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| Thomas George Muthoot, Thomas John Muthoot, Thomas Muthoot |
Gone are the days when gold loans meant distress loans, says Thomas George Muthoot, Director of Muthoot Fincorp Ltd, part of the diversified business conglomerate, Muthoot Pappachan Group. Seasonal Magazine queries Thomas George Muthoot on the Group‘s strategies and plans.
Despite having a listed company in the Group for some time now, you have been reluctant to list your flagship, Muthoot FinCorp. How would you assess the strengths and weaknesses of getting listed?
We are yet to decide the pre-IPO valuation and pricing as we are exploring other options including divesting a strategic stake to private equity players. We are working on our IPO plans & we plan to approach markets at an appropriate time. Basically, we are waiting for the right valuations. We are growing at a good and steady pace, and by the time the formalities are over, and better valuations are available, we would be automatically at a larger size by way of loan book and bottomline.
How do you fund this rapid growth?
There are different avenues for raising funds, but due to the immense trust the Muthoot name has in Kerala, secured bonds is a preferred way before us.
Have you already taken your first institutional investors into Muthoot FinCorp? If not, when is the first entry by PE funds expected?
We are in talks with multiple PE funds, but we have not yet decided or zeroed down on any of the PE funds as of now. Nor have we given the mandate for identifying them to any investment bankers. Our own team which has members with experience in PE funds is handling this now. The company ownership is currently 100 per cent within the family.
How are you capitalizing on the synergies between your listed company doing auto loans and unlisted company doing gold loans, and how it would benefit each?
Muthoot Capital Services enjoys great synergy from Muthoot Fincorp in terms of distribution network and ready customer base resulting into cross selling and up selling of products. The customers walking into Muthoot Fincorp branches can also avail of auto loan services. What we have found, especially in recent years, as a growing trend, is that our customers are often common across categories. For example, somebody who is an insurance customer will very well be a gold loan client too.
That is surprising, as gold loans are largely thought of as distress loans still?
That is a false impression some people have. From our experience, especially in recent years, the majority of gold loans are not distress loans. Our main segment is now the MSME customers, like traders. And they are taking the loans for capitalizing on high seasonal demand for some products, as well as for meeting certain year-end commitments with their bankers. In both cases, the outcome is definite and positive for them, and most-importantly resolved within a short-time. So gold loans are the perfect tool for them. Another strong segment for us is the young employees in new-generation segments like IT companies.
Again, it is a surprising claim. Why would IT sector employees go for gold loans?
They mainly go for it to raise the margin money for housing loans. While they tend to rely for home loans on mainstream players like HDFC or banks, for the margin money for these loans they come to us. We get this business because, these young couples have enough gold with them, and their salaries are high making them confident of quick repayment of our loan, whereas with their home financiers they have enough time like 10 or 15 years to repay.
Gold loan fraud is said to be a new rising challenges for lenders, with false or stolen gold being pledged increasingly. How much is it affecting your business?
What I feel is that frauds related to gold loans were always there. Due to the preciousness of the metal, and the difficulty in ascertaining its purity, fraud was always there. Now it seems to be more mainly because of the volume growth and the better reporting of such incidents. But having said that, let me also tell you that Muthoot Fincorp spends substantially to fortify its systems and processes within its branches. We have gold appraisal not only at the time of loan disbursals, but ongoing periodic inspections of gold ornaments by skilled gold inspectors. We have also instituted the same level of diligence even to gold coins & bars, and use tamper proof packets. So, we have not been affected thanks to our strong internal systems and processes.
Do you think RBI would stipulate a maximum ceiling for gold loan NBFCs’ lending rates, and would such a move be welcomed by you as it may grow volumes sharply?
I would not like to comment on this. But I think these fears are overplayed, as there would be still enough margin for gold loan companies to operate.
As a non-deposit-taking NBFC, how much has losing the priority sector tag on bank advances affected you? Can you mention the impact of other expected regulatory changes in gold loans?
Again, I would not like to comment on this specifically. What I would rather say is that most NBFCs, including gold loan companies, are doing a pivotal role in financial inclusion, and as such all regulatory action will take into account the role companies like ours have been undertaking.
The big game changer for NBFCs is said to be the rural business opening up. How has been your rural push faring?
We already have a healthy mix of semi-urban and rural branches across the country and this model has been doing extremely well for us. We too feel strongly with late management guru CK Prahalad’s vision that future growth is at the bottom of the pyramid, or at least in the middle-to-bottom of it. Conglomerates like Tatas are following it, and we too pay special attention to it.
Can you tell a specific business model where you are targeting BoP?
Well, there are many, but the best recent example is our home loan division. It targets those customers who require only smaller loans, say below 8-10 lakhs, for more affordable homes, and as such doesn’t catch the fancy of mainstream home loan players. It is a fast growing segment, thanks to mass housing schemes, as well as the emergence of new players like us that are focused on this segment. Our customers are mainly in the suburbs of Tier-1 and Tier-2 cities. The interest rates are slightly higher, at 14-15%, but we have to do that as the credit profile of these customers would be a notch less than the high salaried class. Our home loans are proving to be a great enabler for our segment of customers.
Do you think NBFCs like Muthoot FinCorp is doing an important role in financial inclusion, which the authorities are not properly acknowledging. What would be your wish list for NBFCs in this budget?
Increasingly, NBFC’s have helped common people to achieve their larger dreams and meet their immediate requirement for money, leading to financial inclusion in the long run.
Despite having a listed company in the Group for some time now, you have been reluctant to list your flagship, Muthoot FinCorp. How would you assess the strengths and weaknesses of getting listed?
We are yet to decide the pre-IPO valuation and pricing as we are exploring other options including divesting a strategic stake to private equity players. We are working on our IPO plans & we plan to approach markets at an appropriate time. Basically, we are waiting for the right valuations. We are growing at a good and steady pace, and by the time the formalities are over, and better valuations are available, we would be automatically at a larger size by way of loan book and bottomline.
How do you fund this rapid growth?
There are different avenues for raising funds, but due to the immense trust the Muthoot name has in Kerala, secured bonds is a preferred way before us.
Have you already taken your first institutional investors into Muthoot FinCorp? If not, when is the first entry by PE funds expected?
We are in talks with multiple PE funds, but we have not yet decided or zeroed down on any of the PE funds as of now. Nor have we given the mandate for identifying them to any investment bankers. Our own team which has members with experience in PE funds is handling this now. The company ownership is currently 100 per cent within the family.
How are you capitalizing on the synergies between your listed company doing auto loans and unlisted company doing gold loans, and how it would benefit each?
Muthoot Capital Services enjoys great synergy from Muthoot Fincorp in terms of distribution network and ready customer base resulting into cross selling and up selling of products. The customers walking into Muthoot Fincorp branches can also avail of auto loan services. What we have found, especially in recent years, as a growing trend, is that our customers are often common across categories. For example, somebody who is an insurance customer will very well be a gold loan client too.
That is surprising, as gold loans are largely thought of as distress loans still?
That is a false impression some people have. From our experience, especially in recent years, the majority of gold loans are not distress loans. Our main segment is now the MSME customers, like traders. And they are taking the loans for capitalizing on high seasonal demand for some products, as well as for meeting certain year-end commitments with their bankers. In both cases, the outcome is definite and positive for them, and most-importantly resolved within a short-time. So gold loans are the perfect tool for them. Another strong segment for us is the young employees in new-generation segments like IT companies.
Again, it is a surprising claim. Why would IT sector employees go for gold loans?
They mainly go for it to raise the margin money for housing loans. While they tend to rely for home loans on mainstream players like HDFC or banks, for the margin money for these loans they come to us. We get this business because, these young couples have enough gold with them, and their salaries are high making them confident of quick repayment of our loan, whereas with their home financiers they have enough time like 10 or 15 years to repay.
Gold loan fraud is said to be a new rising challenges for lenders, with false or stolen gold being pledged increasingly. How much is it affecting your business?
What I feel is that frauds related to gold loans were always there. Due to the preciousness of the metal, and the difficulty in ascertaining its purity, fraud was always there. Now it seems to be more mainly because of the volume growth and the better reporting of such incidents. But having said that, let me also tell you that Muthoot Fincorp spends substantially to fortify its systems and processes within its branches. We have gold appraisal not only at the time of loan disbursals, but ongoing periodic inspections of gold ornaments by skilled gold inspectors. We have also instituted the same level of diligence even to gold coins & bars, and use tamper proof packets. So, we have not been affected thanks to our strong internal systems and processes.
Do you think RBI would stipulate a maximum ceiling for gold loan NBFCs’ lending rates, and would such a move be welcomed by you as it may grow volumes sharply?
I would not like to comment on this. But I think these fears are overplayed, as there would be still enough margin for gold loan companies to operate.
As a non-deposit-taking NBFC, how much has losing the priority sector tag on bank advances affected you? Can you mention the impact of other expected regulatory changes in gold loans?
Again, I would not like to comment on this specifically. What I would rather say is that most NBFCs, including gold loan companies, are doing a pivotal role in financial inclusion, and as such all regulatory action will take into account the role companies like ours have been undertaking.
The big game changer for NBFCs is said to be the rural business opening up. How has been your rural push faring?
We already have a healthy mix of semi-urban and rural branches across the country and this model has been doing extremely well for us. We too feel strongly with late management guru CK Prahalad’s vision that future growth is at the bottom of the pyramid, or at least in the middle-to-bottom of it. Conglomerates like Tatas are following it, and we too pay special attention to it.
Can you tell a specific business model where you are targeting BoP?
Well, there are many, but the best recent example is our home loan division. It targets those customers who require only smaller loans, say below 8-10 lakhs, for more affordable homes, and as such doesn’t catch the fancy of mainstream home loan players. It is a fast growing segment, thanks to mass housing schemes, as well as the emergence of new players like us that are focused on this segment. Our customers are mainly in the suburbs of Tier-1 and Tier-2 cities. The interest rates are slightly higher, at 14-15%, but we have to do that as the credit profile of these customers would be a notch less than the high salaried class. Our home loans are proving to be a great enabler for our segment of customers.
Do you think NBFCs like Muthoot FinCorp is doing an important role in financial inclusion, which the authorities are not properly acknowledging. What would be your wish list for NBFCs in this budget?
Increasingly, NBFC’s have helped common people to achieve their larger dreams and meet their immediate requirement for money, leading to financial inclusion in the long run.
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