‘The success of gold loan companies rests on their reputation’

Vinson Kurian

The year gone by following the demonetisation of high-value currency notes, which additionally saw the introduction of the Goods and Services Tax (GST), has been a challenging one for companies that operate in the gold space. But Muthoot Finance, which is by some metrics the world’s largest gold financing company, has responded to these challenges by stepping up its digital intiatives and by inculcating a habit among its customers of paying interest on a monthly or quarterly basis so as to protect the growth in its profits. In an interview to BusinessLIne , George Alexander Muthoot, Managing Director of The Muthoot Group, which has ₹27,608 crore in Assets Under Management, explains how it rode the storm and is preparing for better days ahead. Excerpts:

Digital transactions are believed to have given gold loan companies an edge over the unorganised sector. What has been Muthoot’s experience?

Our company has been in the forefront of introducing digital initiatives—even before demonetisation. We had an online platform, Muthoot Webpay, for repayment of interest and principal by our gold loan customers. Our Online Gold Loan product (OGL) rendered it possible for customers to draw and repay loans at their convenience whenever they need, similar to the overdraft facility of banks. All our branches are on the core banking platform and we have introduced new digital initiatives across the country.

We are the first NBFC to meet the challenge arising from demonetisation: we introduced several digital initiatives for disbursement of loan as well as for collection of interest and principal. Indicatively, in response to the currency crunch faced by customers, we introduced POS machines, prepaid cards, co-branded prepaid cards, IMPS, RTGS/NEFT for disbursement of gold loan, and the mobile app ‘iMuthoot”. All these were welcomed by our customers, and the quantum of digital transactions has improved manifold. Daily average disbursement of loan to bank accounts went up from ₹1 crore in October 2016 to ₹16 crore. The daily average number of POS transactions was 3,500 with a value of ₹4 crore during demonetisation.

With the currency crunch situation easing, there has been a drastic reduction in the use of digital modes by customers. But we are in the process of leveraging digital resources to expand our gold loan business.

Have gold loan companies been able to maintain a significant rise in net profit post-demonetisation?

The post-demonetisation rate of growth in profit has actually come down. Our company was also not an exception to this trend. Our PAT was ₹270.26 core in Q1, ₹296.72 crore in Q2, ₹291.06 crore in Q3 and ₹322 crore in Q4. The year-on-year growth was, respectively, 47 per cent, 70 per cent, 56 per cent, and 22 per cent.

This seems to have been achieved against a modest growth in assets. How do you explain this?

We were able to achieve respectable PAT growth despite moderate AUM growth through our mechanism for collecting interest on monthly/quarterly basis. We had been concentrating on recovery of interest on a monthly or quarterly basis by extending rebate on interest for prompt monthly repayment. That has become a habit for our regular customers and we are able to recover interest on monthly/ quarterly basis from most of our regular borrowers. We also maintained our NPA at a low level so that no additional burden by way of provisioning is warranted.

How have net interest income and net profit fared a year after demonetisation?

The NBFC sector as a whole experienced a fall in net interest income and net profit, especially during Q3 2017 post-demonetisation. We were no exceptions. However, we were able to recoup lost ground and improve the net interest income and PAT in Q4 due to our sustained efforts of interest recovery on a monthly basis. The third quarter of FY 2017 also witnessed a considerable fall in the AUM. With the disruptions and the adverse impact of GST implementation on our target group borrowers, such as small traders and SMEs, AUM growth and net interest margin should have been subdued. However, with concerted effort of interest recovery on a monthly/quarterly basis and by maintaining NPAs at a reasonable level, we registered respectable PAT during FY 2017 and the first half of FY 2018.

What is the guidance into the rest of 2017-18, given the bigger macro-economic, geopolitical and regulatory picture and policy-making at the Centre?

The Q2 GDP numbers shows signs of an economic revival, shrugging off the disruptions caused by demonetisation and GST aftereffects. The Indian economy is poised to post higher growth.

The small traders and business community has been the worst affected by the GST implementation, and the revival of these sectors gives opportunities for NBFCs like ours. Most small traders and businessmen approach gold loan companies for their short-term working funds as they are not able to meet the requirement of tax returns and financial statements put forward by banks. We have recently introduced a special gold loan scheme for SME borrowers at 12 per cent. We expect to disburse ₹500 crore by March 2018.

The low cost of funds appears to have aided growth in net margins, increase in net yield and lower operating costs. Could you explain Muthoot’s experience?

We have been able to reduce our cost of funds considerably. With our inherent strengths, CRISIL-AA and ICRA-AA rating for our NCD issues, we have been able to raise listed NCDs of ₹2,000 crore in the current fiscal. We have also paid off high-cost, privately placed NCDs of ₹2,250 crore with interest cost of above 10 per cent during the period. We could reduce our cost of funds from banks and listed NCDs by about 0.25 per cent, apart from repaying high-cost privately placed bonds.

Some companies have shifted gears to short-term loans of three months from longer tenure of around one year and benefited from improved realisation.

Gold loan is traditionally a bullet payment loan and the average period of loan is around four months. Most small players have resorted to short-term loans to mitigate the risk of a fall in gold price. Moreover, they do not want to lock their funds in for 12 months to sustain their working funds. We acknowledge this and we still continue with the 12-month scheme; we have shifted our priority to interest collection on a monthly basis or quarterly basis to mitigate the risk of a fall in gold prices. We try to educate our customers to make it a habit to remit interest monthly by offering rebate on interest for prompt payment of interest monthly/quarterly. We believe that customers should always be given sufficient time to redeem the loan. Ruthlessly auctioning customers’ gold will damage the image of the company also.

Companies are also said to have gained from lower cost of borrowing from Q1 of FY16 to the end of FY17. The operating expense too came down in the process. Will this trend hold?

The interest rate scenario for commercial banks has been moderated with the intervention of the RBI. However the scenario with reference to NBFCs especially gold loan companies, is not the same. Unlike our company, most gold loan companies are small players and their ability to raise funds at low cost is limited, and their cost of funds remains almost the same. However, Muthoot Finance has been able to reduce its cost of funds because of its inherent strengths; the reputation and goodwill of the group has also boosted customer confidence.

Some others have seen growth in assets against lower operational expenses even as return on assets and return on equity have improved. How did Muthoot fare here?

Our AUM growth has not been as expected during FY2017. With the implementation of various digital initiatives to meet the demonetisation challenges, we have been able to maintain reasonable AUM growth. However, we have been able to post respectable net profit levels by our thrust on interest recovery on a monthly basis and reduction in NPAs. Our return on equity has been improving over quarters except in Q3 2017.

Investments were put on hold to some extent, with some companies limiting branch expansion and promotion. Was Muthoot affected?

No, we have not put on hold our branch expansion plans. We are in the process of getting RBI permission to open branches as originally planned. We plan to open 250 branches all over India in the current fiscal.

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