‘The next leg of growth will be more balanced’

We may see one more quarter of asset quality pain. The loans which were given at a higher loan-to-value are going out of the system.





With the Reserve Bank of India accepting almost all the recommendations of the K. U. B. Rao committee, gold loan companies have to be content with lower growth and profitability. We spoke to Thomas John Muthoot, Chairman & Managing Director, Muthoot Pappachan Group, to understand the impact of these regulations and the way forward for all established players in this space.



Excerpts from the interview:

In the last one year or so, there has been a flurry of regulations. What brings in so many restrictions?

The unprecedented growth for gold loan companies in the past few years has caught the eye of the regulator. There has been a significant shift from the unorganised sector (pawn brokers) to the organised sector and this has led to high growth of 50-60 per cent for most players.

Also, the branch expansion of the players has helped. As funding from banks and markets were available easily, NBFCs continued to lend to customers.

The RBI has capped the loan-to-value for gold loans at 60 per cent and standardised the valuation of the collateral. How has this impacted you?

Let us look at how this industry has evolved in the last five years. The market saw a sudden gush of new players aggressively trying to compete with each other. Rather than competing on interest rates, gold loan companies began competing on the loan-to-value (LTV). Due to competitive pressures, we raised our LTV from 60-65 per cent to 65-75 per cent.

Since March 2012, after the RBI notification, we have reduced our LTV to 60 per cent. We still needed to compete with banks that were offering higher LTV of 70-75 per cent.

Now, with the latest guidelines, we are not clear on the LTV calculations, though we understand we need to value the gold jewellery at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by The Bombay Bullion Association. We have sought for clarifications from the regulators on this.

This has certainly impacted growth. We may not see the high growth of 40-50 per cent as in the boom times. But, still, we welcome the RBI’s move. This will now create a level-playing field across players. Banks have also de-risked their business and now offer lower LTV, since the steep price correction in the months of April and May.

So, now, the next leg of growth will be more balanced at, say, 20-25 per cent. However, this year (2013-14) our growth will be marginal.

What about your profitability?

When gold prices corrected sharply in April and May, our board had taken a conscious decision to step up the provisions for bad loans, and we provided Rs 70 crore in the June quarter. We may see one more quarter of asset quality pain. The loans which were lent at a higher LTV are going out of the system.

So, how will different players compete now?

Players will now compete on various products and services that they have to offer. In this regard, we have already started to expand our product portfolio to include housing loans, auto loans, micro finance, and so on.

While gold loans cater to the low-income and mid-income category, auto loans are only for the two- and three-wheeler segment and caters to the low-income group. We also give micro finance of up to Rs 10,000 to women. Housing loan is again for the informal sector, for the low- and mid-income category. Here we offer loans in the range of Rs 3-15 lakh.

How much do these businesses contribute currently?

The share of gold loan business has come down to 89 per cent. Going by the growth in the other businesses, gold loan contribution would come down to 80 per cent in three years. Microfinance is expected to contribute 9 per cent of our income, auto loans 4 per cent and home loans 3.4 per cent.

The new guidelines also prescribe more stringent procedural norms. How will this impact your turnaround time for disbursing loans?

Broadly, our procedures will remain the same. We are already following the required KYC norms. As far as the verification of ownership for more than 20 gm is concerned, we have been taking declaration from the customer that the jewellery belongs to him. We have also clarified to the regulator, that it will be difficult to trace the jewellery in a family from one generation to another. As far as disbursements in cheques are concerned, only 5 per cent of our customers take loans above Rs 1 lakh. Our average ticket size for loans is Rs 35,000. However, we have already started incorporating these practices, post the recommendations of the Rao committee.

How long will the whole procedure take, after the RBI’s recent changes?

Even with all KYC procedures , it will only take 6-10 minutes for first-time customers. That is our USP and we will still deliver quick turnaround. For repeat customer, the process takes only 3-5 minutes.

What about the prior RBI approval required for opening new branches after the first 1,000 branches?

Including branches that are under construction, we currently have 4,000 branches. We have sufficiently expanded to meet our growth targets up to March 2014. Since we are in a mode of consolidation we will not add any more branches till September next year. After that, we will take permission to open new branches.

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