The gold lending business is not a bed of roses, says Muthoot’s chief financial officer

The gold lending business is not a bed of roses, said George Alexander Muthoot, Managing Director, Muthoot Finance Ltd (MFL), referring to some of the major non-bank financial firms (NBFCs) that have jumped into the business to diversify their credit bookings .

In cooperation with Business line, Muthoot, who oversees consolidated assets of approximately 61,000 billion yen (approximately 90 percent of which is in gold loans), observed that more players entering the gold lending business see good prospects. He emphasized that this also justifies MFL’s business model, which has been further developed over the past eight decades.

Excerpts:

Many lenders have jumped on the gold loan train. How do you strengthen your business?

We have a stable business. We haven’t changed our focus. The gold lending business has good prospects. The market is huge. There is room for everyone. And those who are focused will no doubt do good business.

All companies that have entered the gold lending business will face many operational challenges in the future and will shift their focus. This usually happens.

The business is very operationally intensive – taking gold, holding, returning, fighting fraud, etc.

New players will have to face operational challenges. We have been through business cycles. This business is not a bed of roses.

So you don’t see competition as a damper?

We don’t see competition as a business damper. It will only get serious gamblers to focus more on business. More people getting into this business means they see good prospects. This means that what we’ve been doing all along has been vindicated. The competition will be there. It will only expand the market.

I also have the feeling that customers who were previously hesitant to take out a gold loan are now also interested in this product. They see it as an alternative form of credit.

Given that Q1 was a washout due to the second wave of Covid-19, will you be able to meet your AUM year-over-year growth target of 15 percent?

Our independent AUM is around 55,000 crore. We forecast a growth of 15 percent. There wasn’t much we could do in the first quarter. In the second quarter we were able to gain around 5 percent compared to the previous quarter. So in the third and fourth quarters we should catch up and achieve at least 15 percent growth.

We will continue to grow by 15 percent over the next three to four years. This is a reasonable price as the base goes up too.

Three years ago, our average loan amount was about 35,000 yen. Today it’s about 60,000 yen. This increase is directly proportional to the price of gold and the general demand for gold loans

With RBI reducing regulatory arbitrage between banks and NBFCs, are you considering converting to bank?

For the past three to four years we have been closely monitored by the RBI as we are a systemically important NBFC with no deposits. Almost all of the regulations that apply to banks apply to us. There is very little regulatory arbitrage between banks and NBFCs.

But then what is the benefit of becoming a bank? What is the big advantage of getting cheap deposits? Judging by our rating, we can also procure cheap resources. We may not have the luxury of zero interest checking accounts and SBI accounts with low interest rates, etc. But the interest rate differentials on resources between NBFCs and banks are actually narrowing.

At this point in time, we don’t see any benefit (in converting to a bank). But the board has not yet made a decision. Overall, the Board of Management has not given it any thought over the past few years.

Given your projected company growth of 15 percent year-on-year, are you planning to add capital?

As of the end of September 2021, our capital adequacy ratio was 27.60 percent … The current capital adequacy will be sufficient to support business growth for three to four years. But the accumulated profit (retained profits) is also there. So the capital could last longer.

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