Akshay Kumar does not speak Malayalam. Nor does Telugu star Venkatesh or Kannada actor Puneet Raj Kumar. Vikram has acted in a few Malayalam movies, but that was before he struck gold in Tamil. Now gold has brought all these actors together, along with Malayalam star Mohanlal, to enunciate a rather tricky Malayalam word on prime time television.
Manappuram, a firm from the sleepy town of Valapad in Thrissur district of Kerala, roped in these actors to give a pan-Indian face to its business of lending money against pawned gold. “The whole point of our aggressive marketing campaign was to expand our business rapidly because we saw a huge latent potential in gold loans, given that a large chunk of the business continues to be with the unorganised sector,” said V.P. Nandakumar, executive chairman of Manappuram Finance.
And it worked. The brand became a household name all over India, and the non-banking financial company (NBFC) is growing at a furious pace. According to the company, it opened four branches every working day in the quarter ended in December. As on March 24, it had 2,957 branches.
Manappuram, however, is a minnow in comparison with the other national player in the sector from Kerala, Muthoot Finance, which is India's largest gold loan company. Headquartered in Kochi, its roots can be traced back to Kozhencherry in Pathanamthitta district. It has more branches than most banks in the country (3,274 in 20 states); in fact, only State Bank of India and Punjab National Bank have more branches.
And it grows like a thriving start-up, rather than a 73-year-old company. It doubled its profit in the financial year 2010-2011 (1494.2 crore on an income of 12,298.3 crore), from the previous year (1227.6 crore on 11,077.5 crore). This year looks as good. The profit for the first three quarters was 1656.8 crore on an income of 13,238.7 crore, according to the unaudited reports.
The organised gold loan sector in India, by and large, is a playground of NBFCs from Kerala. Along with Muthoot Finance and Manappuram, two other independent concerns run by members of the Muthoot family—Muthoot Fincorp and Mini Muthoottu—and numerous smaller players from the state, account for about half the organised gold loan business in India. All of them are expanding at a rapid pace. Said Thomas George Muthoot, director, Muthoot Fincorp: “We are planning to double the existing volumes and branches within a year.” The company has 1,860 branches.
All these companies are talking about doubling or tripling the number of branches and volumes, but where are the funds coming from? Banks are not very keen, as it is no longer a priority sector and lending to gold loan companies does not improve their priority sector credit score. Said Nandakumar: “In an environment where interest rates have been rising, and liquidity is constrained, raising funds at the right cost has been something of a challenge.” He showed the way ahead in 2007, when Manappuram received foreign institutional investment of 170 crore from Sequoia Capital. In 2008, it got another 1108 crore. In 2010, it hit the capital market with a qualified institutional placement issue, which raised 11,245 crore. As on March 24, its market capitalisation was 13,057 crore.
Muthoot Finance followed suit in 2011. Its initial public offering was oversubscribed 24.5 times, amassing 1906 crore. Later it raised more money through non-convertible debentures. The company's market capitalisation as on March 24 was 15,464 crore. The promoters, who own 80 per cent of the stake, are planning to dilute the holding by another 10 per cent, said George Alexander Muthoot, managing director, Muthoot Finance.
Muthoot Fincorp also is mulling over the IPO way. Said Thomas George: “Considering the volume of our business and those of our competitors, the demand for capital is extremely high. Our IPO plans are aimed at augmenting our capital and investor base.”
How were the private banks in the country, which have a solid base in other loan segments, outshone by these NBFCs in gold loan? “Nothing is more efficient in the financial sector than an NBFC focused on a single product,” said Nandakumar. Banks take much longer time to sanction a loan, which is a big put-off for customers who normally take gold loans to fulfil urgent requirements.
“It took only 20 minutes to get a loan of 150,000,” said Veena R., a BPO employee, who took a gold loan from a leading NBFC. Once she missed an interest payment, but promptly got a call from the branch. “I did not intend to miss the payment, but somehow overlooked it. But they were professional,” she said.
Among the private banks, HDFC Bank has doubled its gold portfolio last year. Now about 75 per cent of its branches offer gold loan. Axis Bank, which recently entered the segment, is planning to expand the footprint. Among public sector banks, Indian Overseas Bank and Indian Bank have strong presence in the segment.
Interestingly, despite the quick sanctioning of loans, which is often done with minimum support documents, the borrower defaults are not very high for gold loan lenders. This could be attributed to the emotional value that gold jewellery commands. People do not like to part with it. Muthoot Finance fully cashes in on this sentiment, as it accepts only jewellery—not bullion bars or coins—against loans.
Though the core business remains gold loan, most of these NBFCs have diversified into other sectors through group companies. While Manappuram has interests in health care and retail jewellery business, Muthoot Group, the parent company of Muthoot Finance, has about 20 businesses. Muthoot Pappachan Group, the parent company of Muthoot Fincorp, has a strong presence in hospitality, automobile dealership and infrastructure development.
The spectacular growth of the gold loan business has attracted the attention of not just investors but also regulators. On March 21, the Reserve Bank came up with a new set of guidelines which cap the loan-to-value ratio on lending against gold jewellery at 60 per cent and mandate a tier-1 capital adequacy ratio of 12 per cent. This definitely will check the growth of the NBFCs. According to a Crisil report, “Business growth is likely to fall from 80 per cent per annum to 20-25 per cent per annum and return on assets is expected to fall from the currently high level of 4.5 per cent to 2.5-3 per cent.”
Alexander Muthoot, however, is unfazed. “We should welcome the measures taken by the RBI because it will go a long way in ensuring that the players in the industry have a robust capital structure. It also addresses possible fall in gold prices,” he told a newspaper in Mumbai. Manappuram, too, has welcomed the move and has said it would reduce the loan amount to 60 per cent of the gold value. Currently, the average loan-to-value offered by the company on its gold loan is around 66 per cent.
Smaller players, however, would lose a major chunk of the business to the unorganised sector, which does not come under the RBI ruling and will continue to offer a higher loan amount for the gold value. In the long run, said Crisil, the regulations will benefit the industry, as lower LTV ratios will strengthen the asset quality of gold loan companies with their improved ability to absorb volatility in gold prices.