| Muthoot Microfin Limited | ||||||||||||||||||||||||||||
| 'CRISIL PPMLD Ar/Stable' assigned to Long Term Principal Protected Market Linked Debentures | ||||||||||||||||||||||||||||
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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. | ||||||||||||||||||||||||||||
| 1 crore = 10 million | ||||||||||||||||||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL PPMLD Ar/Stable’ rating to the Rs 220 crore long term principal protected market linked debentures of Muthoot Microfin Limited (MML). Ratings on MML’s long-term bank facilities and outstanding debt instruments has been reaffirmed at ‘CRISIL A/CRISIL PPMLD Ar/Stable/CRISIL A1’
The rating continues to factor-in the expectation of continued support from the parent, Muthoot Fincorp Ltd. The ratings also factor in MML's adequate capitalisation and diversified resource profile. However, externalities have led to increase in delinquencies, thereby impacting its profitability. The geographical concentration in MML’s portfolio and the susceptibility of the microfinance sector to various regulatory and legislative risks partially offset the above strengths.
The prefix 'PP-MLD' indicates that the principal amount of the debentures is protected, while the returns market-linked. The suffix 'r' shows that the returns on the debentures have significant risks other than credit risk. Also, payments to investors are not fixed and are linked to external variables such as commodity prices, equity indices, foreign exchange rates or equity valuation of the company.
MML's collection efficiency (including overdues but excluding prepayments), which reached over 100% in March 2021, marked by higher overdue payments, was severely impacted in April and May 2021 with the sharp spike in number of cases in the second wave of the pandemic and various forms of lockdowns imposed by states to curb the spread of Covid-19. However, June 2021 saw collections improving to 85%, which has further improved to over 100% from July 2021 to March 2022. Alongside, disbursements have also improved with average monthly disbursement at over Rs 600 crore in Q4 of fiscal 2022. During the first quarter of fiscal 2023, the collections averaged at 98% and disbursements averaged at Rs 436 crore.
The company’s, 90+ days past due (dpd) remained high at 7.5% as of June 30, 2022 (6.8% as of March 31, 2022) compared with 5.7% during March 31, 2020. Additionally, the company has outstanding restructured portfolio (under RBI Resolution framework 2.0) of Rs 489 crore as of June 30, 2022. The performance of the restructured portfolio besides overall book, in the coming months will be a key monitorable. Any change in the payment discipline of borrowers will affect delinquency levels and hence MML’s ability to manage asset quality and maintain healthy collections across buckets including restructured portfolio will remain key monitorable.
MML’s growth momentum moderated by the outbreak of Covid-19 at the onset of fiscal 2021. Nevertheless, with disbursements picking up from Q2 2021, the company’s AUM stood at Rs 4,950 crore registering an on-year growth of 5.2% in fiscal 2021. In the aftermath of the second pandemic wave, growth momentum moderated during Q1 fiscal 2022. However, growth in disbursements picked up from July 2021 onwards which in-turn resulted in the company reporting an AUM of Rs 6,238 crore in March 2022 registering Y-o-Y growth of 26%. During the first quarter of fiscal 2023, the AUM increased to Rs 6483 crore, registering a Q-o-Q growth of 4%. |
Analytical Approach The ratings on MML have been notched up to factor in the 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 Parental support is expected on an ongoing basis as well as in the event of distress. Given majority ownership, shared name, common branding and corporate identity, CRISIL Ratings believes MFL has a strong moral obligation to support MML. 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. The business has stabilised and has contributed significantly to the parent's profitability over the five years through fiscal 2022 (loss in fiscal 2018 was primarily on account of change in accounting method from IGAAP to IndAS. In addition, MML provides diversity to the product profile. The promoters have spent over seven decades in the business of lending, beginning with gold loans, and have over the years forayed into two-wheeler financing, microfinance and housing finance. MPG started its microfinance operations as a separate division of MFL in 2010 and continued it until September 2015. In December 2011, the group acquired a Mumbai-based non-banking financial company (NBFC), Pancharatna Securities Ltd, and renamed it MML. After receiving the NBFC-MFI license from the RBI in March 2015, the microfinance business was shifted to MML from MFL. The second line of management comprises professionals with extensive experience in lending, audit, operations, risk, credit and information technology. Over the years, the group has established a strong reputation and brand in South India, particularly Kerala and Tamil Nadu, and has an appropriate assessment and underwriting methodology, which is being constantly refined.
The presence of the experienced promoters also lends support to diversity in the resource profile for the company. The company had a diversified funding profile with lender base of over 35 lenders as of June 30, 2022, including banks, NBFCs, borrowings from capital markets, securitization and commercial paper.
Above-average earnings historically, albeit moderation on account of higher provisioning to combat the pandemic Historically, the microfinance business has been one of the most profitable businesses for MPG. However, in fiscal 2020, the company reported profit after tax (PAT) of Rs 18 crore, against Rs 201 crore in fiscal 2019. Improved profitability in fiscal 2019 could also partly be attributed to the transitional provisions of IndAS, as the company adopted it for the first time during the year. The decline in profitability in fiscal 2020 was on account of increase in delinquencies, which impacted interest income, as well as a spike in credit costs on account of the company's adoption of an aggressive provisioning policy during the period. Considering the unprecedented times on account of the Coivd-19 pandemic and the credit profile of borrowers, the company had continued with higher provisioning (including write-offs) even in the fiscal 2022 as they did in fiscal 2020 and 2021. As a result, the company reported a profit of Rs 47.4 crore in the fiscal 2022. During Q1 FY23, the company reported a PAT of Rs 7.9 crore.
Credit costs stood at 1.7% in fiscal 2022 on account of continued asset quality pressures in certain geographies, linked to pandemic besides floods and local socio-political issues and the company's aggressive provisioning policy. During fiscal 2022, the company made provisions of Rs 111.5 crore (including write-offs of Rs 100.4 crore). In Q1 FY23, company made additional provisions of Rs 59 crore (including Rs 32.2 crore of write-offs). Given the aggressive provisioning implemented by the company in last two fiscals, profitability is expected to improve in the current fiscal. Nevertheless, MML’s ability to manage recoveries once normalcy is restored would be a key rating sensitivity factor.
Weakness: Moderation in asset quality After showing improvement in fiscal 2019, wherein 90+ days past due (dpd) improved to 2% as of March 2019 from 3.1% a year earlier, the company’s asset quality metrics deteriorated in fiscal 2020.
The 90+ dpd increased to 5.7% as on February 29, 2020, on account of floods in Kerala and Odisha and political unrest in Karnataka. The company also faced challenges in some districts of Tamil Nadu, such as Madurai and Sivagangai because of a cyclone and socio-political issues in coastal Karnataka and Gujarat. However, the company has consciously curtailed disbursements in the affected branches and regions and has shifted its focus to collections in these areas in an effort to keep a check on further delinquencies.
However, asset quality deteriorated in fiscal 2021 and fiscal 2022 amid the pandemic. The 90+ dpd stood at 7.5% as on June 30, 2022 (6.8% as on March 31, 2022), on account of the impact of Covid-19 induced lockdown on the economy and the income-generating capacity of the borrowers. In addition, the outstanding restructured portfolio as on June 30, 2022 was Rs 489 crore (7.5% of the total portfolio). Management of recoveries once normalcy is restored in business operations and the ability to manage asset quality and maintain healthy collections across buckets including restructured portfolio will remain key monitorable.
Operations are expected to remain concentrated in South India over the medium term. MML's microfinance operations from three states accounted for around 63.2% of AUM as on June 30, 2022 with Tamil Nadu, Kerala and Karnataka contributing 32%, 22.4% and 8.9%, respectively. The company has been expanding operations outside southern India to around 13 other states over the past two years. As a result, per-state concentration has been consistently declining, with the top state accounting for 32% of the total portfolio as on June 30, 2022, 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 503 crore as on June 30, 2022, against debt obligation of Rs 629 crore due for servicing over the two months until August 2022 (excluding term loans and securitisation lines). This represents liquidity cover (assuming 75% collection efficiency) of 1.6 times for two months. In addition, the company had securitisation lines of Rs 552 crore as on June 30, 2022. 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 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, 2022, MFL held 54.5% equity and MFL's promoters held 20.3% 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 6,483 crore and networth of Rs 1,350 crore as on June 01, 2022. 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 and Bihar. |
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)
@Yet to be issued |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 19-Sep-22 in line with the lender-wise facility details as on 07-Sep-21 received from the rated entity.
Criteria Details
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