As the key person behind the country’s largest gold loan company, George Alexander Muthoot is a busy man. Just months after the public listing of his company, he is back on the road to raise another Rs 1,000 crore through an NCD issue. Muthoot is backed by big investors, such as the world’s largest sovereign wealth fund Abu Dhabi Investment Authority, besides noted private equity firms Matrix Partners, Kotak Private Equity and Baring India Private Equity. Anand Rai of VCCircle caught up with him to discuss how the gold loan market is shaping in India, competition and more.
How does the market look to you as of now?
The gold loan market has been growing exponentially. Rating agency Crisil had done a study on the gold loan market and they have said that the gold loan companies have been growing at 50 per cent CAGR in the last four years. This is mainly because there is a shift from the unorganised sector to the organised sector and because of the publicity due to the public sector banks, private sector banks and the new generation banks entering the business. It is adding more value and respectability to the business hence more and more people are using this option to meet their funding requirements. Therefore the potential is huge.
What is the loan book targeted by Muthoot Finance in the coming year?
Last year we grew by 110 per cent (from Rs 7,400 crore in the previous year to Rs 15,400 crore). Maybe we won't be able to maintain the same growth this year, so the percentage of growth could come down to 60 per cent but the absolute increase in loan book could still be in the region of Rs 8,000 crore for the coming year, the same as last fiscal.
How much flexibility does Muthoot have in transferring higher value funds to the ultimate customers?
Banks have generally increased their rates by 2 per cent in the last six months; we have been able to pass this on to the customers because the customer who has taken a vehicle loan or a personal loan or a housing loan from a bank is now paying 2 per cent more so he is aware that whatever loan he takes, whether from Muthoot or a bank, the rates have gone up by about 2 per cent. So I don’t think customers have found it difficult to accept.
What happens in the case some one abandons the loan, how do you get back your principle loaned amount?
When we give a loan to say 100 customers, 97 per cent of the loans get paid within 6 months, only 3 per cent of the loans go beyond 12 months and at the 18th month we auction the gold but by the time it reaches the 18th month, another 2 per cent of the loans get paid, so only 1 per cent of the loans go beyond 18 months. Historically, we have auctioned only one per cent of the loans which have been abandoned by the borrowers, so we send a registered notice, do an advertisement in the newspaper and then do an open public auction (which is usually attended by small time jewellers) and we realise our money. Our average loan to value was about 71 per cent at the time of sanctioning the loan, so when we auction at the current gold rates we get around 90 to 95 per cent of the gold value. So we definitely get back our principle, plus we get some interest also.
Your business is mainly focused in South India, how do you plan to increase your footprint in other parts of the country?
We have more than 36 per cent of our branches outside South India; the total business outside is only around 25 per cent because the branches in North India and other parts of the country are relatively new. It usually takes 3 to 4 years for a branch to mature, so as soon as that happens the proportion of the business will also go up. We have planned to increase our business in the North, East and West regions since we do not want to restrict ourselves. We already have branches in all the states in India except the North eastern states; in Delhi itself we have 250 branches.
How do see new competition in the form of MFIs and others foraying into the gold loan sector?
There are mainly two factors. Firstly, the new generation banks and the public sector banks that are coming are opening up the market and giving more visibility and respectability to the product. This has led to the increase in the number of the customers. Earlier it was only the middle class and the lower middle class people that were coming for loans but now the upper middle class is also coming to us for loans, so on one side the market is opening up.
Secondly, when we go to the rural and the semi urban areas, like I mentioned earlier, there is a market shift from unorganised to the organised which means that people tend to come to us for loans because we are more transparent and the safety and security we provide is better.
Also, the competition has been there for decades, most of the south based Indian banks like Federal bank and South Indian bank have been providing gold loans for decades so competition is nothing new for us, this is not a new business, it's just that the focus has shifted towards it.
How does the gold price appreciation inflate your loan book?
Whenever we give a loan, we give it at 71 per cent of the current market rate, so if today the market price is 10,000, we give 71 per cent of that value. If the gold price increases to say 12,000, the new
loans are provided at that rates but nothing changes in the existing loans. Although the customers are free to close their existing loans and then take new ones at the current market rates.
How are you funded right now, any plans to diversify?
As of now we get 50 per cent of our funds from banks while 26 per cent is from retail NCDs. But we are definitely planning to diversify our funding source.