| Muthoot Microfin Limited | ||||||||||||||||
| 'CRISIL PPMLD A r /Stable' assigned to Long Term Principal Protected Market Linked Debentures | ||||||||||||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL PPMLD Ar/Stable’ rating to the Rs 75 crore long term principal protected market linked debentures of Muthoot Microfin Limited (MML). CRISIL Ratings has also reaffirmed its ratings on the company’s long-term bank facilities and outstanding debt instruments at ‘CRISIL A/Stable/CRISIL A1’.
The rating factors 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 had assets under management (AUM) of Rs 4,704 crore as on March 31, 2020, a two-year compound annual growth rate (CAGR) of 32%. The growth momentum was curbed by lower disbursements in the first six months of fiscal 2021 on account of the Covid-19 pandemic. With a gradual revival in business activity through the second half of the fiscal, the AUM increased to Rs 4,950 crore as on March 31, 2021, up 5.2% on-year.
Collection efficiency (including overdues but excluding prepayments) revived towards the end of the first quarter of fiscal 2021, and reached 84% in September 2020. Efficiency improved to 94% in March 2021 but then dropped to around 87% in April 2021 given the sharp spike in cases due to the second wave of Covid-19 and localised lockdown by states to curb the pandemic. The ability of the company to improve collections in the coming months and eventually reach the pre-pandemic level of over 99% on a steady-state basis remains a key monitorable. With steady improvement in collections and initial revival in economic activity, disbursements have also improved. MML started disbursing from August 2020, and with significant improvement in collections, disbursements increased and stood at Rs 2,561 crore till March 2021. However, the pace slowed in April and May 2021 due to lockdown restrictions.
Given the disruption in the cash flows of many borrowers amid the pandemic and considering the potential challenges in recovering overdues, the company made a provision of Rs 131 crore in fiscal 2021. As part of the one-time restructuring scheme related to Covid-19 announced by the Reserve Bank of India (RBI), MML has not undertaken any restructuring so far. Nevertheless, asset quality remained moderate and the 90+ days past due (dpd) stood at 8.0% as on March 31, 2021, compared with 5.7% as on March 31, 2020. The intermittent lockdowns and localised restrictions because of the second wave of the pandemic could delay collections in upcoming months due to the impact on the cash flows of borrowers. Any change in the payment discipline of borrowers will also affect delinquency levels and hence MML’s ability to manage asset quality and maintain healthy collections will remain a monitorable.
On a standalone basis, MML has sufficient liquidity to cover total debt obligation and operating expenses in the coming months. As on May 31, 2021, MML had liquidity of around Rs 309 crore (excluding term loans and securitisation lines), against total debt obligation (including operating expense) Rs 591 crore till July 2021. This represents liquidity cover (assuming 60% collection efficiency) of 1.3 times for two months. Total collection was around Rs 235 crore in May 2021. The monthly collection is adequate to take care of MML’s per month debt obligation and operating expenses. Besides, MML has been regularly raising fresh funds from various banks and financial institutions on regular basis since October 2020. Further, CRISIL Ratings expects MML to receive need-based timely financial support from its parent, MFL, in case of any exigency. Nevertheless, the company’s ability to further improve collection efficiency in the coming months to pre-pandemic levels will remain a monitorable. |
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 four years through fiscal 2021 (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.
* Above-average earnings historically, albeit moderation on account of increase in delinquencies in fiscal 2020 and higher provisioning in the current fiscal 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 current unprecedented times and the credit profile of borrowers, the company is continuing with higher provisioning (including write-offs) even in the current fiscal. As a result, the company has reported a profit of Rs 7 crore in fiscal 2021.
Credit costs increased to 4.1% in fiscal 2020, compared to 0.7% in fiscal 2019 on account of asset quality pressures in certain geographies, linked to floods and local socio-political issues and the company's aggressive provisioning policy. MML wrote off its portfolio of Rs 114 crore in fiscal 2020 and provided for an additional Rs 151 crore. In fiscal 2021, MML wrote off Rs 111 crore of its portfolio and provided for Rs 20 crore. Given the aggressive provisioning implemented by the company in fiscal 2020, as well as fiscal 2021, profitability is expected to improve in the coming quarters of fiscal 2022. Nevertheless, in the near term, 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 amid the pandemic. The 90+ dpd and 30+ dpd stood at 8.0% and 10.5% respectively, as of March 31, 2021, on account of the impact of Covid-19 induced lockdown on the economy and the income-generating capacity of the borrowers. Management of recoveries once normalcy is restored in business operations and the ability to correct and maintain asset quality on a steady-state basis remains a 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 65% of AUM as on March 31, 2021 with Tamil Nadu, Kerala and Karnataka contributing 31%, 25% and 10%, 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 31% of the total portfolio as on March 31, 2021, 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 has witnessed two major disruptive events in its life cycle of around 15 years. The first one was the crisis in Andhra Pradesh in 2010 and the second was demonetisation in 2016. In addition, the sector has faced issues in several geographies of varying intensity. Promulgation of the ordinance on MFIs by the Andhra Pradesh government in 2010 demonstrated their vulnerability 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. Similarly, the sector witnessed sizeable delinquencies following demonetisation and subsequent socio-political events. This indicates the fragility of the business model to external risks. Since the business involves lending to the poor and downtrodden sections of the society, MFIs will remain exposed to socially sensitive factors, including charging high interest rates and, consequently, tighter regulations and legislation. |
Liquidity: Adequate The company had cash and equivalent, including liquid investments, of Rs 309 crore as on March 31, 2021, against debt obligation of Rs 591 crore due for servicing over the two months until July 2021. In addition, the company had securitisation lines of Rs 99 crore as on March 31, 2021. The liquidity is also supported by the steady level of collections (Rs 235 crore) that the company has been reporting for the last 2-3 months. 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, 2021, MFL held 63.6% equity and MFL's promoters held 23.7% in MML. Along with the promoters, MML's board includes one member nominated by Creation Investments and four independent directors.
MML had AUM of Rs 4,950 crore and networth of Rs 890 crore as on March 31, 2021. Operations of the microfinance division are spread across Kerala, Tamil Nadu, Puducherry, Karnataka, Maharashtra, Gujarat, Haryana, Rajasthan, Goa, 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: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Secured Redeemable |
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Criteria Details
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