This is a correction of a release published
Fitch Ratings has affirmed
Key Rating Drivers
Standalone Profile Drives Ratings: MFL's IDRs reflect its leadership in gold jewellery-backed loans with a presence across rural and semi-urban markets in
Improved Sector Risk Operating Environment (SROE): Fitch has revised the SROE score for Indian finance and leasing companies (FLCs) to 'bb+', from 'bb', reflecting improved governance, risk and liquidity management frameworks, due partly to regulatory strengthening in the past few years, and the easing of Covid-19 and commodity shocks on medium-term growth prospects despite lingering global growth and inflation risks. We expect resilient GDP expansion (FY24: 6.3%, FY25: 6.5%) to provide adequate headroom for FLCs to expand profitably in the medium term.
Competition in Gold Loans: Competition in gold-backed lending has increased in the past two years. MFL has maintained its leading albeit niche market share due to its long-standing operations, pan-Indian presence and customer engagement, but competition has resulted in a decline in its lending yields.
Interest income to average loans declined to 18% in the financial year ended
Higher Operational Risks: Operational risks are high in gold-backed financing due to the branch-led business model, physical handling of gold collateral and cash, collateral safe keeping as well as risks of lending against stolen or spurious gold. Various checks and balances, regular inspections and the company's decentralised operations mitigate the operational risk.
Liquid Collateral Limits Losses: Gold-backed loans formed a dominant proportion of its consolidated loans (88% at
Gold prices can be volatile, but a regulatory loan/value ceiling of 75%, standardised valuation and monitoring real-time gold price movement provide a buffer against falls in gold prices. MFL's non-gold loans - microfinance, low-cost housing and auto loans - form the remainder of the loan book. These loans could create more risk, but gold loans are likely to remain the dominant business in the medium term.
Healthy Earnings: MFL's net interest margin declined to 10.2% in FY23 (FY22: 11.4%, FY21: 12.5%) due to falling loan yields. However, gold loans still remain among the widest-margin products within NBFIs. MFL's controlled operating and credit costs resulted in healthy pretax earnings at 6.6% of average assets in FY23.
Moderate Leverage: MFL's healthy internal capital generation helped to maintain its debt/tangible equity ratio of 2.6x at
Adequate Funding: We expect the funding and liquidity profile to remain broadly stable. MFL benefits from fairly diversified funding sources, including loans from banks and wide access to capital market instruments, such as bonds and commercial paper. Liquidity is also supported by short asset tenors, with a positive short-term asset-liability maturity profile.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The ratings may be downgraded if competition materially affects MFL's gold loans' franchise and business prospects, or if aggressive expansion in non-gold loans segments leads Fitch to assess MFL's risk appetite and asset quality less favourably, or if gold collateral values weaken sharply and materially diminish MFL's profitability and capitalisation.
The ratings may also be downgraded in case of excessive operational risk losses, or if debt/tangible equity were to exceed 4.5x for a prolonged period, or if liquidity coverage or funding access deteriorates significantly.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
MFL's ratings are at the higher end of rated local peers. An upgrade would hinge on a steady record of expansion in MFL's franchise beyond the gold-loan market. This is provided that it maintains its segment market share and profitability in gold loans amid rising competition, satisfactory asset quality, and balance-sheet metrics commensurate with a stronger rating as it expands.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The rating on MFL's US dollar medium-term note (MTN) programme is at the same level as its Long-Term Foreign-Currency IDR.
The borrowings of Indian non-bank financial institutions are typically secured and we believe non-payment of senior secured debt would best reflect the uncured failure of the entity. Non-bank financial institutions can issue unsecured debt in the overseas market, but such debt is likely to constitute a small portion of their funding and thus cannot be viewed as their primary financial obligation.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The rating on MFL's US dollar MTN programme is sensitive to its Long-Term Foreign-Currency IDR. Any action on the Long-Term Foreign-Currency IDR will drive similar action on the MTN programme's rating.
ADJUSTMENTS
The 'bb+' sector risk operating environment score is above the 'b' implied score for the following reasons: size and structure of economy (positive) and economic performance (positive).
The 'bb' funding, liquidity and coverage score is above the 'ccc' implied score for the following reason: funding flexibility (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
MFL has an ESG Relevance Score of '3' for Customer Welfare, compared with the standard score of '2' for the finance company sector. This reflects its retail-focused operations, which expose it to risks around fair lending practices, pricing transparency, repossession, foreclosure and collection practices, whereby aggressive practices in these areas may subject the company to legal or regulatory and reputational risk that may damage its credit profile. The score of '3' for this factor reflects our view that such risks are adequately managed and have a low impact on the company's credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. . Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
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