Wednesday, June 29, 2011

Muthoot Finance

The Reserve Bank of India (RBI) recently conducted a probe into Muthoot Finance for alleged violation of norms while raising money from the public. Managing director George Alexander Muthoot terms it a routine inspection in an interview with Dilip Kumar Jha. Edited excerpts :
There was an RBI probe at your office. Anything adverse?
It’s incorrect to say there was a probe. It was a routine inspection like various others in the past. They went through all the documents they would have covered in a normal inspection.
Do you see a change in the customer profile for gold loans, towards more productive use and less consumption?
There has been no change in customer profile. In fact, the product acceptability has gone wider due to constant efforts by all leading players. Being the market leader, Muthoot Finance has taken the lead in bringing innovations and strategies for this product, whether it’s launching a low rate scheme of one per cent a month or initiating an advertising campaign to create better awareness among the masses.
We are glad that gold loans are now being availed of by people from all segments of the society. Thus, the customer profile has widened, not changed. Today, gold loans are taken more for productive uses and less for consumption. Why should a rational customer, interested in using the funds for consumption and having no intention of redeeming the loan, pledge his ornament and take only 70-80 per cent of the value of gold? He can sell his ornament and get a higher amount. In our view, these funds are used for meeting short-term requirement, for a period of three-six months. Customers use them for purchasing stock for business, agriculture, education, house repair, etc. In all these cases, borrowers expect to receive some funds in the future. The stigma attached to pledging gold ornaments is slowly vanishing. People have understood its convenience. Now, the upper class also has started taking gold loans.
With the entry of public sector banks and non banking finance companies (NBFCs), how is competition shaping up?
India is estimated to have 18,000 tonnes of gold holdings, worth Rs 36,00,000 crore. Even a small portion of this can take the sector to greater levels. Realising the potential of the market, several banks have started gold loan portfolios. However, the product can never be a bank’s core product as it is labour-intensive and banks have many more remunerative products to handle. Moreover, since these loans are of a smaller ticket size, overheads are quite high. Thus, as a standalone business, it may not be a profitable venture.
However, it can remain one of the many products for a bank and may not be scaleable. Other NBFCs are also trying to enter this market. It will take them a while to reach a significant size and master the nuances of this business. However, the fact is that there is room for all players and success depends on how one manages operations.
Can you throw some light on your existing and future funding mix?
As of March 31, 2011, 56 per cent of the total assets were funded through bank lines and 32 per cent through debentures, subordinated debt and commercial paper. Going forward, we wish to tap institutional funding in a major way by issuing rated debt instruments. We are also planning to securitise our loan portfolio under the PTC route, and are coming with a public issue of secured non-convertible debentures (NCDs) very shortly. Other options include perpetual bonds, preference shares, etc, which will be tapped if there is a need to improve capital adequacy.
What is your view on the recent tightening of interest rates and its impact on NBFCs?
The recent increase in repo and reverse repo rates, leading to higher interest rates, is directed at containing the spiralling inflation. Specialised NBFCs like ours will be able to pass on the increased rates to the borrower as the ticket size is low and service quality is given more weightage by the borrower.
Given the high cost of funds, what is your growth target?
We are continuously diversifying the sourcing of funds and, currently, the average cost of funds works out to 11 per cent. Our retail loan portfolio grew by 120 per cent, at Rs 7,438 crore, in financial year 2009-10. It rose by 113 per cent, at Rs 15,868 crore, in 2010-11. On a higher base figure, it may range between 40-50 per cent compounded annual growth rate over the next three years.

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