Rationale

 The rating upgrade factors in the sustained healthy financial performance of Muthoot Finance Limited (MFL) along with the scale-up in the overall portfolio, which was largely led by the gold loan business. MFL's gold loan book has more than doubled over the last 5 years to Rs. 49,622 crore as of December 2020 and accounted for about 90% of its overall consolidated portfolio. The credit costs in the gold loan business have been under control, uplifting the consolidated earnings performance (PAT/AMA1 in the range of 5.5-6.5% during FY2018 to 9M FY2021). ICRA expects the consolidated earnings performance to remain healthy as gold loans would account for about 85-90% of the overall lending portfolio. MFL's capitalisation profile, characterised by a consolidated managed gearing of 3.5 times as of December 2020 (range of 3.0-3.5 times over the last 3-4 years), is also expected to remain comfortable over the medium term supported by its expected healthy accruals. The ratings continue to factor in MFL's long 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. MFL's ability to raise funds from diverse sources, its current on-balance sheet liquidity and the short-term nature of the loans result in a strong liquidity profile. ICRA, however, takes note of the performance of the non-gold segments in the consolidated portfolio, which are of a relatively lower vintage; the sustained good quality growth and earnings performance of these segments would remain a monitorable. Some of the asset segments, namely microfinance (5% of the consolidated AUM2 as of December 2020), vehicle finance (0.8%) and affordable housing (3%) faced higher 90+ days past due (dpd) of 5.5%, 9.2% and 6.8%, respectively, vis-àvis 1.3% in the gold loan segment. Also, in view of the expected portfolio risks post the Covid-19 pandemic, these segments faced portfolio contraction (vehicle finance and affordable housing) or growth moderation (microfinance) in 9M FY2021 vis-àvis gold loans, which grew at 29% (annualised) during this period. ICRA also takes note of the geographical concentration of the branches and the loan book in South India. South India accounts for 60% of MFL's gold loan branches, contributing about 49% to the gold loan book. A demonstrated performance track record in the non-gold segments and a steady improvement in geographical diversity would be key, going forward, from a rating 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 is expected to account for about 85-90% of the consolidated AUM over the medium term, and its comfortable overall financial risk profile. ICRA has also upgraded and withdrawn the long-term rating on the Rs. 1,898.73-crore non-convertible debenture (NCD) programme and the Rs. 55.79-crore subordinated debt programme in accordance with ICRA's policy on the withdrawal of credit ratings as the instruments have matured and are fully repaid.