Rationale

 The ratings reaffirmation factors in DCB Bank Limited's (DCB) comfortable capital cushions with Tier-I and CRAR at 15.1% and 18.2% (excluding profits for 9M FY2022), respectively, while deposit granularisation has continued to progress satisfactorily, leading to lower concentration levels from the significantly higher levels seen in the past. Further, the Covid-19 pandemicinduced slippages witnessed a sharp rise in 9M FY2022, leading to elevated credit costs and weaker profitability levels. The weakening in the asset quality was partly due to the bank's customer profile, mainly comprising small-ticket borrowers in the self-employed segment, that was more severely impacted by the pandemic. Nevertheless, collections and recoveries were satisfactory and helped offset the impact of high slippages to a certain extent. Moreover, the overall book remains well collateralised, thereby lowering DCB's credit losses. The overall standard restructured book remains high at ~8% of standard advances as on December 31, 2021. This, together with the sizeable overdue book (special mention account (SMA)-1 & SMA2), remains materially high in relation to the capital. These monitorable pools of loans could remain a potential source of incremental stress, which could delay the improvement in the asset quality and profitability from the current levels over the near term. Further, DCB's cost profile remains relatively weak, with the cost of funds as well as the cost-to-income ratio remaining comparatively higher than the private sector banks' (PVB) average. While the bank's stated growth guidance of doubling the book over the next 3-4 years may help derive operational leverage over the long term, the operating expenses necessary for expanding the franchise are likely to remain high in the near term. Additionally, the bank's ability to match the book growth by mobilising deposits at competitive rates, thereby narrowing the differential with the PVB average while sustaining granularity, will remain key for building a stable franchise and improving the cost metrics. The Stable outlook on the rating reflects the expectation that the bank will be able to maintain high recoverability from its pool of non-performing advances (NPAs) while ensuring that the solvency levels (net non-performing loans/core capital) and capital cushions remain above the negative rating triggers. The possibility of near-term asset quality challenges from a sizeable monitorable book and higher operating expenses could keep the profitability at sub-optimal levels (<1%) in the near term.>