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Crisil Ratings has revised its outlook on the long-term bank facilities and non convertible debentures of Muthoot Microfin Limited (MML, a part of Muthoot Pappachan group [MPG]) to ‘Positive’ from ‘Stable’ while reaffirming the rating at 'Crisil A+’. Crisil Ratings has assigned its ‘Crisil A+/Positive’ rating to Rs 300 crore non convertible debentures of MML. Rating on commercial paper has been reaffirmed at ‘Crisil A1+’.

Crisil Ratings has also withdrawn its rating on non-convertible debentures (NCDs) worth Rs 150 crore, on receipt of an independent confirmation that these instruments have been fully redeemed, in line with its withdrawal policy. (Refer to ‘Annexure - Details of rating withdrawn' for details).

The revision in outlook follows a similar rating action on the Muthoot Fincorp Limited (MFL; rated 'Crisil AA-/Crisil A+/Positive/Crisil A1+'), the parent and flagship company of the Muthoot Pappachan group (MPG).

The ratings continue to factor in expectation of continued support from the parent, MFL. It also takes into consideration MML’s adequate capital position and its diversified resource profile. These strengths are partially offset by geographical concentration in the loan portfolio, moderate asset quality and susceptibility of the microfinance sector to regulatory and legislative changes.

MML’s portfolio quality has been affected in line with several issues faced by the sector over the last few quarters. The 90+ day past due (dpd) stood at 6.2% as on June 30, 2025 (5.7% as on March 31, 2025), as against 4.3% as on March 31, 2024. Gross non-performing assets (GNPAs) stood at 4.8% as on June 30, 2025 (4.8% as of March 31, 2025), as against 2.3% as on March 31, 2024. Assets under management (AUM) degrew slightly during the first quarter of fiscal 2026 to Rs 12,253 crore from Rs 12,357 crore as on March 31, 2025. However, overall asset quality (in terms of collections) has started showing some stability, since the fourth quarter of fiscal 2025. Collection efficiency under the non-overdue bucket has remained at over 99% during fiscal 2026. Further, the company has maintained adequate provisions for its stressed accounts, as reflected in the provision cover of 69% as on June 30, 2025. Crisil Ratings believes that despite some early signs of improvement in collections (in terms of collection efficiency under non-overdue bucket), the company’s ability to show substantial improvement in portfolio quality will be closely monitored.

Higher delinquencies led to elevation of credit cost (on account of higher provisions and write-offs), thereby affecting overall profitability of the company. Credit cost rose to around 7.5% during fiscal 2025, from 4.2% in fiscal 2024, while operating expense stood at 5.5% (5.2%), following the implementation of enhanced collection incentives to drive recoveries. The operating expenses inched up further during Q1 of fiscal 2026 to 6.1% (annualised), however, the credit cost have shown a decline to 3.6%. As a result, the company reported marginal profits during the quarter of Rs 6 crore with return on managed assets (RoMA) at 0.2% (annualised) as against the loss of Rs 222 crore, with return on managed assets (RoMA) at -1.6% during fiscal 2025 (Rs 449.6 crore and 3.7%, respectively, in fiscal 2024). Crisil Ratings expects earnings profile to improve in the second half of fiscal 2026 supported by further reduction in credit costs as portfolio asset quality improves.

The company remained well-capitalised, as reflected by networth of Rs 2,641 crore and gearing of 2.8 times as on June 30, 2025 (Rs 2,632 crore and 3.0 times, respectively, as on March 31, 2025). Capital position of the company also benefits from its strong parentage, which enables it to raise funds in a timely manner.

Analytical Approach

To arrive at the ratings, Crisil Ratings has taken a standalone view of MML and factored in expected support from MFL, the parent and flagship company of the Muthoot Pappachan group (MPG).

Key Rating Drivers & Detailed Description

Strengths:

Expected financial, operational and management support from the parent

Given the majority ownership, shared name, common branding and corporate identity, Crisil Ratings believes MFL has a strong moral obligation to support MML, both on an ongoing basis and in the event of distress. The promoters of MPG are also on the board of MML. The microfinance business is strategically important to the group and is its second largest business, in terms of AUM, after gold loans. In addition, MML provides diversity to the overall product profile of the group. The company is also likely to benefit from new microfinance regulations, which allow for 40% of non qualified assets in the overall book. The company is expected to diversify across the secured segments leveraging the expertise of the group companies. Consequently, MML’s share in MPG’s profitability is expected to increase over the medium term.

Adequate capitalization

MML is adequately capitalised, with networth of Rs 2,641 crore (Rs 2, 632 crore as on March 31, 2025) and gearing of 2.8 times as on June 30, 2025. Capitalisation was supported by capital infusion through an initial public offer (IPO) in December 2023, with fresh equity of Rs 760 crore and Rs 200 crore via offer for sale. Resultantly, the capital adequacy ratio (CAR) stood at 27.9% as on June 30, 2025. Despite the equity raise, which has brought down MFL’s stake to 50.2% from 60.3% earlier, Crisil Ratings understands MFL will retain the majority ownership in MML. Extent of ownership retained by MFL will be a key rating sensitivity factor.

Diversified resource profile

Strong relationships of the parent company and track record in navigating industry cycles have helped MML to develop a large base of lenders; the company has over 50 lenders as on June 30, 2025, diversified across term loans (46%), ECB (14%), non-convertible debentures (6%) and securitization (36%). Currently, the average cost of borrowing stood at around 10.9%. Along with the normal funding limit, the company also has unutilised securitisation lines amounting to Rs 1,002 crore as on June 30, 2025. Crisil Ratings overall believes, given the company’s reasonable growth plans, its ability to continue to raise funds at competitive rates will remain a monitorable.

Liquidity: Adequate

MML had cash and equivalents (including liquid investments) of Rs 923 crore as on April 30, 2025, against debt obligation of Rs 1,645 crore due for servicing over May and June 2025 (excluding term loans and securitisation lines). This represents a liquidity cover (assuming 75% collection efficiency) of 1.3 times for two months. In addition, the company had securitisation lines of Rs 1,632 crore as on April 30, 2025. Liquidity is further backed by steady collections reported for the last 2-3 months, and fresh sanctions in the pipeline, and expectation of need-based and timely funding support from the parent, MFL.

Outlook: Positive

Crisil Ratings believes MML will continue to benefit from the strong support of its parent, MFL.

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