Key Rating Drivers & Detailed Description
Strengths:
Established market position in gold financing, supported by extensive experience of the promoters
MFL is the third largest gold loan non-banking financial company (NBFC). The promoters have spent over seven decades in the business of lending against gold jewellery. Over the years, the group has established a strong reputation and brand in South India and has an appropriate assessment and underwriting methodology.
The gold loan AUM stood at Rs 15,881 crore (excluding total colending of Rs 1621 crore) as on September 30, 2021 as compared to Rs 18,068 crore (excluding total colending of Rs 618 crore) as on March 2021. This decline in gold loan AUM can be attributed to slowdown in disbursement due to second wave of covid 19. The total gold holding stood at around 56.7 tonnes on of June 30, 2021 (51 tonnes as on March 31, 2020). During fiscal 2021, the company disbursed Rs 38,744 crore. The growth in fiscal 2021 has been despite increase in competition from banks and having a regulatory LTV disadvantage during this period. In H1 2022, company has disbursed Rs 14,487 crore. The AUM per branch has also increased to Rs ~4.9 crore as on March 31, 2021 as compared to Rs ~3.5 crore a year ago. CRISIL Ratings expects the company to grow 18-20% over the medium term.
Diversified product profile of the MPG group
MPG has diversified its product profile over the past few years. Currently, the group operates in five major segments: loan against gold jewellery, two-wheeler finance, microfinance, housing finance and small business loans. Overall managed AUM of MPG is around Rs 24,505 crore as on September 30, 2021 (Rs 26,753 crore as on March 31, 2021). The proportion of gold loans has remained steady at 66% in H1 2022 as compared to 67% in March 2021. The microfinance portfolio is second largest with around 20% of overall portfolio of the group as on September 30, 2021. In light of the current pandemic-related challenges, the growth in non-gold segments, such as microfinance and vehicle finance, is expected to remain muted in the near term. Furthermore, the demand for gold loans during this period is expected to remain high and, as a result, the proportion of gold loans is expected to be maintained in the near term.
Healthy asset quality in the gold loan segment to support overall group asset quality
The gross NPAs for MFL stood at 2.87% as on September 30, 2021, against 1.92% as on March 31, 2021. The NPAs are primarily in the SME portfolio wherein the performance was affected due to slowdown in the sector. However, CRISIL Ratings notes that due to asset quality issues and the pandemic, the company, incrementally, has reduced its exposure to the SME segment and has started focusing primarily on gold loan products. The proportion of SME loans has reduced further to around 4% of the overall group’s AUM as on September 30, 2021, from 8% as on March 31, 2018. In the gold loan segment, MFL has maintained healthy asset quality over the years, backed by strong collection efficiency, as reflected in GNPAs of 1.0-2.0% over the last five fiscals. Asset quality, as better measured by credit costs, has also been under control within 0.5% during this period for gold loans. As of H1 2022, credit cost stood at 0.2%. Post second wave of covid, company has been doing regular auctions since June 2021 and the NPAs in the gold segment are likely to reduce in the coming period. Furthermore, company is focusing on short tenure (6-month) gold loan product compared to average 9-month product in the previous fiscal. This should help MFL de-risk the portfolio from any sharp movements in gold prices in the near term.
Improving earnings profile for gold loan business
MFL's profitability, on standalone basis, has improved in fiscal 2021 on account of higher returns from the gold business during the pandemic, steady reduction in overall opex cost over the years and overall low credit costs. RoMA improved significantly to 1.8% compared to just 1.2% and 1.0% in fiscal 2020 and 2018, respectively. In H1 2022, MFL reported RoMA of 1.8%(annualised). MFL has maintained its focus on regular interest collection which may reduce loss on interest income, if any, on auction of pledged jewellery. Furthermore, with the current trend in gold prices, the company is not expecting any issues with respect to interest losses. On a consolidated level, MFL’s profitability is expected to support the group’s profitability. Therefore, profitability of MPG is expected to improve steadily over the medium term. However, the group’s ability to manage earnings primarily within non-gold segments will be monitored.
Weakness:
Moderate capitalisation
MFL’s networth, at standalone level, stood at Rs 3,442 crore (including CCCPS) as on September 30, 2021 as against Rs 3,201 crore as on March 31, 2021. Additionally, adjusted gearing (including securitisation [assignments or PTCs] treated as borrowings) stood at 5.5 times as on September 30, 2021 (5.9 times as on March 31, 2021). On a consolidated level, networth stood at Rs 3,595 crore as on March 31, 2021, against Rs 3,160 crore as on March 31, 2020 and adjusted gearing of the group stood at 7.2 times as on March 31, 2021, as compared with 7.6% as on March 31, 2020. Capitalisation is further supported by low asset-side risks (security of gold jewellery, which is liquid and in the lender’s possession).
Furthermore, MFL’s exposure to real estate assets stood at Rs 540 crore (2.4% of total assets) as on September 30, 2021 down from Rs 876 crore as on March 31, 2017 (6.5% of total assets). CRISIL Ratings also understands that the company has raised funds by placing around 55% of these assets as security and utilised those funds for core business operations. CRISIL Ratings notionally allocates a part of networth towards such asset acquisition so as to simulate a funding model for these assets, with low gearing (debt: equity) of 0.5 time. Post adjusting the MFL’s real estate exposure of Rs 540 crore, the adjusted gearing at standalone and consolidated levels stands at 6.3 times and 7.7 times, respectively, as on March 31, 2021. Additionally, the company has received Rs. 150 crore of cumulative compulsory convertible preference shares on private placement basis in first quarter of fiscal 2022. Also, company expects further infusion of Rs 50 crore in the coming 2-3 quarters. The management is expected to maintain gearing at current level over the medium term. Any material increase in gearing beyond current thresholds will be a key rating sensitivity factor.
Geographical concentration in portfolio
High geographical concentration persists, with South India accounting for around 62% of the gold loan portfolio as on September 30, 2021 (as compared to 70% as on March 31, 2019). This was achieved by increase in per branch business from branches other than southern branches, opening of new branches in North, East and South and closure or merger of non-viable branches in South India. At the MPG level, around 80% of AUM is concentrated in South Indian states. While the level of concentration has been declining, it is higher than that of its peers. Presently, the demand for gold loans has been high in the region. Therefore, the proportion of AUM from the South region may not decline further in the current fiscal.
Furthermore, Kerala accounts for around 11% of the group’s loan portfolio. Impact of the Kerala Money Lenders Act, 1958, on NBFCs, the applicability of which depends on the decision of the Supreme Court, could affect lending rates and operational expenditure.
Potential challenges associated with non-gold loan segments
The non-gold segments accounted for less than 35% of the overall portfolio as on September 30, 2021. While MPG has managed to grow these businesses and increase the segmental share over the last 2-3 years, potential challenges linked to seasoning of the loan book and asset quality remain. The microfinance portfolio registered no growth in fiscal 2021 whereas the vehicle loan portfolio has registered decline of 21% in fiscal 2021. On the other hand, housing finance business has grown 7.3% over the same period.
Asset quality in both microfinance and vehicle finance segments has witnessed deterioration. The 90+ dpd level for MML stood at 9.0% as on September 30, 2021 (8.1% as on March 31, 2021). The gross NPAs in case of MCSL have increased to 19.4% as on September 30, 2021, against 11.1% as on March 31, 2021. The 90+ dpd for MHFL stood at 3.5% as on March 31, 2021.
The microfinance and vehicle finance businesses are more prone to risks arising due to the pandemic. Nevertheless, post September 2020, CRISIL Ratings has observed substantial improvement in the collection efficiency within the vehicle finance segment. The microfinance segment has also witnessed improvement in its collections consistently during the last quarter of fiscal 2021. However, due to the second wave of Covid 19, collection efficiency dropped in the month of April 2021 and further in the month of May 2021. However, it has picked up from June 2021 onwards. CRISIL Ratings believes that the consolidated credit profile will be able to absorb asset quality risks in the microfinance, vehicle or housing finance businesses in the near term. Furthermore, the non-gold segment is expected to recover over the next 2-3 quarters. Nevertheless, CRISIL Ratings will continue to closely monitor the delinquency trend and collection efficiencies in the non-gold loan segments in the near term. Additionally, sufficiency of capital buffers to withstand asset-side shocks remains a key rating sensitivity factor.