A gold loan customer has to come to the branch once when they take the loan and again when they take back the gold.
The entry of public sector banks (PSBs) into the gold loan market will help expand and broaden it, George Alexander Muthoot, MD, Muthoot Finance, told Shritama Bose. The company has used the lockdown period to digitise a larger portion of its repayment channels, he added. Edited excerpts:
At a time of lockdown, you have seen good growth and improvement in asset quality. What has worked for you?
What has really worked favourably for us in the last nine months is the crisis in the NBFC sector, with what has happened with IL&FS, Dewan Housing, Yes Bank and so many others. There was a lot of difficulty for people to get small loans from NBFCs. At that time we were able to provide finance to the people.
The second part is on the collateral value. As per the regulatory guidelines, we are supposed to loan maximum 75% of the gold value. We give loans only against household ornaments and not bullion or coins. But not everybody takes the whole 75% available to them. So our overall loan-to-value (LTV) is about 70% and we have a 30% margin. What has happened in the last four-five months is that the price of gold has really gone up. Loans where we had given 70% six months back are now at only 50% of the gold value. Our LTV has fallen to 53%, which means we have a 47% margin on the loans which we have given.
Have your collections been hit during the lockdown?
A gold loan customer has to come to the branch once when they take the loan and again when they take back the gold. The other transactions you can do online. You can borrow online, borrow part of the loan or repay part of the loan, but to take back the gold, you have to come to the branch. Usually people close a loan when they come to take it back. During the lockdown branches were closed and people could not come to the branches. So only a few people would have paid. Since May 10 all our branches in Kerala have been opened. People came and repaid their loans. For the month of April, repayments were not there. By July, we will be back to normal in terms of collections.
What would have been the maximum drop in collections?
For us there are no EMIs. The customer has the option to pay later. In the normal course we see people come and pay when they have the money, but that was not happening in April. Probably if we were expecting 100 people, only 10 people would have come. The other 90 didn’t come as they were not able to.They have all started coming back now. During the lockdown we have encouraged all our employees to contact the customers and link their bank accounts to our system. The share of customers paying digitally went up from 18% to 40%. We linked the bank accounts so that if such a situation comes up again, they will be able to pay online.
Have any of your customers availed the moratorium?
Gold loan customers don’t need the moratorium because there are no EMIs. What we are doing is that we will not do any auctions. Also, we don’t need to do any auctions because the price of gold is so high that if I do an auction, I’ll have to pay back money to the customer.
How has cost of funds moved for you in Q4?
Actually, in the last one year the cost of funds has moved up by over 150 bps. Banks have cut interest rates for customers on housing, personal or vehicle loans, but when they refinance NBFCs like us, they have really not passed on the benefit. A 10-20 bps cut may have happened. In the next few months, we expect lending rates to moderate.
We are seeing quite a few PSBs entering the gold loan market. Does this mean competitive intensity will increase?
People enter a new business when it is good, profitable and safe. We are only happy that banks are coming in as it gives more credibility to the business. In our country touching the gold to take a loan is seen as the last resort. But when banks like SBI and others start encouraging gold loans. Today in India we have 20,000 tonne of gold and only about 2 tonne of gold comes to the organised market. (With the banks coming in) the volume will increase. It will help expand the market. We are the most reasonable among NBFCs in terms of auction process, interest rate and customer service. We welcome competition as it will broaden the market.