Muthoot MD shines a light on how gold loan business works, with Covid as a backdrop

George Alexander, MD, Muthoot Finance explains why lockdowns didn't land any noticeable blow on the gold loan business, with special focus on his company. Edited excerpts:

ET Now: What is the outlook on demand for gold loans, given the cash crunch people might be facing during these lockdowns?George Alexander: Many people including some of our employees have got Covid, but otherwise footfalls etc. have not seen any drastic reduction. Gold loan is a business where customers need to come to the branch to take the loan. Customers have to come to the branch to bring the gold and also to get back their gold. That is still happening despite Covid.

We are of course seeing more people using the online way now instead of the physical process. They are going online to pay the interest as well as part of capital, and also take top-up loans.

For some customers, we have the on-request facility of home collection of gold for a fee. But it is expensive, so not very many people use that method. The majority of customers are comfortable coming to the branch.

So, to answer your question, we have not seen any drastic reduction in demand for gold loan. Customers are still coming to our branches to transact business. Most of the states have allowed financial institutions including NBFCs to open their office.

Has the fall in gold prices had any impact on your business? Also, what is the average LTV that you operate at?
We give our customers 75% of the current day’s gold price. That is the maximum.

However, not every customer needs or takes the maximum. Some people take 65%, some 70%. Our average disbursal is only 68% to 69%.

Now the question about fall in gold prices. We don't call it a fall, we call it fluctuation. And we always have a margin cushion, because we give only 75%.

Just because gold prices fall does not mean that the customer abandons his ornaments. We have seen it over the last several decades.

We do not give finance on gold bars, coins, bullions etc. We only give loans against household ornaments. Ornaments also have a 15% to 20% making charges which is an additional margin of cushion that we have. It means that the customer's equity in this is not 100, it is actually 120, against which he takes just 65% or 70% or 75%.

Like I said, people do not abandon their gold. The auctions what we did last year were just 0.5% of the total portfolio. Auctions are very few and far between.

If the price depreciates, auctions may go from 0.5 to 1% or 1.5%. But that does not impact the business or business model.

Would you like to change your guidance of 15% growth for FY22 in view of the lockdown? How will the AUM growth shape up?
Gold loan is a very convenient loan which people take for their businesses. When businesses restarted after last year's lockdowns, they needed quick and easy finance, and there was a huge demand for gold loans.

After reopening came the need for expansion, and again there was this need for quick finance, and gold loans again came up as the quickest, easiest and most convenient form of working capital.

If Covid 2.0 shuts down business, small businesses — our bread and butter — might again see payments not forthcoming. In such a case, they will look up to gold loans as the easiest and most convenient form of finance.

What kind of provisions do you think you will need to make in FY22 if NPAs rise?
I will talk about the December quarter. There is no provision. There is no need for provisioning for any gold loan company.

Of course, we have a large provision because of statutory standard asset provisioning. But none of those provisions eventually results in a loan loss.

Our annual loan loss is only 0.05%. And even that is not because of NPAs, it is because of theft or burglary.

None of the NPAs results in a loan loss because the gold is always with us — we auction the gold, we get back our money, probably the majority of interest as well. NPAs and these things do not affect gold loans.