Rationale

The ratings factor in Muthoot Finance Limited's (MFL) long-standing track record and its leadership position in the gold loan segment, its established franchise with a pan-India branch network, and its efficient internal controls and monitoring systems. The ratings also consider the company's comfortable capitalisation profile, its ability to raise funds from diverse sources and good profitability indicators. ICRA takes note of the Muthoot Group's portfolio diversification initiatives via its subsidiaries. MFL's ability to grow its non-gold loan portfolio profitably without any significant credit losses would be monitorable over the medium term. However, the share of the non-gold business is expected to moderate in the near term from the current levels (11%) as the growth of these asset segments is expected to be lower. The ratings factor in the portfolio concentration in the gold loan business, MFL's geographically concentrated operations, the vulnerability of its operations to adverse gold price fluctuations and the marginal borrower profile. ICRA, however, notes that the credit cost has remained under control and modest over the past five years (average of 0.5% of total managed assets). ICRA notes that the weighted average loan-to-value (LTV) for gold loans was comfortable at 61% as on September 30, 2020 (55% as on June 30, 2020). While access to collateral (in case of gold loans) provides comfort, the ability to undertake timely recoveries in case the gold price movements turn adverse and the performance of the nongold segments would be monitorables from a credit perspective. The Stable outlook factors in ICRA's expectation that MFL will continue to benefit from its established operational track record in the gold loan business, which accounted for 89% of the consolidated assets under management (AUM), as of September 2020, and its comfortable overall financial risk profile.