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, 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 would be critical over the medium term as the share of the non-gold business is expected to increase to 15-20% over the next five years from 13% in December 2019. 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) even though the reported asset quality indicators weakened. The ongoing Covid-19 related lockdown is expected to affect the company's operations and asset quality, considering its sizeable dependence on cash transactions. 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 non-gold segments would be monitorables. 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 87% of the consolidated assets under management (AUM), as of December 2019, and its comfortable overall financial risk profile.