ICRA has upgraded the outlook on the outstanding ratings of A+ on the long term debt and bank borrowings of Manappuram Finance (MFIN) from negative to stable.
ICRA has an outstanding rating of A1+ on the short term fund based limits and Commercial Paper programme of the company.
The revision in rating outlook factors in the regulatory policy change announced by RBI and the reduction in risk profile of the company. RBI on Jan. 8, 2014 announced a relaxation in the LTV norms for gold loans originated by NBFCs from the present level of 60% to 75% of the intrinsic value of gold content of jewellery.
In ICRAs view the same should improve the growth prospects of MFIN and partly address concerns regarding its competitive position viz.a.viz banks and the unorganized sector (which do not have any LTV regulatory restriction). The revision in rating outlook as takes into account the reduction in risk profile of the company following an improvement in its LTV mix with a reduction in proportion of high loan-to-value4 (LTV) contracts to around 4% of total portfolio in Oct-13 against 61% in April-13. The rating also takes into account the reduction in delinquencies of MFIN from its peak 90+ day delinquency level of 9.43% as on Mar. 31, 2013 to 2.2% as on Dec. 31, 2013.
In ICRA's view maximum incremental LTV of 75% should keep the company's exposure to adverse movements in gold prices manageable. Additionally formulation of a transparent gold valuation process laid down in the regulation, along with potential stabilization of regulatory framework for the sector could improve lender comfort and financial flexibility of the company.
The rating continues to reflect the established track record of MFIN in operating in the niche gold loan segment, its good monitoring and internal audit systems and the company’s healthy capitalization levels, with a regulatory Tier 1 Capital of 22.54% as on Sept. 30, 2013, which should enable it to grow its portfolio.
While since December 2012 quarterly earnings and internal capital generation of the company has been impacted by under-realization from auctions of gold jewelries of overdue customers, ICRA expects incremental earnings of the company improve going forward backed by healthy incremental NIM’s (11-12%) and improving operating efficiencies as the company starts to grow its portfolio (operating expenses as % of ATA in Q2-14 were 5.83%).
At the same time ability of the company to maintain stable earnings by managing the risks associated with adverse movements in gold prices through proactive monitoring of portfolio and timely auctioning of security to reduce severity of losses on delinquent accounts remain key rating sensitivities; regulatory LTV cap of 75% however is expected to keep the company's to adverse movements in gold prices manageable; furthermore ICRA notes the increase in focus of the company to recover accrued interest from its customers periodically during the contract period as against earlier when interest serving was predominately made as a bullet payment upon maturity of the loan.
