Muthoot Finance, the main borrower of gold, which saw moderate loan growth in the second quarter, believes that the migration to higher interest rate loans from lower interest rate teaser loans will begin to contribute to an increase in returns in the following quarters. George Alexander Muthoot, MD, told Sajan C Kumar that the company will be able to stick to earlier forecasts of double-digit growth in gold loans for FY23. Excerpts:
Reasons for the drop in profits in the second quarter despite the increase in assets under management?
Although net profit fell to Rs 867 crore from Rs 994 crore, it was up 8% on a quarterly basis from Rs 802 crore. The reason for lower earnings in the second quarter was that we had a lower interest rate (call rate) program running in the prior year period. Although we have discontinued this program and moved to a higher interest rate regime, the full effect of this will be felt in the coming quarters. Going forward, you can see earnings increase, and that’s precisely why we saw a sequential increase in earnings in the second quarter.
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Given the second quarter’s performance, do you foresee any difficulty meeting the gold loan growth target of double digits for FY23?
We still have two quarters left and we hope we can do it. We are doing our best and we are not changing our directions. We have permission to open 150 branches this fiscal year. During the September quarter, we opened 24 branches. Digital initiatives are also on the rise, which will build momentum.
How do you see competition from banks in the area of gold lending?
Previously, banks were not in favor of lending on gold. Over the past two years, they have actively marketed the product, as many of their other loan portfolios were not doing well. Due to the widespread nature of banks, their presence is going to have a significant impact on the gold lending market. As a result, new customers have turned to banks, which has competed with companies like ours and is also one of the reasons why growth has not been in line with expectations. But then, because of the quality of our service and our speed of execution and probably because of brand loyalty, we get customers.
What is your response to the perception that a return to a high interest rate regime could harm the growth prospectus?
It is not the case that if you lower the interest rate you will get all the business. It is based on the business convenience of customers, which we have developed over decades. It’s a temporary phenomenon that some new customers have turned to banks, things will come back and that’s why we expect good loan growth over the next few quarters. Even when not, we have seen good client acquisition as our terms are normally very short, around three to four months. Most clients close their loans in three or four months and we need to find new clients.
Do you foresee pressure on margins due to competition? What about your financing cost?
It is not a pressure on the margins. We have consciously reduced our yields and that is why our margins have fallen. As a result, we saw a decline in profits. Now that we have stopped low interest loans, we will be able to make higher profits. We can easily get good financing from banks as we are the highest rated gold lending company. Today, our capital adequacy is over 25% and the cost of borrowing for us is lower than others.
How is the non-gold business doing for you?
We carry out a real estate loan activity that we are going to develop. Now that the issues related to Covid are behind us, we will give more weight to home loans, personal loans and car loans. All these non-gold activities currently contribute around 10% to the group’s total activity. The proportion of non-gold activities could reach 15 to 20% over the next five years.