Detailed Rationale

Crisil Ratings has assigned its ‘Crisil A1+’ rating to Rs 50 crore commercial paper of Muthoot Microfin Ltd (MML). The rating on the long-term bank loan facilities and non convertible debentures has been reaffirmed at ‘Crisil A+/Stable'.

 

Crisil Ratings has also withdrawn its rating on non-convertible debentures (NCDs) worth Rs 111.8 crore, on receipt of an independent confirmation that these instruments have been fully redeemed, in line with its withdrawal policy. (Refer to ‘Annexure - Details of rating withdrawn' for details).

 

The ratings continue to factor in expectation of continued support from the parent, Muthoot Fincorp Ltd (MFL; rated ‘Crisil AA-/Crisil A+/Stable/Crisil A1+’). It also takes into consideration MML’s adequate capital position and its diversified resource profile. These strengths are partially offset by geographical concentration in the loan portfolio, moderate asset quality and susceptibility of the microfinance sector to regulatory and legislative changes.

 

MML’s portfolio quality has been affected in line with several issues faced by the sector over the last 3-4 quarters. However, overall asset quality (in terms of collections) has started showing some stability, particularly during the fourth quarter of fiscal 2025. Collection efficiency under the non-overdue bucket has remained at over 97% during the last 3-4 months of fiscal 2025. The 90+ day past due (dpd) delinquency ratio stood at 5.7% as on March 31, 2025, as against 4.3% as on March 31, 2024. Gross non-performing assets (GNPAs) stood at 4.8% as of March 31, 2025, as against 2.3% as on March 31, 2024. Assets under management (AUM) grew ~1.3% during fiscal 2025. Nevertheless, the company has maintained adequate provisions for its stressed accounts, as reflected in the provision cover of 73% as on March 31, 2025. Crisil Ratings believes that despite some early signs of improvement in collections (in terms of collection efficiency under non-overdue bucket), the company’s ability to show substantial improvement in portfolio quality will be closely monitored.

 

Higher delinquencies led to elevation of credit cost (on account of higher provisions and write-offs), thereby affecting overall profitability of the company. Credit cost rose to around 5.6% during fiscal 2025, from 4.2% in fiscal 2024, while operating expense stood at 5.5% (5.2%), following the implementation of enhanced collection incentives to drive recoveries. The combined effect of higher credit cost and operating cost led to lower topline and profitability. As a result, the company reported loss of Rs 222 crore, with return on managed assets (RoMA) at -1.6% during fiscal 2025, as against PAT of Rs 449.6 crore and 3.7%, respectively, in fiscal 2024.

 

The company remained well-capitalised, as reflected by networth of Rs 2,632 crore and gearing of 3.0 times as on March 31, 2025 (Rs 2,804 crore and 3.0 times, respectively, as on March 31, 2024). Capital position of the company also benefits from its strong parentage, which enables it to raise funds in a timely manner.

Analytical Approach

To arrive at the ratings, Crisil Ratings has taken a standalone view of MML and factored in expected support from MFL, the parent and flagship company of the Muthoot Pappachan group (MPG).

Key Rating Drivers & Detailed Description

Strengths:

Expected financial, operational and management support from the parent

Given the majority ownership, shared name, common branding and corporate identity, Crisil Ratings believes MFL has a strong moral obligation to support MML, both on an ongoing basis and in the event of distress. The promoters of MPG are also on the board of MML. The microfinance business is strategically important to the group and is its second largest business, in terms of AUM, after gold loans. In addition, MML provides diversity to the overall product profile of the group. The company is also likely to benefit from new microfinance regulations, which allow for risk-based pricing. Consequently, MML’s share in MPG’s profitability is expected to increase over the medium term.

 

Adequate capitalisation

MML is adequately capitalised, with networth of Rs 2,632 crore (Rs 2,804 crore as on March 31, 2024) and gearing of 3.0 times as on March 31, 2025. Capitalisation was supported by capital infusion through an initial public offer (IPO) in December 2023, with fresh equity of Rs 760 crore and Rs 200 crore via offer for sale. Resultantly, the capital adequacy ratio (CAR) improved to 27.9% as on March 31, 2025 from 29% as of March 31, 2024. Despite the equity raise, which has brought down MFL’s stake to 50.2% from 60.3% earlier, Crisil Ratings understands MFL will retain the majority ownership in MML. Extent of ownership retained by MFL will be a key rating sensitivity factor.

 

Diversified resource profile

Strong relationships of the parent company and steady-state profitable operations have helped MML to develop a base of over 50 lenders as on March 31, 2025. Currently, the average cost of borrowing stood at around 11.4%. The company has raised Rs 1,299 crore during the second half of fiscal 2025, from various financial institutions.  Along with the normal funding limit, the company also has unutilised securitisation lines amounting to Rs 1,619 crore as on April 30, 2025. Crisil Ratings overall believes, given the company has reasonable growth plans, the company’s ability to continue to raise funds at competitive rates remains monitorable.

 

Weakness:

Average asset quality

The 90+ dpd rose to 5.6% as on March 31, 2025, from 4.2% as on March 31, 2024. Asset quality has been impacted by increase in indebtedness across customers, along with external challenges such as heat waves, elections and ground-level attrition. However, overall asset quality (in terms of collections) started showing some stability, particularly during the fourth quarter of fiscal 2025. Collection efficiency under the non-overdue bucket was around 97% consistently during the last 3-4 months of fiscal 2025. The overall average collection efficiency stood at 92.5% during the last six months showing signs of portfolio quality stabilising (on an incremental basis). The company undertook an ARC sale of Rs 494 crore in fiscal 2025. Owing to weakening in asset quality, credit cost increased to 7.5% during fiscal 2025, from 1.5% in fiscal 2024 and 2.5% in fiscal 2023. The company cumulatively wrote off Rs 424 crore in fiscal 2025. However, to manage asset quality issues, it has maintained higher provision to cover most of its stressed accounts. The provision cover stood at 73% as on March 31, 2025.

 

Higher delinquencies led to elevation of credit cost (on account of higher provisions and write-offs), thereby affecting overall profitability of the company. Credit cost rose to around 5.6% during fiscal 2025, from 4.2% in fiscal 2024, while operating expense stood at 5.5% (5.2%), following the implementation of enhanced collection incentives to drive recoveries. The combined effect of higher credit cost and operating cost led to lower topline and profitability. As a result, the company reported loss of Rs 222 crore, with return on managed assets (RoMA) at -1.6% during fiscal 2025, as against PAT of Rs 449.6 crore and 3.7%, respectively, in fiscal 2024.

 

Geographical concentration remains high

Operations are expected to remain concentrated in South India over the medium term. Tamil Nadu, Kerala and Karnataka account for 25%, 14% and 8% of MML’s portfolio, respectively, and together formed 47% of its AUM as on March 31, 2025. The company has been expanding to  around 15 other states over the past two years. As a result, per-state concentration has declined consistently, with the top state accounting for 25% of the total portfolio as on March 31, 2025, down from 53% as on March 31, 2016. However, the ability to replicate systems, processes and controls in new geographies remains a key monitorable. Following natural calamities such as cyclones and floods reported in recent fiscals, the company plans to reduce geographical concentration of its portfolio to around 20% per state, over the medium term, so as to reduce the impact of such events on the overall portfolio.

 

Susceptibility to risks arising from exposure to borrowers with inherently weak credit risk profiles and socio-political issues in the sector:

A significant portion of the MML’s portfolio comprises loans to individuals under the joint-liability group (JLG) mechanism. These customers have weak credit risk profiles and lack of access to formal credit. They include farmers, tailors, cattle owners/traders, small vegetable vendors, teashop owners and dairy farmers. The incomes of these households could be volatile and dependent on the performance of the local economy.
 

The microfinance sector has witnessed various events over the years, including regulatory and legislative challenges, that have disrupted operations. Some of these events include the Andhra crisis, demonetisation in 2016, Covid-19 pandemic and sociopolitical issues in certain states. These events adversely affected the sector, elevated delinquencies and hurt the profitability and capitalisation metrics of NBFC-MFIs. These challenges underscore the vulnerability of the microfinance business model to external risks. Covid-19 introduced new challenges, aggravating existing vulnerabilities in the microfinance sector by heightening credit risks and the likelihood of loan default by borrowers. While the sector has navigated these events, it remains susceptible to issues, including local elections, natural calamities and borrower protests, which may increase delinquencies for a while. Nevertheless, the company was able to manage its portfolio well without any significant impact on recoveries. However, MFIs remain vulnerable to socially sensitive factors and the macroeconomic scenario. Furthermore, the sector is regulated by multiple bodies which, from time to time, have been providing several directives to maintain credit discipline and avoid over indebtedness for borrowers

Liquidity: Adequate

MML had cash and equivalents (including liquid investments) of Rs 923 crore as on April 30, 2025, against debt obligation of Rs 1,645 crore due for servicing over May and June 2025 (excluding term loans and securitisation lines). This represents a liquidity cover (assuming 75% collection efficiency) of 1.3 times for two months. In addition, the company had securitisation lines of Rs 1,632 crore as on April 30, 2025. Liquidity is further backed by steady collections reported for the last 2-3 months, and fresh sanctions in the pipeline, and 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

• Geographical diversification in operations alongside scale with reduction in state and district level concentration
• Improvement in earnings with RoMA maintained at over 3.0% on consistent basis
• Improvement in asset quality, while growing portfolio, with 90+ dpd remaining less than 1% on steady-state basis
• Any upward revision in the rating view on the parent, MFL

 

Downward factors

• Any downward revision in the rating view on MFL or change in the support philosophy from it
• Adjusted gearing increasing to and remaining above 7 times for a prolonged period
• Weakening of asset quality or earnings profile, leading to stressed profitability and capital position

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 non-banking financial company (NBFC), Pancharatna Securities Ltd, and renamed it as MML.

 

In March 2015, MML received an NBFC-MFI licence from the Reserve Bank of India. As on March 31, 2025, MFL held 50.2% equity in MML, followed by its promoters, who held 5.3%. 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 12,356 crore and networth of Rs 2,632 crore as on March 31, 2025. 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, Himachal Pradesh and Telangana.

Any other information: Not Applicable