Standard and Poor’s (S&P) has upgraded Manappuram Finance Ltd’s long term issuer rating from “B+” to “BB-” on the expectation that it will continue to perform better than its NBFC peers over the next 12 months.
The outlook is stable. The global Rating agency also affirmed the ‘B’ short-term issuer credit rating on the India-based finance company.
This expectation of better performance would be reflected in the company’s lower credit costs, above-average profitability, and strong capitalisation.
The rating agency in a statement said that Manappuram’s gold-based lending model with a three-month tenor allows it to recognise asset quality stress early. Gold prices had fallen significantly till April 2021, from a peak in August 2020.
The decline in gold prices led to increased auctions of higher loan-to-value (LTV) loans in Q1FY22.
The company’s gold auctions are likely to gradually return to their normal levels as economic conditions improve. Elevated auctions have in part lowered Manappuram’s average LTV ratio to about 65% as of June 30, 2021, from about 71% as of end-March 2021. This, provided the company some buffer to absorb price fluctuations.
Stress will likely remain high in Manappuram’s non-gold portfolio, especially in the micro finance business. The asset quality of the non-gold loan portfolio has deteriorated sharply over the past two years. However, billing and collection efficiency are returning to pre-Covid-19 levels, hinting at improving asset quality trends.
The agency said it expected Manappuram’s risk-adjusted capital ratio to stay above 30% over the next 12 months. The company’s core earnings are likely to remain at more than 5% of its average managed assets during this period. This ratio is one of the highest among its rated peers.