Rationale

 The highest short-term rating on PNB Gilts Limited's debt programme continues to factor in its strong parentage in the form of Punjab National Bank (PNB; rated [ICRA]AA+ (Stable)/[ICRA]A1+) and the continued support as depicted in the managerial support received from the bank. The rating reaffirmation also factors in PNB Gilts' strong capitalisation position and large net worth, which provides a satisfactory cushion against adverse interest rate movements given the inherent nature of the primary dealer (PD) business. The rating is also supported by the company's superior liquidity profile, as reflected in the high share of liquid Government securities (G-Secs) in the overall assets and access to call money and borrowings under repo from the market, apart from access to a standing liquidity facility (SLF) from the Reserve Bank of India (RBI) for participating in primary auctions. The share of non-statutory liquidity ratio (SLR) securities has also remained restricted to highly rated corporate bonds. Further, the company has adequate safeguards, as mentioned in the business policy document, to monitor interest rate, liquidity and credit risks. ICRA, however, notes the less-diversified revenue stream of the company and its high reliance on interest income and trading income with fee income largely comprising underwriting fee on G-Secs. ICRA further notes the susceptibility of the company's overall profitability and capitalisation profile to interest rate movements. With a significant uptick in the bond yields in H1 FY2022, PNB Gilts reported losses in its trading operations, though this was offset by higher net interest income (NII). The NII was supported by the higher leverage (and in turn, a higher investment portfolio) and moderate funding costs amid the surplus liquidity environment, which boosted the company's overall NII. Even through the profitability moderated in H1 FY2022 compared to the previous year, it remained strong with a return on net worth of 18.1% (38.5% for FY2021 and 19.2% for FY2020).