Muthoot Finance Limited 'CRISIL AA+/Stable' assigned to Non Convertible Debentures; Rated amount enhanced for Commercial Paper
Rating Action
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 AA+/Stable’ rating to Rs 1000 crore Non-Convertible Debentures of Muthoot Finance Limited (Muthoot Finance). The ratings on other existing debt instruments have been reaffirmed at 'CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+'.
CRISIL Rating has also withdrawn its ratings on non-convertible debentures worth Rs 1327.6 crore (see ‘Annexure - Details of Rating Withdrawn’ for details) at the client’s request and on receipt of requisite documentation as these have been redeemed. The withdrawal is in line with the CRISIL Ratings policy on withdrawal of ratings.
The ratings are driven by Muthoot Finance’s demonstrated ability of profitably scaling up its core gold loan business while maintaining its strong financial risk profile. It also factors in the company’s strong market position within the gold loan segment of India, bolstered by promoter experience. These strengths are partially offset by geographical concentration in operations and low market share in the non-gold segments and, asset quality challenges relating to these non-gold segments.
For fiscal 2024, the consolidated AUM grew by ~25% (Y-o-Y) to Rs 89079 crore from Rs 71497 crore. The gold loan segment grew by ~20% (Y-o-Y) to Rs 75827 crore from Rs 63210 crore and the non gold loan segment has registered a growth of ~60% (Y-o-Y) to Rs 13252 crore from Rs 8287 crore.
CRISIL Ratings has taken note of the email advisory sent by RBI to non-banking financial companies (NBFCs) concerning disbursal of gold loans in cash. The NBFCs have been asked to adhere to the provisions of the Income Tax Act, which essentially stipulate that no individual should receive more than Rs 20,000 in cash. CRISIL Ratings understands NBFCs are transitioning to online disbursements, which involves re-verifying existing customers bank account details and validating new customers information. This may lead to a temporary increase in turnaround time for loan disbursement. Additionally, some customers may opt for unorganized sector lenders, as the borrowers in the segment are typically habituated to cash transactions. During this transitional phase, gold loan disbursements may be affected. However, according to management, the company has not experienced any significant impact on disbursements thus far. CRISIL Ratings, will continue to monitor the impact of these revised guidelines on the growth in gold loan portfolio of Muthoot Finance.
The AUM of the non-gold loan portfolio stood at Rs 13252 crore as on March 31, 2024. The non-gold loan portfolio accounts for ~15% of the consolidated AUM, out of which, the microfinance business (Belstar) (which is 2nd largest company of the group) accounts for ~11%, followed by housing finance (Muthoot Homefin) accounting for ~2% and vehicle finance (Muthoot Money) accounting for ~1%. The microfinance business has shown steady improvement both in asset quality and profitability metrics. The GNPA in microfinance segment stood at 1.8% as of March 31, 2024 (2.4% as of March 31, 2023) and similarly, the profitability in this segment (in terms of return on managed assets (RoMA)) has also shown steady improvement with RoMA at 3.6% in fiscal 2024 (2.0% during fiscal 2023).
The company’s earnings profile has remained healthy over the years. As of March 31, 2024, the company reported a consolidated return on managed assets (RoMA) of 5.1%, driven by high interest margins and efficient operating and credit management. In addition, the company has successfully expanded its operations while maintaining a strong capital position, with a reported net worth of Rs 25,107 crore and gearing remained low at 2.7 times as of March 31, 2024 (consolidated). Also, its standalone tier I capital adequacy ratio stood at a comfortable 29.6%. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Muthoot Finance and its subsidiaries, including Muthoot Homefin India Limited [Muthoot Homefin], Muthoot Money Limited [Muthoot Money] and Belstar Microfinance Limited [Belstar].
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Established track record and brand name in gold financing industry Muthoot Finance has sustained its leadership position in the gold financing segment, supported by the long and established track record of 85 years of its promoter family. The group has a large operational base of over 6541 branches across India (with over 4800 branches offering gold loans), which has supported its leadership position among NBFCs carrying out gold loan business over the years. The group maintained consistent growth in gold loan business; the gold loan AUM grew by ~20% (Y-o-Y) as of March 31, 2024 taking portfolio to Rs 75,827 (Rs 63,210 crore as of March 31, 2023). The consolidated AUM grew by 25% (Y-o-Y) to Rs 89079 crore in fiscal 2024 (Rs 71497crore as of March 2023). The growth was also supported by appreciation in gold prices during the last 4-6 quarters and new disbursals getting aligned with the same. In terms of active borrowers and no. of loan accounts, it also showed steady increase; the active borrowers crossed 56.7 lakh mark as of March 31, 2024 from 53.2 lakh as of March 31, 2023. Similarly, the number of loan accounts also increased to 87.4 lakh as of March 31, 2024, from 81.5 lakh as of March 31, 2023. Muthoot Finance’s extensive branch network and client base, which is relatively more diverse in terms of geographies and is gradually improving further, should support the further strengthening of its competitive position over the medium term. CRISIL Ratings overall believes that, while the company has taken substantial steps and diversified non-gold segments, its primary focus will continue to remain on gold loans over the medium term.
Strong capitalisation Muthoot Finance’s capital position remains strong in relation to its scale and nature of operations, supported by its demonstrated ability to raise capital frequently and large accretions to networth. As on March 31, 2024, the company reported a consolidated networth of Rs 25107 crore and a comfortable gearing of 2.7 times. The gearing has remained below 4 times for several years now. Tier I and overall capital adequacy ratios on a standalone basis have also remained comfortable over 20% over the last few years driven by stable growth in business and stood at 29.6% and 30.4% respectively on March 31, 2024. Strong internal cash generation from the gold loan business will allow Muthoot Finance to prudently capitalize its subsidiaries and provide need-based liquidity support, apart from strengthening its standalone capital position. Even after factoring in leverage in the key subsidiaries, CRISIL Ratings believes the consolidated gearing will remain below 5 times and capital adequacy ratio above 20% over the medium term.
Profitability among the best in the industry, expected to remain healthy The company’s earnings profile has been healthy in the past and has improved further over the last few fiscals to outperform NBFCs and banks. For fiscal 2024 and fiscal 2023, the consolidated RoMA stood at 5.1% and 4.9%, respectively, and is expected to remain at similar level over the medium term. This superior profitability can be attributed to the company’s ability to generate high interest margins while keeping operating expenses and provisioning requirements low. In terms of asset quality as measured by annualised credit costs has also been under control. Stage III assets, which have remained below 3% on a steady state basis in the past and stood at 3.3% as on March 31, 2024. However, the ultimate credit costs have remained within 1% (0.04% of loan assets in FY2024) on account of low asset-side risk (security of gold, which is liquid and is in the lender’s possession) in the gold finance business. In the medium term, consolidated profitability is expected to remain healthy. As the group diversifies into other segments in the long run, asset quality and profitability of the non-gold businesses will remain monitorable.
Weakness: Geographical concentration in operations and low market presence in non-gold businesses Muthoot Finance’s operations have a degree of geographical concentration - South India accounting for about 59% of its branches as on March 31, 2024. However, from gold loan portfolio perspective, there has been reduction in concentration with South region accounting for 47% as of March 31, 2024, which was at 86% in fiscal 2007. Nevertheless, higher regional concentration renders the company to vulnerabilities of economic, social, and political disruptions in the region.
Apart from continued focus on regional diversity, Muthoot Finance also diversified its product suite across microfinance, housing finance, vehicle finance and a few other segments. However, the share of non-gold segments in the group’s portfolio remains low given the gradual restoration of asset quality and lagged pick-up in growth across most segments except microfinance. Overall, non-gold loans saw a growth of ~60% (Y-o-Y) to Rs 13252 crore. Over the medium term, as the focus on these segments will remain low – high segmental concentration in AUM and revenue profile will remain a key monitorable.
Asset quality challenges associated with non-gold loan segments Given the limited seasoning in the non-gold loan segments (excluding microfinance segment), the growth, asset quality and profitability in those segments are yet to stabilize. Within the housing finance segment, Muthoot Homefin operates in the affordable housing finance segment, catering to self-employed customers engaged in small business activities and thus, have a relatively weak credit risk profile because of the volatile nature of their income and employment in un-organised segments. Similarly, microfinance loans (under Belstar Microfinance), through which the company intends to cater to weaker sections of the society, are unsecured in nature and are rendered to borrowers with a weak credit risk profile. This segment also exhibits high subjectivity to local socio-political issues. The vehicle finance business (under Muthoot Money), which is relatively new, deals with lending against commercial vehicles and equipment – majority of which are used/pre-owned vehicles. Nevertheless, the asset quality situation (post absorbing Covid impact) has been restored, owing to the inherent weaknesses of the non-gold segments in which Muthoot Finance operates. As on March 31, 2024, the GNPA for Belstar Microfinance stood at 1.8% (2.4% as on March 31, 2023) and for Muthoot Homefin stood at 1.9% (4.0% as on March 31, 2023) and for Muthoot Money stood at 1.5% (3.7% as on March 31, 2023). From a longer-term perspective, as the growth within these segments has remained limited as yet, the asset quality and profitability in these businesses will be a key monitorable. |
Liquidity: Strong The company’s standalone liquidity position remains strong with a liquidity balance of Rs 6883 crore as on June 10, 2024 (excluding un-utilized portion of existing term loans, including un-utilized portion of Cash Credit and Working Capital Demand Loans). Liquidity cover for debt obligations arising over the following 2.5 months, without factoring in any rollover or incremental collections, was at 0.98 time. Over the last 4-5 quarters, Muthoot Finance has been maintaining about 5-8% of its balance sheet as liquidity balance. The company has also been able to roll over existing working capital lines and also raise incremental funds at competitive rates over the last few quarters. In fiscal 2024, the company has raised around Rs. 37,223 crore of funds from various avenues.
ESG Profile CRISIL Ratings believes that Muthoot Finance’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.
Muthoot Finance has a continuous focus on strengthening various aspects of its ESG profile.
Muthoot Finance’s key ESG Highlights:
There is growing importance of ESG among investors and lenders. Muthoot Finance’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes Muthoot Finance will sustain its strong capitalisation and healthy profitability. Asset quality in the gold business, which accounts for a majority of the AUM, will remain sound, supported by increased frequency of interest collections and the highly liquid nature of the underlying security (gold jewelry), which should keep credit losses low. For non-gold segments, maintenance of asset quality and profitability alongside growth remains monitorable. |
Rating Sensitivity Factors Upward Factors
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About the Company Muthoot Finance, an NBFC, was originally set up as a private limited company in 1997 and was reconstituted as a public limited company in November 2008. It provides finance against used household gold jewellery. The promoter family has been in this business for over eight decades since 1939. During the initial days, the business was carried out under Muthoot Bankers, a partnership firm. Muthoot Finance is the flagship company of the Muthoot group (promoter of Muthoot Finance), which is also in the hospitality, healthcare, media, education, information technology, foreign exchange, insurance distribution, and money transfer businesses. |
Key Financial Indicators(Standalone)
Key Financial Indicators: (consolidated)
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Any other information: Not Applicable |
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Annexure - Details of Instrument(s)
^Yet to be issued
Annexure - Details of Rating Withdrawn
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Annexure - List of Entities Consolidated
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Criteria Details
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