With Rs. 25,712 crore gross retail loan assets under management, gold finance company, Muthoot Finance, aims to strengthen its leadership position through branch expansion, targeting new customers, accessing low cost funds and strengthening its operating processes and risk management    

POORNIMA KAVLEKAR

Owning gold jewellery is an intrinsic part of the Indian social system and it is no wonder then that India is among the largest consumers of gold with an annual consumption of 900 tonnes. Around 65 per cent of this gold is found in the semi-urban and the rural market in the form of ornaments.  Realising the power of gold holding, India’s gold loan industry made financial inclusion a reality for this population that holds small gold savings. And since then, the gold loan industry has serviced the need of semi-urban and rural markets by offering short-term loans against pledged gold. For decades, those offering loans against gold holdings were operating without inspection or regulation. Kochi-based Muthoot Finance Ltd. (MFL) was the first Indian company to corporatise this business under the non-banking financial company (NBFC) framework. “We are the pioneers in this business and set the standards and the market follows what we do,” states George Alexander Muthoot, managing director. Today, MFL is a leading gold financing company in India with a 20 per cent market share in the organised gold loan business (according to IMACS Industry Report, 2012).

Making finance accessible

MFL provides personal and business loans secured by gold jewellery, or gold loans, primarily to individuals who possess gold jewellery but are unable to access formal credit within a reasonable time, or to whom credit may not be available at all, to meet unanticipated or other short-term liquidity requirements.  It offers products with varying loan amounts, advance rates (per gram of gold) and interest rates. The principal loan amounts that it disburses usually range from Rs. 2,000 to Rs. 2,00,000 while interest rates on its gold loans range between 12 per cent and 26 per cent per annum.

It has a strong presence in the under-served semi-urban and rural markets (around 70 per cent) and a majority of its accounts are from areas with a population of less than 50,000. Due to its early entry in the organised market, it has built a recognisable brand, particularly in the southern Indian states of Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and the union territory of Pondicherry. As of September 30 2012, these states constituted 65 per cent of its branches.

MFL has multiple sources of funding. It borrows from banks, sells down receivables under bilateral assignments, listed non-convertible debentures (NCD), secured NCDs (Muthoot gold bonds), commercial paper and opts for other loans. The company recently raised Rs. 286 crore through NCD.  The company also tapped the capital market in April 2011.  “While we are a professionally managed company and have been credit rated by ICRA, we had one difficulty – we still were a family owned company. We wanted to get rid of that tag,” shares Alexander Muthoot. MFL went for minimum dilution and issued fresh shares. Today, 80 per cent of the shareholding is held by the promoters while 20 per cent is held by the public.

Growing the gold portfolio

Riding on the strong economic growth in the country, the company has come a long way in the last decade. With a strong presence in southern India, MFL enhanced its operations across the country.  Its branch network has expanded significantly in recent years from 373 branches as of March 31 2005 to 3,914 branches spread across 21 Indian states including NCR region and four union territories.  Its gross retail loan assets under management (AUM) as of December 2012 is Rs. 25,712 crore as against Rs. 22,885 crore in December 2011.  For FY2012, it was Rs. 24,673 crore up from Rs.7,438 crore in FY2010.  Its income from operations for the first nine months of the current fiscal increased by 22 per cent while the net profit increased by 19 per cent when compared to the corresponding previous year.

One of the main growth drivers in this business is the shift of customers, who were earlier borrowing from the unorganised sector (money lenders, pawn brokers, etc.), to the organised sector (like banks and NBFCs).  Also, in the last ten years, MFL has advertised heavily about this product making it more of a lifestyle product rather than a desperate loan which one takes in case of an emergency. And importantly, the impact of this strategy can be seen. Earlier, only the lower or the middle income group was taking MFL’s loan. Now, the upper middle class is also part of the customer mix. “People are nowadays not shy of taking this loan. And the entry of banks has enhanced the product perception in the minds of people. It is now seen as a respectable and aspirational product,” says Alexander Muthoot. Additionally, small businessmen, shopkeepers, builders, contractors and agriculturists also use this loan for their working capital.

Critical success factors

Earning the trust of customers is very critical for companies operating in this space. This is because jewellery is a precious commodity not just in monetary terms but it also holds a lot of sentimental value.  “We have been in the business since 1939. Muthoot is the first name of recall when someone thinks of a gold loan,” says Alexander Muthoot.

Systems and processes also play a very important role in this business. “We have to check the gold ornament without destroying them. There are no machines today which can check the jewellery for its purity without destroying it.  The method that we use for checking the jewellery has been acquired over a long period of time and each member has been well trained to follow it,” says Alexander Muthoot.

This apart, strong reach and distribution systems, faster turnaround time and access to low cost funds are some other factors that contribute to the success of a gold loan company.

However, along with success comes challenges. And the company finds training its staff a big challenge.  To counter this, it has set up training centres and staff training colleges. Marketing the concept of a gold loan in north India is another challenge. This is primarily because the concept of gold loans is prevalent in the south, but not in north, east and west India. “We did spend a lot of money in marketing and selling the concept. Now it is fairly well known,” says Alexander Muthoot.

Growth dynamics

The recent RBI regulation to cap the loan to value of gold loans at 60 per cent (from 70 per cent) will lead to industry-wide standardisation and compliance. It has also raised the capital requirement from 10 per cent  to 12 per cent by April 2014. “We maintain a capital adequacy which is much more than the regulatory requirement. It is about 15 per cent. Any financial institution having more capital is good. It makes it more robust,” says Alexander Muthoot.

The company has tied up with Pension Fund Regulatory and Development Authority (PFRDA), an autonomous body under the Ministry of Finance, to act as a service provider for the National Pension Scheme.  “We are the only NBFC in Kerala to be approved by PFRDA,”states Alexander Muthoot.  He continues, “It fits into our philosophy of working towards financial inclusion in India.”   The company also plans to set up a white label ATMs business across the country.

While organised players add significant value to this market in terms of standard practices and ethics, it is still dominated by the unorganised market, mainly by way of small ticket loans usually borrowed from local moneylenders. What is encouraging is the entry of nationalised banks and new generation private sector banks that have helped address the issue of social stigma. Gold loans are now perceived as a convenient source of short-term/bridge financing and the sentimental value attributed to gold  jewellery ensures high recoverability.

Gold demand in India is expected to reach a minimum annual demand of 1,200 tonnes by 2020 and the accumulated gold jewellery stock in India is estimated at around 20,000 tonnes. “Currently, we are looking at 10 per cent to 15 per cent growth in our AUM this fiscal and aim to grow at 25 per cent from the fiscal following that,” shares Alexander Muthoot.  To grow further, the company plans to expand its branch network and visibility to maintain market leadership, target new customers, access low cost funds and diversified sources of funds, strengthen its operating processes and risk management.

Snapshot

Muthoot Finance Ltd.

Year:  1997

City: Kochi, Kerala

Income from operations (for 9M FY13): Rs. 3,952 crore

Net Profit (for 9M FY13) : Rs. 784.20 crore

What Next?

• Expand branch network
• Remain the largest player in the gold loan business
• Target new customers
• Access low cost funds and diversified sources of funds
• Strengthen operating processes and risk management