Rationale

 The ratings factor in Muthoot Finance Limited's (MFL) healthy financial risk profile and the scale-up in its 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. 51,927 crore as of March 2021 and accounted for about 90% of its consolidated portfolio. The credit costs in the gold loan business have been under control, boosting the consolidated earnings performance (PAT/AMA1 in the range of 5.5-6.5% during FY2018 to 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 gearing2 of 3.2 times as of March 2021 (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, 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 (6% of the consolidated AUM3 as of March 2021), vehicle finance (0.6%) and affordable housing (3%) recorded higher gross stage 3 (GS3) of 2.4%, 8.6% and 4.0%, respectively, vis-à-vis 0.9% in the gold loan segment as of March 2021. Also, in view of the expected portfolio risks post the onset of the Covid-19 pandemic, these segments faced portfolio contraction (vehicle finance and affordable housing) or growth moderation (microfinance) in FY2021 vis-à-vis gold loans, which grew at 25% 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 50% to the gold loan book. A demonstrated 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 reaffirmed and withdrawn the long-term rating on the Rs. 2,265.35-crore non-convertible debenture (NCD) programme and the Rs. 69.09-crore subordinated debt programme in accordance with ICRA's policy on the withdrawal of credit ratings as the instruments have matured and have been fully repaid.