| Muthoot Microfin Limited | ||||||||||||||||||||||||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||||||||||||||||||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the long-term bank facilities and debt programmes of Muthoot Microfin Limited (MML) at ‘CRISIL A+/CRISIL PPMLD A+/Stable/CRISIL A1+’.
The rating continues to factor-in the expectation of continued support from the parent, Muthoot Fincorp Ltd (MFL; rated ‘CRISIL AA-/CRISIL PPMLD AA-/CRISIL A/Stable’). The ratings also factor in MML's adequate capitalisation and long track record and experience of the promoters in the microfinance space and above-average earnings profile. These rating strengths are partially offset by moderate asset quality, geographical concentration in MML’s portfolio and the susceptibility of the microfinance sector to various regulatory and legislative risks partially offset the above strengths.
MML has adequate capitalisation, which was bolstered by $50 million equity funding by Greater Pacific Capital (GPC) in fiscal 2022. Additionally, GPC has infused additional amount of $10 million in September 2022. With this infusion, the networth improved to Rs 1626 crore and adjusted gearing stood at 5.2 times as on March 31, 2023.
In terms of asset quality, during Q2 fiscal 2023, the company sold NPAs worth Rs 300 crore to asset reconstruction company (ARC) at net valuation of Rs 90 crore. Post this, the 90+ dpd stood at 5.1% as on March 31, 2023 (6.8% as on March 31, 2022). The company, further, wrote off its portfolio to the tune of Rs 188 crore during fiscal 2023. As far as net NPA is concerned, it has remained at 0.60% as on March 31, 2023 as compared to 2.96% as on March 31, 2022.
While the outstanding restructured portfolio as on March 31, 2023 stood at Rs 224 crore (2.44% of the total portfolio), with company having made adequate provisions, company is well placed to cover any further asset quality challenges arising from the restructured book. Nevertheless, the ability to manage asset quality and maintain healthy collections across buckets including restructured portfolio will remain key monitorable. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has taken a standalone view of MML and additionally factored in expected support from MFL, the parent and the flagship company of Muthoot Pappachan Group (MPG). |
Key Rating Drivers & Detailed Description Strengths: * Expected financial, operational and management support from the parent Given majority ownership, shared name, common branding and corporate identity, CRISIL Ratings believes MFL has a strong moral obligation to support MML. Parental support is expected on an ongoing basis as well as in the event of distress. The MPG promoters are also on the board of MML. The microfinance business is strategically important and is the second largest, in terms of AUM, for the group, after gold loans. In addition, MML provides diversity to the product profile. MML is likely to benefit from the new microfinance regulations, which allows for risk based pricing. Consequently, MML share in MPG profitability is expected to increase over the medium term.
* Adequate capitalisation MML is adequately capitalised with networth of Rs 1626 crore and adjusted gearing of 5.2 times as of March 31, 2023 (Rs 1337 crore and 4.4 times as of March 31, 2022). The capitalisation has been supported by regular capital infusions. The promoters and the private equity fund, Creation Investments, infused capital of around Rs 440 crore in fiscals 2016-2019. The capitalisation was further strengthened by the $50 million equity funding by Greater Pacific Capital (GPC) in fiscal 2022. Additionally, GPC has infused additional amount of $10 million in September 2022, which further supports the capitalisation profile. With the recent infusion, the capital adequacy ratio (CAR) improved to 21.87% as of March 31, 2023 (22.71% as of March 31, 2021). Despite the recent equity raise, CRISIL Ratings understands MFL will continue to retain majority ownership in MML. The extent of ownership retained by MFL will be a key rating sensitivity factor.
* Above-average earnings profile historically, characterized by higher provisioning buffer Historically, the microfinance business has been one of the most profitable businesses for MPG. With the pandemic impact diminishing, the company’s profitability is returning steadily back to its normal level. During fiscal 2023, the company reported return on managed assets (RoMA) of around 1.8% during fiscal 2023 as against 0.7% during fiscal 2022. This upward trend in profitability is expected to continue mainly supported by higher net interest margins (NIM) and controlled credit costs. With the revised regulatory framework (de-regulation of interest rates), the company has raised their interest yields by about 100 to 300 bps on the incremental disbursements done during Q2 and Q3 of fiscal 2023.
MML has been carrying high level provisions till end of fiscal 2023 in order to manage expected pressure from restructured book. Additionally, the company also wrote off its portfolio to the tune of Rs 188 crore during fiscal 2023. Further, during later half of fiscal 2023, the company sold NPAs worth Rs 300 crore to asset reconstruction company (ARC). Due to these steps taken by the company and also collection efficiency on newer disbursements done over last 12-18 months being high, the credit costs on incremental basis are expected to remain low. As far as operating costs are concerned, the company did expansion of its branches during pandemic period. The company would now be leveraging on all these and existing branches for incremental growth. As a result, the operating expenses are expected to remain stable with no material increase over medium term. CRISIL Rating overall believes that, considering the revision in the interest yields and credit costs on incremental basis remaining low, MML’s earnings profile is expected to improve considerably from present level.
Weakness: * Moderate asset quality With the diminishing impact of pandemic and owing certain steps taken by management, MML’s asset quality started stabilizing. The 90+ dpd (at reported level) stood at 5.1% as on March 31, 2023 as against 6.8% as on March 31, 2022. During Q2 fiscal 2023, the company sold-off NPAs worth Rs 300 crore to ARC at valuation of Rs 90 crore. However, including NPA portfolio that got sold-off, the 90+ dpd stood at over 8%. Further, the outstanding restructured portfolio stood at Rs 224 crore (2.44% of the total portfolio) as on March 31, 2023. Majority of this restructured book saw start of billing cycle during Q1 fiscal 2023 which resulted in elevation of 90+ dpd level. MML, however, maintained high level provisions in order to absorb the asset quality pressure faced till fiscal 2023. Apart from this, the company also wrote-off portfolio of Rs 188 crore during the same period. The asset quality pressure, nevertheless, is expected to ease to some extent given the collection efficiency during most months of fiscal 2023 has been at around 99%. CRISIL Rating, overall believes, MML’s ability to maintain healthy collection efficiency across buckets including restructured portfolio will remain key rating sensitivity factor.
Operations are expected to remain concentrated in South India over the medium term. MML's microfinance operations from three states accounted for around 56% of AUM as on March 31, 2023 with Tamil Nadu, Kerala and Karnataka contributing 28%, 19% and 9%, respectively. The company has been expanding operations outside southern India to around 14 other states over the past two years. As a result, per-state concentration has been consistently declining, with the top state accounting for 28% of the total portfolio as on March 31, 2023, down from 53% as on March 31, 2016. However, the ability to replicate similar systems, processes and controls in new geographies will need to be closely monitored. As a result of the natural calamities in fiscal 2018 (cyclones in Tamil Nadu and Odisha and floods in Kerala), the company plans to reduce geographical concentration of portfolio to around 20% per state, over the medium term, in order to reduce the impact of such events on the overall portfolio.
* Susceptibility to regulatory and legislative risks associated with the microfinance sector The microfinance sector witnessed two major disruptive events in the past decade. The first was the crisis promulgated by the ordinance passed by the government of Andhra Pradesh in 2010, and the second was demonetisation in 2016. Promulgation of the ordinance on MFIs by the government of Andhra Pradesh in 2010 exposed them to regulatory and legislative risks. The ordinance triggered a chain of events that adversely affected the business models of MFIs by impairing their growth, asset quality, profitability and solvency. The sector witnessed high levels of delinquencies post demonetisation and subsequent socio-political events. The MFI Bill, 2020 passed recently by the Assam Assembly may increase asset-quality challenges for MFIs. Further, announcement of any loan waivers may worsen matters, due to their impact on repayment discipline. The sector also remains susceptible to regional issues such as elections, natural calamities and borrower protests among others, which may result in momentary spurt in delinquencies. This indicates the fragility of the business model to external risks. As the business involves lending to the poor and downtrodden sections of society, MFIs will remain exposed to socially sensitive factors, including high interest rates, tighter regulations and legislations. |
Liquidity: Adequate The company had cash and equivalent, including liquid investments, of Rs 1059.5 crore as on March 31, 2023, against debt obligation of Rs 753.9 crore due for servicing over the three months until March 2023 (excluding term loans and securitisation lines). This represents liquidity cover (assuming 75% collection efficiency) of 2.7 times for three months. In addition, the company had securitisation lines of Rs 359 crore as on March 31, 2023. The liquidity is also supported by the steady level of collections that the company has been reporting for the last 2-3 months and fresh sanctions in pipeline. Liquidity is further cushioned by expectation of need-based and timely funding support from the parent, MFL. |
Outlook: Stable CRISIL Ratings believes MML will continue to benefit from the strong support of its parent, MFL. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company MML, a part of MPG, provides microfinance loans to women. MPG started its microfinance operations in 2010 as a separate division of MFL, the flagship company of the group. In December 2011, the group acquired a Mumbai-based NBFC, Pancharatna Securities Ltd, and renamed it MML. In March 2015, MML received an NBFC-MFI licence from the RBI. As on March 31, 2023, MFL held 60.3% equity and MFL's promoters held 8.6% in MML. Along with the promoters, MML's board includes one member nominated by Creation Investments and Greater Pacific Capital and four independent directors.
MML had AUM of Rs 9180 crore and networth of Rs 1626 crore as on March 31, 2023. Operations of the microfinance division are spread across Kerala, Tamil Nadu, Puducherry, Karnataka, Maharashtra, Gujarat, Haryana, Rajasthan, Uttarakhand, Madhya Pradesh, Uttar Pradesh, Odisha, West Bengal, Punjab, Chhattisgarh, Jharkhand, Bihar and Himachal Pradesh. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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This Annexure has been updated on 05-Jun-23 in line with the lender-wise facility details as on 07-Sep-21 received from the rated entity.
Criteria Details
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