S&P downgrades Manappuram; affirms Muthoot’s rating with negative outlook

‘Microfinance to be worst hit by lockdown’

KOCHI: The global rating agency, S&P has downgraded the credit rating of Manappuram Finance by a notch from BB-/Negative/B to ‘B+/Stable/B’, which is two notches into speculative grade.

On the other hand, S&P affirmed the issuer credit rating of the other gold loan company from Kerala, Muthoot Finance at BB, with a negative outlook. Muthoot is the country’s largest gold loan company.

The rating downgrade could negatively impact the fund raising plans of Manappuram at a time when the company  is seriously considering borrowing from the international markets, where the company had raised $300 million in January by way of senior secured fixed rate notes issuance for a three-year tenor.

“We downgraded Manappuram to reflect the heightened risks associated with economic conditions in India and their high impact on the microfinance segment. That said, the gold-backed loan business has held up relatively well under these conditions.

On Manappuram, S&P said the stable outlook reflects its view that company’s core gold-backed loan portfolio will continue to offer stability against an incremental deterioration in the company’s microfinance portfolio.

Further, Manappuram’s capitalisation buffer and earnings remains strong, with the company being able to continue to access funding markets.

“As a result, we believe Manappuram can absorb any extraordinary losses from the microfinance portfolio over the next 12-18 months,” S&P noted.

S&P affirmed ratings on Muthoot because it believes the company’s business franchise, asset quality, and access to funding at competitive rates have not been as severely hit as for other finance companies.

“The negative outlook reflects our view that Muthoot is still subject to heightened economic risks affecting India’s financial system over the next 12-18 months. We would lower the ratings on Muthoot if the challenging operating environment translates into funding challenges for the company and affect its ability to roll over its short-term funding,” the rating agency said.

The worsening operating conditions following COVID-19 have increased risks for financial institutions operating in India. S&P said it expects a recession to hurt the financial sector.

“We expect the asset quality of Indian finance companies to deteriorate, credit costs to rise, and profitability to decline over the next 12 months,” it noted.

Given the large acceptance of moratorium by borrowers, funding and liquidity problems could worsen for these companies.

Stating that credit risks remain very high for finance companies in India, the agency added that it expects the deterioration in NBFCs’ asset quality to intensify as the economy slows amid the pandemic.

“We expect the microfinance segment to be the most affected by the lockdown and other measures in the fight against COVID-19. That is because the microfinance institutions primarily rely on cash collections, and many borrowers with weak credit profiles would have faced disruptions in income generation,” S&P further said.

 

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