Business Today

Good as gold

K.R. Balasubramanyam | Print Edition: Dec 25, 2011

They run 18 different businesses, from houseboats to rubber plantations. But mention the name 'Muthoot' and only one of these comes to mind: gold loans. Muthoot Finance, a non-banking finance company, or NBFC, run by the four Muthoot brothers, has made a remarkable success of a business historically associated with pawnbrokers. It is today the largest lender against gold jewellery in the country with around 130 tonnes of gold currently in its vaults held against advances of Rs 20,766 crore. Indeed, the enthusiastic response to Muthoot Finance's initial public offer in May this year - oversubscribed 24.5 times and netting Rs 906 crore - makes the brothers, who own 80 per cent of the stake, worth nearly a billion dollars.

Builder Sayed Nazrullah often borrows from Muthoot Finance's Koramangala branch in Bangalore. He currently owes the company Rs 45 lakh. "I borrow to make payments whenever these have to be in cash," he says. "There is no risk in keeping one's jewellery with Muthoot, unlike with pawnbrokers, who wait for any opportunity to sell off your gold."

READ:Muthoot Fin to raise Rs 6,000 cr in FY12

Muthoot Finance's rise is due to two factors: its rapidly growing portfolio of gold loans and its low rate of borrower default. The first is the result of an aggressive advertising campaign to underscore the speed and ease with which the company provides the loans, as well as to point out that there is nothing wrong in families monetising gold ornaments in times of need. Muthoot's advertising budget, Rs 60 crore in 2010/11, has been raised to Rs 100 crore in the current fiscal year. The company is also the main sponsor of the Indian Premier League cricket team, Delhi Daredevils. "We are positioning our product as an option of convenience and removing the stigma attached to pledging jewellery," says George Alexander Muthoot, Managing Director, Muthoot Finance, the youngest of the four brothers. The low default rate, observers believe, lies in Muthoot's accepting only jewellery - not gold bars or coins. For most families gold jewellery has emotional associations: they ensure it comes back to them.

Muthoot Finance IPO subscribed 22.2 times

Muthoot Finance ads
Muthoot Finance ads on boats along the Ganga river at Varanasi in Uttar Pradesh
The Muthoot brothers hail from Kozhencherry in Pattanamthitta district of south-central Kerala. Their company is headquartered in Kochi, 105 km away, but its branches have spread all over the country, right up to Jammu in the north. It has been expanding at a furious pace, from 985 branches in 2009 to 3,369 at present. This is about the same number as Canara Bank - the third largest bank by number of branches in the country, behind only State Bank of India and Punjab National Bank - has. On a single day, January 31 this year, Muthoot Finance opened 103 new branches. "You cannot really canvass for gold loans," says Muthoot, a chartered accountant by training. "You can only increase your brand's visibility. "In 2010/11, the company reported a net profit of Rs 494 crore on an income of Rs 2,315 crore.

"We have not shut down a single branch so far for want of business," says Muthoot. A new branch costs between Rs 8 lakh and Rs 13 lakh to set up. Customers can borrow up to 90 per cent of the value of the jewellery, for which they pay an annual interest varying between 12 and 24 per cent, depending on the size and tenor of the loan. In cases of default, the jewellery is auctioned off after a period of 16 months from the time it was pledged. The pledged valuables are kept in secure vaults, insured against burglary and fire. In 2010/11, Muthoot Finance's average lending rate was 19.7 per cent, while the cost of funds stood at 8.7 per cent. The average loan size was Rs 35,000.

Backers of Muthoot Finance are gung-ho. "Gold is the new credit card for India's masses," says Rishi Navani, Managing Director of private equity firm Matrix India, which picked up a 2.11 per cent stake in Muthoot Finance last year in two separate deals for a total of around Rs 104 crore. "People store a lot of assets in gold. I'm very positive about this company's prospects."

Paradoxically, the currently bleak economic scenario can only help Muthoot. "The weak rupee, weak equity markets and low liquidity, will only sustain the demand for gold loans," says Alex K. Mathews, Head of Research at Geojit BNP Paribas Financial Services.

V.P. Nandakumar, Chairman, Manappuram Finance
I don't think RBI will interfere with network expansion of gold loan firms or cap their interest rates: V.P. Nandakumar
Bright prospects, however, invariably attract competition, and the gold loans category is no different. For the Muthoot brothers, there is, to start with, family competition - the NBFCs Muthoot Fincorp and Muthoottu Mini, headed by their cousins, Thomas John Muthoot and Roy M. Mathew, respectively. The father of the brothers running Muthoot Finance, M. George Muthoot, set up the gold loans business in 1939, along with his brothers, Muthoot M. Pappachan and Muthoot Mathew. But in 1975 they parted ways, with Pappachan and Mathew setting up their own gold loan companies. Muthoot insists the personal relationship between the three families remains cordial.

"Ours is a healthy competition," he says. "We support one another in every way, except in business." Besides, Muthoot Finance has always stayed well ahead of the other two. Its closest rivals are public sector banks, which also disburse gold loans; and in the private sector, Manappuram Finance, started by fellow-Malayalee V.P. Nandakumar, in 1992. Manappuram, headquartered at Valapad in Thrissur district of Kerala, has around 2,700 branches across the country. A 2010 report by ICRA Management Consulting Services said Muthoot Finance held a 19.5 per cent market share in the gold loan segment, followed by Indian Overseas Bank at 13.9 per cent, Indian Bank at 10.4 per cent and Manappuram Finance at 6.8 per cent.

So, are banks the real threat? Not really, feel analysts. For one, dispensing gold loans is hardly the banks' central activity; they can never give it the sort of concentrated attention NBFCs like Muthoot Finance or Manappuram do. Both claim to disburse loans up to Rs 20,000 within 10 minutes of the gold jewellery being submitted - a speed no bank can match. Besides, banks need Reserve Bank of India's, or RBI's, permission to set up new branches, while NBFCs are currently under no such obligation.

Yet challenges remain. Though Muthoot Finance has a pan-India presence, around 85 per cent of its business still comes from the four southern states. It is trying hard to expand further in the rest of the country, with the eldest of the four brothers, company Chairman M.G. George Muthoot, who has based himself in Delhi, personally driving the growth in the north.

The RBI decision in February this year, to take gold loan companies off the priority sector lending list for banks, has affected them adver sely. Since lending to gold loan NBFCs no longer improves a bank's priority sector credit score, the flow of bank funds has fallen, forcing the NBFCs to tap other sources and increasing their cost of funds. "Our expansion depends on the availability of funds," says Manappuram's Nandakumar.

Muthoot, however, displays a stiff upper lip. "The RBI's policy on priority lending has impacted our cost of funds by just 0.5 per cent," he says. Will RBI tighten the screws further on gold loan NBFCs? "I don't think RBI will interfere with network expansion or cap interest rates," says Nandakumar. But with increasing competition, the possibility of interest rates on gold loans tumbling is for real, but again Muthoot maintains he is not worried. "There are signs of that, but we are the first choice for customers," he says. "We set the industry standards."

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