CRISIL has assigned its ‘CRISIL AA-/Stable’ rating to the Rs.6-billion non-convertible debentures (NCDs) of Muthoot Finance Ltd (MFL), while reaffirming its ratings on MFL’s other above-mentioned debt instruments and programmes at ‘CRISIL AA-/Stable/CRISIL A1+’.

The ratings continue to reflect MFL’s established track record in the business of financing against gold jewellery, its strong and stable asset quality, and healthy capitalisation and earnings profile. These rating strengths are partially offset by MFL’s susceptibility to adverse changes in regulatory and legislative framework, lack of diversity in funding profile and geographic and product concentration.

MFL’s promoter family has a long and established track record, extending to over seven decades, in the business of financing against gold jewellery, which has helped MFL design an appropriate assessment and underwriting methodology that has helped it to maintain its strong asset quality, scale up its business significantly, and facilitate easy replication over various geographies. The promoters’ experience and strong reputation, and the company’s stringent controls and processes have helped MFL scale up its business significantly since 2006-07 (refers to financial year, April 1 to March 31). The company’s assets under management (AUM) increased to Rs.158.7 billion as on March 31, 2011, from Rs.14.5 billion as on March 31, 2007, a phenomenal growth of 11 times in four years. The AUM was Rs.209.41 billion as on September 30, 2011.

MFL has maintained a strong and stable asset quality over the past few years. The gross non-performing asset (NPA) ratio in MFL’s gold loan financing portfolio was low at 0.29 per cent as on March 31, 2011, compared with 0.46 per cent a year ago. It was 0.59 per cent as on September 30, 2011. Besides, strong credit underwriting norms, marked by a conservative loan to value (LTV) ratio of around 70 per cent, enable MFL to maintain consistently high level of asset quality. Furthermore, the ability to auction gold ornaments in case of delinquencies helps minimise losses considerably. However, any material increase in LTV ratio at origination beyond the current levels would mean increasing risk of the underlying portfolio that could lead to change in CRISIL’s view on MFL’s asset quality. CRISIL will continue to closely monitor the LTV ratio. MFL has a healthy earnings profile, supported by its high interest spreads and low credit costs. MFL’s net profitability margin (NPM), based on quarterly average, was 5.5 per cent in 2010-11, as against 5.1 per cent in the previous year. The removal of priority sector lending (PSL) benefits and increasing interest rates have increased the cost funds for MFL by about 200 basis points (bps; 100 bps equals 1 percentage point). However, MFL has passed on the increased cost to its customers. MFL’s NPM is expected to remain comfortable, at around 4 per cent, over the medium term.

MFL is susceptible to adverse changes in regulatory and legislative framework. In January 2011, the Reserve Bank of India (RBI) removed the benefit of priority sector status for bank lending to, and portfolios originated by, gold loan companies. Given MFL’s large dependence on bank funding, any changes in regulations or policies relating to bank financing could adversely affect its growth or profitability. The Supreme Court is yet to give its verdict on applicability of The Kerala Money Lenders Act, 1958, for non-banking financial companies (NBFCs); an unfavourable verdict could not only adversely affect MFL’s lending rates but also increase its operational expenditure, given the requirements (under the said Act) of registering all establishments with state authorities and complying with state regulations. Furthermore, MFL has high concentration in South India, which accounts for more than 74 per cent of its total loans; thus, it remains vulnerable to the economic, social, and political upheavals in the region. In addition, MFL’s operations remain confined to financing against gold ornaments; this segment constitutes over 99 per cent of its total advances; MFL is, thus, susceptible to risks of revenue concentration over a single asset class.

Outlook: Stable
CRISIL believes that MFL will maintain its growth, strong asset quality, and earnings profile, over the long term. The outlook may be revised to ‘Positive’ if MFL improves its competitive positioning significantly without weakening its capitalisation, asset quality, or earnings profile. Conversely, the outlook may be revised to ‘Negative’ in case of a steep decline in the company’s asset quality or capitalisation.

About the Company
MFL, an NBFC, was set up as a private limited company in 1997 and reconstituted as a public limited company in November 2008. MFL is in the business of financing against used household gold jewellery. MFL is also the flagship company of the Muthoot Group, which is also into hospitality, healthcare, media, education, information technology, foreign exchange, insurance distribution, and money transfer services. MFL operates through a nationwide network of 3274 branches as on September 30, 2011. MFL is the largest gold loan company in India.

The Muthoot Group has been organising chit funds and financing against used household gold ornaments since 1939. The financial services business was started by the late Mr. M George Muthoot, father of the current promoter-directors of MFL. The financing against gold jewellery business was initially carried out under Muthoot Bankers, a partnership firm. In 2001, when MFL was registered by RBI as an NBFC, the group started carrying out the lending business under MFL.

For 2010-11, MFL reported a profit after tax (PAT) of Rs.4.9 billion on a total income of Rs.23.2 billion, as against a PAT of Rs.2.3 billion on a total income of Rs.10.9 billion for the preceding year. For the half year ended September 30, 2011, MFL reported PAT of Rs.4.06 billion on a total income of Rs.20.25 billion, compared to Rs.1.99 billion of PAT and Rs.9.12 billion of total income for the corresponding period of the previous year.