MUTHOOT FINANCE LIMITED
ANNUAL REPORT 2011-2012
Interestingly, India is among the world`s largest consumers of gold with an
annual appetite of around 900 tones. It is estimated that around 65% of
this gold finds its way into semi-urban and rural geographies as ornaments.
Ironically, even as India suffers from a capital shortage, much of this
gold continues to stay locked in the form of ornaments even as its holders
need to take loans for their short-term needs at high interest rates from
the unorganised sector.
For decades, India`s gold loan industry serviced the needs of rural and
semi-urban millions through a simple proposition: pledge your gold, take a
short-term loan, repay and take your gold home. As a result, gold jewellery
has been treated only as a means to mobilize finance for working capital
requirements; the industry has not evolved to finance the purchase of
jewellery. As it has turned out, in our business, gold jewellery merely
services the role of safe collateral against which finance can be provided.
Over the decades, a significant part of the loans across rural and semi-
urban India was provided to those without bank accounts. This made the
recipients financially inclusive for the first time. Even as this was
happening, the interesting point is that organised gold loans accounted
only for a mere 10% of India`s total gold holding, clearly implying that
with increasing penetration, the productivity of India`s rural economy can
be easily strengthened.
The evidence then is that gold loans are a safe, liquid and convenient way
to transform an economically unproductive asset into an economy driver for
some good reasons.
One, the business is adequately collateralised. Even after two of the most
sweeping downturns in the global and Indian economy since 2008, no
organised gold loan company defaulted to lending banks.
Two, the business revolves around the smaller ticket size short-term credit
requirements of people and small businesses, which requires a specialized
approach and is generally unviable for commercial banks due to a large
volume of transactions.
Three, the product offers customers a superior borrowing alternative -
without service charges, processing fees, upfront interest collections or
Gold jewellery is an intrinsic part of the Indian social system. Hence,
gold loans do not drive gold imports. The business only represents a
monetization of gold that is already existing in the country. The gold loan
sector provides a deep service by bringing liquidity to an asset class that
would have otherwise remained idle.
In this context, some of the recent directives of the Reserve Bank of India
to regulate the growth of India`s gold loan industry come as a serious
assault on the inclusive growth agenda of the country.
In March 2012, the RBI directed that NBFCs must not provide loans exceeding
60%of the value of gold jewellery pledged with them.
In April 2012, the RBI directed banks to rationalise their exposure ceiling
in a single NBFC, having gold loans to the extent of 50%or more of its
total financial assets, from 10%to 7.5%of the bank`s capital funds.
At Muthoot, while we welcomed the RBI`s regulation to cap the loan to value
as a way of industry-wide standardisation and compliance, we feel that the
recent initiatives could stagger industry growth and induce a shift in gold
loan seekers from the organised to the unorganised industry who are
operating outside the RBI`s purview. For decades, India`s organised gold
loan segment worked hard to induce a business shift to a more credible
alternative; there is a growing apprehension that the recent RBI
initiatives could well undo the hard work of the years.
In this connection, it would be pertinent to put the recent industry growth
into a responsible long-term perspective: for the last few years, the rapid
growth of India`s organised gold loan sector was merely an overdue
correction following decades of unorganised sector growth in a traditional
industry. The rapid growth was more due to a shift of the customer base
from the unorganised sector to the organised sector and also due to
increase in the reach of industry players through the addition of new
branches. Our apprehension is that with the RBI stepping in, the organised
sector`s cash supply lines will decline and this could affect the
industry`s capability to service growing customer needs across rural and
At Muthoot, while the directive restricting funding from banks affects our
fund sourcing from banks (about 40%of our total working capital), we
believe that since our bank borrowings are fairly diversified, several
banks have adequate room to enhance their exposures within the revised
We possess robust fundamentals to address these challenges. Our negligible
credit losses coupled with strict provisions, a brand of trust, a dispersed
presence across 3,678 locations, and one of the most rigorous Standard
Operating Procedures represent some of our core strengths. However, to
derive active participation and support from all market participants
(lenders, customers, capital market investors, local administration, among
others), the RBI will need to dispel the apprehensions and negative
perceptions about the sector.
To provide the regulator comfort and time to understand the growth dynamics
of the sector better, the Company consciously decided to reduce the pace of
its growth and consolidate its operations during the current year, focusing
on improving customer service, staff training and internal controls while
In the Company`s opinion, a higher LTV cap, liberal funding from the
banking system, level playing field with banks especially with regard to
LTV and risk weightage, and dispelling the apprehensions and negative
perceptions on the sector by the regulator will be a key requirement for
the healthy growth of the sector.
We offer all our support and cooperation to the regulator in understanding
the sector better as well as to achieve its agenda of financial inclusion.
Being the largest company in the sector, we have an added responsibility to
take the lead role in setting the right sectoral trends and practices. We
wish to assure all our shareholders that the Company will strive to enhance
the confidence of the regulator while being engaged in its journey in
M.G. George Muthoot,