as on March 31, 2017. NCDC's loan book comprised loans to state governments (16% of total loan book as on Mar-18), loans guaranteed by state governments (19%) and balance 65% is cooperatives societies (including state level marketing federations, societies engaged in sugar, textile, dairy and other activities and cooperative banks). Incrementally, NCDC is focussing more on funding through state governments / state government guarantees and intends to cautious in lending to sugar and textile sector, which is expected to be position for NCDC's portfolio vulnerability. NCDC provides longer tenure loans in the term of term loans and margin money loans (these two accounted for 44% of loan book as on Mar-18) as well as loans for working capital requirements which are mostly less than one-year maturity loans (56% of loan book).

6 1. Complete definition of the ratings assigned are available at and other CARE publications 1 CARE Ratings Limited Press Release Healthy asset quality despite being into relatively more risky cooperative sector NCDC has been maintaining healthy asset quality over the years as reflected in low gross NPA of as on March 31,2018 ( as on Mar-17). NCDC's net NPAs were nil as on March 31, 2018 as the Corporation has been maintaining 100% coverage ratio for its NPAs. During FY18 fresh NPA slippage were low at crores ( of the opening loan book). Recovery performance of the Corporation remains healthy with recovery performance of in FY18 (vs. in FY17). However, NCDC's NPA classification norms are lenient vs. NPA classification norms prescribed by RBI. NCDC classifies any account as NPA when interest repayment is delayed by more than 6 months past due date and principal repayment is delayed by more than 1 year past due date given its funding is to the Agri based Co-operative sector.

7 However, NCDC's recovery performance has been good at over last three years. Also, NCDC has over the last few years provided for 100% provision against sub-standard assets as against graded provisioning resulting in Nil NNPAs. However, with the growth in loan book and exposure to relatively vulnerable segment; the ability of the Corporation to sustain the asset quality would be crucial. Incrementally, NCDC is focussing more on funding through state governments / state government guarantees and intends to cautious in lending to sugar and textile sector, which is expected to be position for NCDC's portfolio vulnerability. NCDC's ability to maintain good asset quality profile and recoveries will be critical for its credit profile. Adequate capital structure as on Mar-18, however, increasing gearing levels NCDC has a Net-worth base of ,428 crore as on March 31, 2018 which primarily includes NCDC fund and special reserves created out of Corporation 's profits over the years.

8 Being a non-equity based entity, NCDC cannot raise equity capital. The Corporation has relied on generation of internal accruals and external borrowings for funding its growth having raised only crore from GOI since inception. With significant growth in in book size and consequently increase in borrowings (over last two years), the overall gearing of the Corporation has increased to as on March 31, 2018 from as on March 31, 2017 and times as on March 31, 2016. The peak gearing levels are higher during the procurement season. Also, the gearing levels could increase further over next few years in line with planned growth. CARE expects NCDC to maintain comfortable capital structure, NCDC's ability to maintain gearing at comfortable level will be critical for its credit profile. Adequate profitability NCDC's profitability profile is comfortable.

9 NCDC reported a PAT of crores during FY18 as against crores in FY17 (a growth of 104% y-o-y). ROTA has improved from in FY17 to in FY18. Return on net worth was in FY18 (vs. in FY17). NCDC saw growth in income and profitability during FY18 on the back of growth in book growth resulting in improved Net Interest Margins (NIM improved to in FY18 as against during FY17). Operating expenses (Operating expenses/ Avg. total assets) have also declined from in FY17 to in FY18 following growth in asset base. Also, NCDC made lower provisioning of cr during FY18 (as against cr during FY17) also translated into higher profitability during FY18. Diversified funding profile and Comfortable liquidity profile NCDC has a diversified funding profile having raised funds at competitive rates in the form of bank borrowings, commercial papers and NCDs.

10 NCDC has banking relationship with 15 banks and one FI (NABARD). Borrowings from banking sector accounted for 85% of NCDC's total borrowings as on Mar-18, commercial paper borrowings accounted for 12% of borrowings and balance 3% from were from bonds and other sources. The liquidity profile of NCDC also remains comfortable. As a policy, NCDC intends to fund short tenure loan book through short tenure borrowings and long term loans majorly through its net-worth and long-term funding which is likely to result in comfortable liquidity profile. However, the share of Long term lines in the overall debt mix (sanctioned lines) was low at 4% and NCDC management is trying to increase the long term funding in the debt mix in order to fund the increasing share of long term loan assets. The liquidity profile of the Corporation is currently supported by significant unutilized bank lines.