Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to Rs.1000 crore Non-Convertible Debentures of Muthoot Finance Ltd (Muthoot Finance). The ratings on existing debt instruments have been reaffirmed at 'CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+'.
The ratings are driven by Muthoot Finance’s demonstrated ability of profitably scaling up its core gold loan business while maintaining its strong financial risk profile. It also factors in the company’s strong market position within the gold loan segment of India, bolstered by promoter experience. These strengths are partially offset by geographical concentration in operations and low market share in the non-gold segments and, asset quality challenges relating to these non-gold segments.
Over fiscal 2022, the company’s consolidated AUM grew at 11% as against a 26% growth clocked over fiscal 2021. Higher growth in fiscal 2021 was influenced by a number of one-off extraordinary factors like pandemic-induced need for quick credit, appreciating gold prices, increased disbursements to new and inactive customers and rise in average LTVs. However, with correction in gold prices and outbreak of the second pandemic wave, growth moderated in fiscal 2022. For 9M 2023, the consolidated AUM remained almost flat with a nominal growth of 0.9% (year to date) - as new disbursements remained low.
Over the near to medium term, CRISIL Ratings expects the company to grow at a steady-state level of 4-7% and, retain its leadership position among gold loan financiers. However, in the long term, ability to maintain this growth momentum alongside increasing competition from banks, will be a monitorable.
Asset quality for gold loans, as better measured by credit costs, has also been sound, except for the fourth quarter of fiscal 2018 when non-performing asset (NPA) levels increased after change in NPA recognition norms. Standalone gross stage III assets, having remained below 3.0% for the last 7 fiscals (except for fiscal 2018), stood at 2.6% on December 31, 2022. In fiscal 2021, cumulative auctions done by the company were Rs 171 crore however, in fiscal 2022 and 9M 2023 – the cumulative auctions done increased to Rs 5211 crore and Rs 2176 crore respectively. Nonetheless, the overall auction proceeds have been higher than the principal component of the collateral against which the loan was extended.
The non-gold portfolios faced asset quality challenges in the aftermath of the pandemic however, the resolution in those portfolios has started to increase gradually and should stabilize in the medium term.
CRISIL Ratings believes that the gold loan AUM will continue to account for 85% of the consolidated AUM and over 90% of consolidated profit over the medium term. Consequently, the consolidated credit profile has the ability to absorb asset quality and earnings risks in the microfinance, vehicle or housing finance businesses in the near term.
The company’s earnings profile has remained healthy over the years. Muthoot Finance reported a consolidated return on managed assets (RoMA) of 4.8% (annualized) for 9M 2023. This superior earnings profile is supported by high interest margins and, low operating and credit costs. The company has maintained strong capital position while ramping up operations over the years. As on December 31, 2022, its reported networth was Rs 20,668 crore (consolidated), tier I capital adequacy ratio was adequate at 32.4% (standalone) and gearing low at 2.4 times (consolidated). |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Muthoot Finance and its subsidiaries, including Muthoot Homefin India Limited [Muthoot Homefin], Muthoot Money Limited [Muthoot Money]) and Belstar Microfinance Limited [Belstar].
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Established track record and brand name in gold financing industry Muthoot Finance has sustained its leadership position in the gold financing segment, supported by the long and established track record of 84 years of its promoter family. The company has a large operational base of over 4,600 branches across India, which has supported its leadership position among NBFCs carrying out gold loan business over the years. Despite moderate volume growth and increased competition from banks due to LTV relaxation benefit extended to them until March 31, 2021, the company’s gold loan AUM grew by 27.4% over fiscal 2021 to reach Rs 51,927 crore on March 31, 2021. This was a factor of appreciation in gold prices, new disbursals made at marginally higher than average LTV and, expansion of active customer base through reactivation of old inactive customers and increase in the number of new customers. Following the second pandemic wave and the liquidity constraints within certain borrower segments thereafter, annual growth in gold loan portfolio was 11% for fiscal 2022 and it further tapered drastically to 0.9% for 9M 2023 owing to lesser new disbursals.
Historically, the company’s operating efficiency – indicated by average gold loan AUM per branch – has been higher than that of peers. As at the end of December 31, 2022, the average AUM per branch stood at Rs 12.2 crore, almost double of that for fiscal 2013.
Muthoot Finance’s extensive branch network and client base, which is relatively more diverse in terms of geographies and is gradually improving further, should support the further strengthening of its competitive position over the medium term. While the company had started to diversify into non-gold segments, its primary focus would remain on gold loans over the medium term in light of the challenges being faced by other asset classes after the pandemic,
Strong capitalisation Muthoot Finance’s capital position remains strong in relation to its scale and nature of operations, supported by its demonstrated ability to raise capital frequently and large accretions to networth. As on December 31, 2022, the company reported a consolidated networth of Rs 20,668 crore and a comfortable gearing of 2.4 times. The gearing has remained below 4 times for several years now. Tier I and overall capital adequacy ratios on a standalone basis have also remained comfortable over 20% over the last few years driven by stable growth in business, and stood at 32.4% and 33.3% respectively on December 31, 2022. Strong internal cash generation from the gold loan business will allow Muthoot Finance to prudently capitalize its subsidiaries and provide need-based liquidity support, apart from strengthening its standalone capital position. Even after factoring in leverage in the key subsidiaries, CRISIL Ratings believes the consolidated gearing will remain below 5 times and capital adequacy ratio above 20% over the medium term.
Profitability among the best in the industry, expected to remain healthy The company’s earnings profile has been healthy in the past and, has improved further over the last few fiscals to outperform NBFCs and banks. For fiscal 2021 and 2022, the consolidated RoMA stood at 6.1% and 5.6% (annualized), respectively – which is higher than almost all lending entities operating in India. This superior profitability can be attributed to the company’s ability to generate high interest margins while keeping operating expenses and provisioning requirements low. Over the past 2-3 fiscals, increased focus on collection of interest on a regular basis and revision in interest rates on different schemes helped sustain margins. Asset quality as measured by annualised credit costs has also been under control, except a one-time deviation in the fourth quarter of fiscal 2018 when NPAs rose due to change in NPA recognition norms from account-wise to borrower-wise.
Stage III assets, which have remained below 3% on a steady state basis in the past, increased to 3.8% as on December 31, 2021 due to the overhang of pandemic imposed challenges. However, ultimate credit costs have remained within 1% on account of low asset-side risk (security of gold, which is liquid and is in the lender’s possession) in the gold finance business. The gross stage III assets as a percentage of gross loans has declined in Q3 2023 and stood at 2.6%. In the medium term, consolidated profitability is expected to remain healthy. As the group diversifies into other segments in the long run, asset quality and profitability of the non-gold businesses will remain monitorables.
Weakness: Geographical concentration in operations and low market presence in non-gold businesses Despite attempts for gradual diversification, Muthoot Finance’s operations have a high degree of geographical concentration - South India accounted for 47% of the company’s AUM and 59% of its branches as on December 31, 2022. Significant regional concentration renders the company to vulnerabilities of economic, social, and political disruptions in the region. An instance of this nature was witnessed last year in the form of strikes called by a group of employees associated with Centre of Indian Trade Unions (CITU) which resulted in momentary disruption of operations of a few branches in Kerala. However, as per the management, none of the existing branches in the state are facing any disruptions on account of this event. As of December 31, 2022, the company had a small exposure of <3% to Kerala and as part of its branch rationalisation strategy, this exposure may get reduced further.
Muthoot Finance had started to diversify its product suite across housing finance, microfinance, vehicle finance and a few other segments. This expansion into non- gold segments and growth of these businesses led to an increase in their share in the consolidated AUM, to almost 13% by the end of fiscal 2020. However, none of these businesses command good market share. Furthermore, in the aftermath of the pandemic, the management took a conscious call to curtail disbursements over the following few quarters. Nonetheless, with revival in macro situation – non gold portfolios have started to revive gradually. During 9M 2023, the microfinance and vehicle loan portfolio clocked a growth (Y-o-Y) of 39% and 24%, respectively; while the housing loan portfolio registered a decline of 11% during the same period. As a result, the share of non-gold businesses remained at 12% in the consolidated AUM of Muthoot Finance. Over the medium term, as the focus on these segments will remain low – high segmental concentration in AUM and revenue profile will remain a key monitorable.
Asset quality challenges associated with non-gold loan segments Given the low track record and seasoning in the non-gold loan segments, the growth, asset quality and profitability in those segments are yet to stabilise. Within the housing finance segment, Muthoot Homefin operates in the affordable housing finance segment, catering to self-employed customers engaged in small business activities and thus, have a relatively weak credit risk profile because of the volatile nature of their income and employment in un-organised segments. Similarly, microfinance loans (under Belstar Microfinance), through which the company intends to cater to weaker sections of the society, are unsecured in nature and are rendered to borrowers with a weak credit risk profile. This segment also exhibits high subjectivity to local socio-political issues. The vehicle finance business (under Muthoot Money), which is relatively new, deals with lending against commercial vehicles and equipment – majority of which are used/pre-owned vehicles.
With respect to impact of covid-19, the non-gold businesses faced asset quality challenges in its aftermath leading to a spurt in reported NPAs requiring additional provisioning. While the asset quality situation has started to restore, owing to the inherent weaknesses of the non-gold segments in which Muthoot Finance operates - the standalone earnings profile of non-gold businesses is expected to remain susceptible. From a longer-term perspective, as the growth within these segments has remained limited as yet, the asset quality and profitability in these businesses will be a key monitorable. |
Liquidity: Strong The company’s standalone liquidity position remains strong with a liquidity balance of Rs 6,531 crore as on February 2, 2023 (including un-utilized portion of existing term loans, including un-utilized portion of Cash Credit and Working Capital Demand Loans). Liquidity cover for debt obligations arising over the following 2 months, without factoring in any roll over or incremental collections, was at 0.89 time. Over the last 4-5 quarters, Muthoot Finance has been maintaining about 5-8% of its balance sheet as liquidity balance. The company has also been able to roll over existing working capital lines and also raise incremental funds at competitive rates over the last few quarters. Over 9M 2023, the company has raised around Rs. 4,801 crore of funds from various avenues.
ESG Profile CRISIL Ratings believes that Muthoot Finance’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.
Muthoot Finance has a continuous focus on strengthening various aspects of its ESG profile.
Muthoot Finance’s key ESG Highlights:
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Outlook: Stable CRISIL Ratings believes Muthoot Finance will sustain its strong capitalisation and healthy profitability. Asset quality in the gold business, which accounts for a majority of the AUM, will remain sound, supported by increased frequency of interest collections and the highly liquid nature of the underlying security (gold jewelry), which should keep credit losses low. For non-gold segments, maintenance of asset quality and profitability alongside growth remains a monitorable |
Rating Sensitivity Factors Upward Factors
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About the Company Muthoot Finance, an NBFC, was originally set up as a private limited company in 1997 and was reconstituted as a public limited company in November 2008. It provides finance against used household gold jewellery. The promoter family has been in this business for over eight decades. During the initial days, the business was carried out under Muthoot Bankers, a partnership firm. Muthoot Finance is the flagship company of the Muthoot group (promoter of Muthoot Finance), which is also in the hospitality, healthcare, media, education, information technology, foreign exchange, insurance distribution, and money transfer businesses. |
Key Financial Indicators
Key Financial Indicators (Consolidated)
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Any other information: Not applicable |
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Annexure - Details of Instrument(s)
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Criteria Details
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