Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position in gold financing, supported by extensive experience of the promoters

MFL has established market position in the gold financing. 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. MFL’s gold loan business grew at steady rate of 22% compound annual growth rate (CAGR) over fiscals 2018 to 2020 and 21% in fiscal 2021 despite increase in competition from banks and having a regulatory loan-to-value (LTV) disadvantage during last fiscal. However, in fiscal 2022, higher volatility in gold prices between January and April 2021 followed by localised lockdown impose by states to curb the impact of the second wave of covid-19 impacted the branch operations and disbursements during first half of current fiscal. This coupled with higher auctions in Q3 of fiscal 2022, MFL’s gold loan AUM stood at Rs 18,125 crore as of March 2022 as compared to Rs 18,701 crore as of March 2021. In fiscal 2023, MFL’s gold loans AUM stood at Rs 17,942 crore which improved to Rs 18,636 crore in Q1 2024. The total gold holding stood at around 48.1 tonnes on of June 30, 2023 (51 tonnes as on March 31, 2020) owing to decline in the gold loan portfolio. During fiscal 2023, the company disbursed Rs. 40,065 crore as compared to Rs 35,154 crore in fiscal 2022. In Q1 2024, company disbursed Rs. 12,470 crore. The AUM per branch stood at Rs 5.4 crore as on June 30, 2023, as compared to Rs ~3.6 crore in fiscal 2019.

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 33,332 crore as on June 30, 2023 (Rs 31,587 crore as on March 31, 2023). The proportion of gold loans has remained high at 56% in June 2023. The microfinance portfolio is the second largest with around 30% of overall portfolio of the group as on June 30, 2023. CRISIL Ratings believes that the gold loans will continue to hold the largest share in the consolidated AUM over the medium term.

Improvement in capitalisation with the recent infusion

MFL’s networth, at standalone level, stood at Rs 4,264 crore (including CCCPS) as on June 30, 2023 as against Rs 4,050 crore as on March 31, 2023. Capitalisation is further supported by low asset-side risks (security of gold jewellery, which is liquid and in the lender’s possession). On a consolidated level, networth stood at Rs 4,904 crore (including CCCPS) as on March 31, 2023, against Rs 4,271 crore as on March 31, 2022 which was bolstered by $50 million in MML by a PE investor Greater Pacific Capital in fiscal 2022 and $10 million in September 2022. Moreover, net gearing (adjusted for cash and real estate assets) at the standalone level stood at 4.2 times in fiscal 2023 as compared to 4.8 times in fiscal 2022 and at consolidated level improved to 5.8 times in fiscal 2023 as compared to 6.0 times in fiscal 2022. As of June 2023, net gearing at standalone level stood at 4.3 times in Q1 2024.

Furthermore, MFL’s exposure to real estate assets has reduced to Rs 380 crore in June 2023 (1.5% of total assets) as compared to Rs 451 crore (1.9% of total assets) as on March 31, 2023 down from Rs 876 crore as on March 31, 2017 (6.5% of total assets). 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.

Healthy asset quality in the gold loan segment to support overall group asset quality

The gross NPAs for MFL stood at 2.9% as of June 30, 2023 as compared to 2.1% in March 31, 2023. Further there is a negligible impact of the Reserve Bank of India (RBI) clarification released in November 2021 on the NPAs as gold loans are demand loans where the interest and principal amount are due for payment at the end of tenor. 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 5.5% of the overall group’s AUM as on June 30, 2023, from 8% as on March 31, 2018. Additionally, company is doing regular auctions of gold loans which would help in reducing GNPA below 1% in gold loans. In the gold loan segment, MFL has maintained healthy asset quality over the years, backed by strong collection efficiency. Asset quality, as better measured by credit costs, has also been under control within 0.5% during this period for gold loans. In fiscal 2023, credit cost stood at 0.3%. Post second wave of covid, company has been doing regular auctions since June 2021. 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 over the last 2-3 years 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 1.7% in fiscal 2021 compared to just 1.2% and 1.0% in fiscal 2020 and 2018, respectively. In fiscal 2022, MFL reported slight reduction in RoMA to 1.5% owing to slight decline in NIMs and rise in operating cost associated with core banking migration and rise in employee benefit expense. In fiscal 2023, RoMA improved at 1.9%. If we adjust for non-interest bearing assets, profitability improves to 2.4% in fiscal 2023. As of June 2023, RoMA stood at 1.8%. 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, RoMA improved to 2.0% in fiscal 2023 as compared to 0.7% in fiscal 2022. MFL’s profitability is expected to support the consolidated profitability. Additionally, with the improvement in the earning profile of subsidiaries and MCSL, overall profitability is expected to improve further in fiscal 2024. As of March 2023, MML has total provisioning buffer of Rs 172 crore (1.9% of the total book). Given the higher provisioning buffer, company is well placed to cover any further asset quality challenges. Additionally, the removal of interest rate cap as per new RBI directives is expected to bolster the profitability of the company. Similarly, MCSL is carrying a huge provision buffer of Rs 393 crore (18.7% of the on book portfolio as of March 31, 2023), write backs are also expected in the current fiscal in addition to the improving profitability on account of expected growth. 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:

Geographical concentration in portfolio

High geographical concentration persists, with South India accounting for around 60% of the gold loan portfolio as on March 31, 2023 (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.

Potential challenges associated with non-gold loan segments

The non-gold segments accounted for 44% of the overall portfolio as on June 30, 2023. 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. In fiscal 2023, microfinance portfolio and housing finance portfolio has registered a double-digit growth of 47% and 14% respectively and vehicle loan portfolio grew by only 2.2%.

However, asset quality in both microfinance and vehicle finance segments has witnessed deterioration. The 90+ dpd level for MML stood at 4.8% as of June 2023 (5.1% as on March 31, 2023). The GNPA in case of MCSL stood at 21.1% as of June 2023 (20.55% as on March 31, 2023) as against 25.9% as on March 31, 2022. The 90+ dpd for MHFCL stood at 0.99% as on June 30, 2023 (0.8% as on March 31, 2023).

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 segments are recovering post the pandemic. 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.