KOCHI: Fitch Ratings has downgraded the Long-Term Issuer Default Rating (IDR) of Muthoot Finance Ltd (MFL) to ‘BB’ from ‘BB+’ and placed its rating on Rating Watch Negative (RWN), whereas the ‘BB-‘ rating of Manappuram Finance Ltd (MFIN) has been placed on Negative Watch.
Fitch has also downgraded the ratings of Shriram Transport Finance Company Ltd (STFC) and India Infoline Finance Ltd (IIFL). Fitch said the rating actions reflect increasing macro-economic challenges for the Indian non-bank financial institution (NBFI) sector.
“These include the growing effects from measures to contain the COVID-19 pandemic, which will compound the tightening in funding conditions for NBFIs in recent weeks,” said Fitch.
The international rating agency viewed that RBI’s recent liquidity and regulatory support measures should help to improve the funding environment in the near term, but it also underlines the severity of the situation, and sees continued uncertainty in the coming months nonetheless.
Fitch also expects the constraints on business activity to lead to operational disruptions that will directly affect asset quality. This comes on top of existing weak asset quality across banks and some NBFIs, and under-capitalisation in the banking system, which are likely to continue to hamper the growth and funding of the NBFI sector.
Fitch recently revised down India’s GDP growth forecast for the fiscal year ending March 2021 (FY21) to 5.1 per cent, from 5.6per cent previously, and the risks are skewed to the downside as the authorities attempt to contain the virus.
Key Rating Drivers
The weaker economic outlook and uncertain funding conditions negatively affect Fitch’s assessment of the sector’s operating environment, growth and asset-quality prospects.
“The support measures announced by the RBI on March 27 should help address some near-term pressures on reported asset quality metrics and market liquidity, but will not materially change the anticipated deterioration in underlying borrower repayment capacity. We also expect debt markets to remain risk averse, while banks are likely to be selective when providing fresh funds to the NBFI sector,” Fitch added.
The Negative Watch on the ratings reflects sustained uncertainty in the near term, partly stemming from the authorities’ measures to contain the spread of COVID-19.
Stating that both Muthoot and Manappuram have retained funding market access despite market dislocation in recent weeks, Fitch said any evidence of increased refinancing risk, weaker funding access, or an outsized deterioration in asset quality could lead to further rating downside for these NBFIs.
Muthoot’s ratings reflect its moderate franchise in the niche of gold-backed financing, and its history of low credit losses and satisfactory leverage. “These are counterbalanced by elevated key-person risk, a track record of shortcomings in governance and operational management, and growing risk appetite as the company pursues higher growth in non-gold backed financing segments, which are relatively new to the company,” Fitch noted.
The Negative Watch on Muthoot takes into account potential earnings reduction as the unfavorable operating environment slows portfolio growth, particularly in gold loans (currently 66 per cent of the total portfolio), which amortise at a faster pace due to the product’s short tenure. The asset quality of other segments is also likely to deteriorate as borrower earnings are affected by slower domestic economic activity, while collections and recoveries may also be disrupted.
The Negative Watch on Manappuram reflects the weakening operating environment and the related operational challenges. Fitch observed that slower economic activity will dampen Manappuram Finance’s business growth prospects, while its branch-led distribution model for gold-backed loans, which form 89 per cent of MFL’s total loans, will be affected by disruptions from measures to contain the pandemic.
Fitch expects delinquencies to rise as borrower earnings are affected by the slower economic growth, while recoveries of the gold collateral backing the loans may be delayed as auctions may be affected in the near term.