George Alexander Muthoot, Managing Director of Muthoot Finance, isn’t too worried that banks are suddenly becoming aggressive in the “loan-for-jewelry” industry, which is his daily bread and butter.
In an interaction with Activity area, Muthoot stressed that banks will lose interest in this activity as soon as they find another loan opportunity. Excerpts from the interaction:
The banks are following you as the Reserve Bank of India allowed them to give 90 percent of the value of gold in the form of a loan (LTV), but the gold lending companies continue to pay 75%. percent of LTV. Do you see this as a disadvantage?
Banks don’t steal our stuff. In fact, they are getting more and more clients… It is the larger banknote loans (clients wishing to take out a loan of 5 lakh or 10 lakh) that go to the bank. In fact, the pie (of gold loans) is increasing.
To my knowledge, no bank makes loans on gold with 90 percent LTV. Not all customers want the maximum (loan) amount. Today, for the same gold, you can get 30-40% more loan.
Why Muthoot Finance’s stock is a good buy
How do you compete with the banks, which offer gold loans at around 7.50 percent?
It’s not just the interest rate that a customer sees. There are also other factors such as convenience and turnaround time … Sometimes banks get very aggressive. After a while, when they have another opportunity, they lose interest. This happened in 2008 and 2010 as well. Not only banks but other NBFCs (non-bank financial corporations) will also look into this issue (gold lending activity) now. After a while, the financial intermediaries, who are not focused, will lose interest.
But we also try to be aware of what the competition is doing.
Gold-lending NBFCs to See Up to 18% Growth in Assets Under Management in FY21
Will the 32% growth in assets under management in the second quarter year over year be sustainable?
In the first half of FY21, the first quarter (Q1: April-June) was a slump (Assets under management decreased by 277.5 crore in the quarter). However, in the second quarter (Q2: July-September), assets under management increased by 5,739 yen crore to reach 46,234 yen crore at the end of September 2020.
For the whole year (FY21), the growth of our portfolio will certainly be above 15%.
The demand for gold loans exceeds your branches’ ability to handle business?
In fact, our branches can handle a lot more (business). There is no problem with the transaction capacity in the branches. Operationally, our branches are able to handle more business.
Our branches process on average around 10 crore of gold loans. As the average business grows, operating expenses decrease.
In Kerala the average turnover per branch is only ₹ 2 crore. Thus, they do not make as much profit as other branches (in other states).
What is the status of your branch expansion?
In the first quarter, we couldn’t add anything. We typically add 150 to 200 branches every year. We are slowly reducing the number of branches in Kerala, our home state. We had about 850 branches in the state about six years ago. Now there are only 550 left. We had branches in every nook and cranny. Rationalization is only due to commercial considerations… The state has not traditionally been a lender state. It is a deposit state.
We are expanding our network in all other states except Kerala.
What trend have you seen in gold lending since the start of the pandemic?
There are people who have taken out short-term loans at very high interest rates; there are credit card rollovers, and all of those things. Sometimes we ask our potential clients why they want to pay such a high interest rate. ‘Either way, the gold ornament is inactive in your locker. Give it to us. We will give the money. Go pay this high cost debt.
We have encouraged our clients to transact online – 40% of our clients transact (payment of interest, return of principal, possibility of reloading) online. They have to come to the branch to deposit gold and take it back. We are customers in hand for online transactions.
We have also launched a “home loan” product. Our staff go to large customers (their home) and bring the gold to the branch. The moment the gold is given to us, we transfer the money. This facility is intended for customers borrowing more than ₹ 2 lakh. Small customers would be comfortable bringing their gold to the branch.
What do you think of the co-loan (with the banks)?
The co-loan usually occurs when there is a shortage of funding. NBFCs which are not in a position to raise resources themselves enter into this agreement with the banks. We raised 2,000 crore through a non-convertible debenture (NCD) issue during the last week of October. We have sufficient and greater funds now. The demand (for loans) is there and the funds are there.