Rationale

 The ratings factor in Muthoot Finance Limited's (MFL) healthy financial risk profile and the scale-up in its consolidated portfolio, which was largely led by the gold loan business. MFL's gold loan book has more than doubled over the last five years to Rs. 54,682 crore as of September 2021 and accounted for about 90% of its consolidated portfolio. 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 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 AUM1 as of September 2021), vehicle finance (0.5%) and affordable housing (3%) recorded higher gross stage 3 (GS3) of 3.6%, 17.0% and 4.7%, respectively, vis-à-vis 1.9% in the gold loan segment as of September 2021 (GS3 at 0.9% in March 2021). ICRA takes note of the higher gold loan auctions undertaken by MFL in H1 FY2022 vis-à-vis FY2021 and FY2020, largely on account of the loan origination in Q1/Q2 FY2021 when gold prices were high Consequently, the average portfolio loan-to-value (LTV) increased to 73% in September 2021 vis-à-vis 65% in December 2020 (61% in September 2020); this is expected to moderate in H2 FY2022 on account of recovery measures to be followed by the company including auctions. ICRA expects auctions to remain elevated in the remaining part of the current fiscal in case MFL is unable to make recoveries from its overdues via normal collections. The credit costs in the gold loan business have, however, remained under control in the past, which supported the consolidated earnings performance (PAT/AMA2 in the range of 5.5-6.5% during FY2018 to H1 FY2022). Improvement in the operating efficiency also supported the earnings profile in FY2021 and H2 FY2022, while the company faced a moderation in margins. ICRA expects the consolidated earnings performance to remain healthy as gold loans would account for about 85-90% of the overall lending portfolio and recoveries from overdues are expected to be good, which would keep the credit costs under control. MFL's capitalisation profile, characterised by a consolidated managed gearing3 of 3.2 times as of March 2021 (range of 3.0-3.5 times over the last 3-4 years), is expected to remain comfortable over the medium term supported by the expected healthy accruals. ICRA 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. 1,685.43 crore non-convertible debenture (NCD) programme in accordance with ICRA's policy on the withdrawal of credit ratings as the instruments have matured and have been fully repaid.