Moody’s upgrades Muthoot Finance Limited's ratings to stable from negative

Moody's Investors Service has upgraded gold loan lender Muthoot Finance Limited's rating to Ba2 and its outlook to stable from negative.

"The affirmation and change in outlook to stable reflect Muthoot's steady credit profile despite the economic contraction caused by the coronavirus pandemic," Moody's said.

Moody's expects Muthoot's financial performance to remain stable over the next 12-18 months supported by its leading franchise and track record of providing loans against gold jewellery, superior profitability and strong capitalisation.

Over the last six months, a rise in gold price helped improve loan collections and disbursements with both exceeding their five-year averages in the quarter ended September 2020.

Similarly, higher gold prices helped lower Muthoot's gross nonperforming loan (NPL) ratio for the gold portfolio to 1.3% at the end of September 2020 from 3.4% a year earlier, Moody's added.

Nevertheless, "the asset quality of Muthoot's non-gold loan segments which includes home, vehicle and micro finance loans, is susceptible to thechallenging operating environment," Moody's said.

While loans against gold jewellery are also susceptible to a sharp and sudden fall in gold prices, Moody's said, this risk is mitigated by the short-duration and collateralised nature of the company's loan book, the maximum loan-to-value restriction under the central bank's norms and the ability of the company to quickly liquidate the collateral if the borrower is unable to service the loan.

"Muthoot's funding also remains steady as the secured and highly liquid nature of its loans enables it to obtain funding from banks and debt investors. Over the past year, the company has diversified its funding sources to more stable, long-term funding sources -- a credit positive," Moody’s added.

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