Rising Gold Prices Have Enabled Customers To Borrow More From The Same Collateral Gold: Muthoot Fin

Summary

In this interview, Mr. George Alexander, MD of Muthoot Finance, discusses the impact of rising gold prices on the gold financing business in India. With gold prices surging past $2600 an ounce, the value of gold held by customers has increased significantly. This has led to a higher demand for gold loans, as customers can now borrow more against the same gold value. Alexander highlights that Muthoot Finance is experiencing an uptick in market demand for gold loans, especially as unsecured loans become more challenging to obtain. He also addresses the company's loan to value (LTV) ratio, which is maintained at around 70%, and the potential for AUM growth with the current gold price boom. The conversation also touches on the company's liability profile and the anticipated effects of potential interest rate cuts on their net interest margin.

Takeaways

• 📈 Gold prices have significantly increased, with spot prices surpassing $2600 an ounce, marking a nearly 60% rise from two years prior.
• 💹 The surge in gold prices has a positive impact on the gold financing business in India, as it allows for increased lending against gold holdings.
• 🏦 Muthoot Finance, a key player in the gold loan sector, is capitalizing on the high gold prices and reports a rise in market demand for gold loans.
• 📉 Despite the potential for higher loan-to-value (LTV) ratios due to increased gold prices, Muthoot Finance maintains an average LTV of around 70%, with some flexibility.
• 🔼 The company has observed a significant uptick in gold loan demand, partly due to the difficulty in obtaining unsecured loans from banks and other financial institutions.
• 🌐 International gold prices are a key driver for the Indian gold financing business, influencing both customer behavior and company strategies.
• 📊 Muthoot Finance aims to maintain a net interest margin of around 10%, adjusting lending rates in response to changes in borrowing costs.
• 📉 The cost of borrowings has plateaued, with Muthoot Finance anticipating a potential decrease in the future, which could benefit customers through lower lending rates.
• 🏡 The home finance division of Muthoot Finance is performing well, with a focus on secured loans and a current AUM of around 2,500 crores.
• 📢 Muthoot Finance has plans for an IPO for its subsidiary Muthootstar MFI, with the market launch anticipated within the next year, pending favorable market conditions.

Q & A

What has been the recent trend in gold prices as discussed in the script?

Gold prices have been rising, with spot prices in the US surpassing the $2600 an ounce mark.

How does an increase in gold prices impact the gold financing business in India?

An increase in gold prices allows companies like Muthoot Finance to lend more money against gold as collateral, as the value of the gold held increases.

What is the maximum loan to value (LTV) ratio that Muthoot Finance offers on gold loans?

Muthoot Finance offers a maximum loan to value (LTV) ratio of 75% for gold loans.

What is the average loan to value (LTV) ratio that customers typically utilize according to Muthoot Finance's MD?

The average LTV ratio utilized by customers is around 68% or less than 70%.

What has been the impact of the rising gold prices on Muthoot Finance's business?

The rising gold prices have led to an uptick in market demand for gold loans, and Muthoot Finance has experienced good growth momentum in this sector.

Why has there been an increase in demand for gold loans according to the discussion?

The demand for gold loans has increased because unsecured loans have become more difficult to obtain, making gold loans a more attractive option.

What is the current average cost of borrowing for Muthoot Finance?

The current average cost of borrowing for Muthoot Finance is around 9 to 9.5%.

How does Muthoot Finance plan to respond to potential interest rate cuts in the US and India?

Muthoot Finance intends to pass on the benefits of lower borrowing costs to customers by reducing their lending rates, maintaining a net interest margin of around 10%.

What is the maturity profile of Muthoot Finance's liabilities book?

Around 50% of Muthoot Finance's liabilities book is linked to bank rates, which reset every three to six months, and 20 to 25% is in the form of NCDs with fixed rates for 3 to 4 years.

What is the growth guidance for Muthoot Finance's home finance division?

The home finance division is expected to see good growth, with the asset under management (AUM) around 2,500 crores.

What is the current status of Muthoot Finance's plans for an IPO for its subsidiary Muthootstar MFI?

Muthoot Finance has received the green signal from the Securities and Exchange Board of India (SEBI) for the IPO of Muthootstar MFI and is waiting for a good opportunity time, possibly within the next year.

Outlines

00:00

📈 Gold Financing in India Amidst Rising Gold Prices

The interview with Mr. George Alexander, MD at Muthoot Finance, discusses the impact of gold prices soaring past $2600 an ounce on the gold financing business in India. Mr. Alexander explains that with the increase in gold prices, the value of gold held by customers has risen substantially, which allows them to borrow more against their gold. The company's loan to value (LTV) ratio is typically around 75%, but the average LTV dispersed is around 68-70%. The demand for gold loans has seen an uptick in the past five to six months, partly due to the difficulty in obtaining unsecured loans from banks and non-banking financial companies (NBFCs). The conversation also touches on the company's AUM growth, which was initially guided at 15% but may be revised upwards due to the tailwinds from higher gold prices and increased demand for gold loans.

05:02

💹 Impact of Interest Rate Changes on Muthoot Finance

This segment delves into the effects of potential interest rate cuts in the US and India on Muthoot Finance's liabilities and net interest margin (NIM). Mr. Alexander mentions that the company has maintained a NIM of around 10%, adjusting for changes in borrowing costs. With expectations of rate cuts, the company plans to pass on the benefits to customers by reducing their lending rates. The discussion also covers the maturity profile of the liabilities, with 50% linked to bank rates that reset every three to six months. The company's cost of borrowing has plateaued at around 9-9.75%, and Mr. Alexander anticipates rates to decrease in the future. The conversation concludes with a brief mention of the company's growth in the home finance division and the microfinance sector, with a 30-35% growth guidance for the latter.

10:02

🏢 Future Growth and IPO Plans for Muthoot Finance

In the final part of the interview, Mr. Alexander provides insights into the growth expectations for Muthoot Finance's home finance division, which currently stands at around 2,500 crores and is expected to see significant growth. He also discusses the microfinance sector's contribution to empowering customers through providing them with purchasing power. The guidance for microfinance growth is around 30-35%, although the exact figure is not confirmed. Lastly, Mr. Alexander shares that the company has received the green signal from the Securities and Exchange Board of India (SEBI) for an initial public offering (IPO) of its subsidiary, Muthoot Star Finance. The company is awaiting a favorable market opportunity, possibly within the next year, to launch the IPO.

Keywords

💡Gold financing

Gold financing refers to the practice of providing loans secured by gold. It is a popular form of collateral lending, especially in India, where gold is considered a stable asset and a symbol of wealth. In the context of the video, gold financing is discussed in relation to the rising gold prices and how it impacts the business of Muthoot Finance, a company that specializes in gold loans. The script mentions how higher gold prices can lead to an increase in the loan-to-value ratio, allowing borrowers to access more funds against their gold holdings.

💡Spot gold prices

Spot gold prices refer to the current market price of gold for immediate delivery. These prices fluctuate based on supply and demand, economic indicators, and investor sentiment. In the transcript, the discussion revolves around how spot gold prices have surpassed $2600 an ounce, which is a significant milestone and has implications for the gold financing industry. The interviewee, Mr. George Alexander, discusses the impact of this price increase on Muthoot Finance's business operations.

💡Loan-to-value (LTV)

Loan-to-value (LTV) is a financial ratio that represents the amount of a loan as a percentage of the value of the asset being purchased. In the context of gold financing, LTV is crucial as it determines how much a borrower can borrow against their gold holdings. The script mentions that the maximum LTV is 75%, but the average disbursed LTV is around 68-70%. This is significant because it indicates the leverage borrowers have when using gold as collateral.

💡Muthoot Finance

Muthoot Finance is a leading Indian financial services company known for its gold loan services. It is mentioned in the script as the company in focus, with Mr. George Alexander, its Managing Director, being interviewed. The company's business model and performance are discussed in relation to the gold market dynamics, highlighting its role in the gold financing sector.

💡Gold ornaments

Gold ornaments are items of personal adornment made from gold, which are often considered both a luxury good and an investment. In the video script, gold ornaments are highlighted as the primary collateral for gold loans provided by Muthoot Finance. The value of these ornaments has increased significantly due to rising gold prices, which impacts the amount borrowers can receive as loans.

💡Unsecured loans

Unsecured loans are loans that do not require collateral and are based on the borrower's creditworthiness. In the transcript, unsecured loans are contrasted with gold loans, which are secured. The interviewee notes that unsecured loans have become more difficult to obtain, which has increased demand for gold loans as an alternative source of credit.

💡Interest rates

Interest rates are the cost of borrowing money and are a key factor in the financial industry. The script discusses the potential for interest rate cuts in the US and India, which could affect borrowing costs for financial institutions like Muthoot Finance. Lower interest rates can lead to reduced borrowing costs, which can influence the net interest margin and the rates offered to borrowers.

💡Net interest margin (NIM)

Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders. In the context of the video, NIM is discussed as a key performance indicator for Muthoot Finance. The interviewee mentions that the company aims to maintain a stable NIM despite fluctuations in interest rates.

💡Asset Under Management (AUM)

Asset Under Management (AUM) refers to the total market value of investments managed by an individual or entity. In the script, AUM growth is discussed as an indicator of the financial health and growth of Muthoot Finance. The company is aiming for a certain percentage growth in AUM, which is influenced by factors such as loan demand and the value of gold.

💡Microfinance

Microfinance involves extending a range of financial services to low-income individuals or those without access to typical banking services. In the video, microfinance is mentioned as a part of Muthoot Finance's operations, with a focus on providing loans to those who may not qualify for traditional bank loans. The growth and performance of this segment are discussed in relation to the overall business strategy of the company.

💡Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the first sale of stock by a private company to the public. The script mentions that Muthoot Finance is considering an IPO, indicating a significant milestone in the company's growth and its intention to raise capital through public markets. The discussion around the IPO reflects the company's ambitions and financial strategies.

Highlights

Gold prices in the US Comex market have surpassed $2,600 an ounce, representing a significant increase from $1,650 just two years ago, which marks a 60% rise.

The rising gold prices have positively impacted the gold financing business, allowing customers to borrow more for the same amount of gold collateral.

Muthoot Finance, a major gold loan provider, finances only gold ornaments and does not engage in bullion financing.

Customers who previously received 100 rupees for their gold can now get 160 rupees due to the increase in gold prices.

The loan-to-value ratio (LTV) for gold loans is capped at 75%, but most customers only utilize about 68-70% of this limit.

Demand for gold loans has increased over the last five to six months, partly due to a decline in availability of unsecured loans such as personal loans.

Muthoot Finance has experienced growth momentum across its 6,000 branches, with a strong performance in the last quarter.

The company expects continued demand for gold loans as they are a secured option and customers appreciate the ease and speed of borrowing.

Muthoot Finance is forecasting a 15% AUM (Assets Under Management) growth, with plans to revisit this guidance after the second quarter results.

As gold prices continue to rise, more customers are seeing gold as a valuable asset they can borrow against, further boosting demand for gold loans.

Muthoot Finance maintains a net interest margin (NIM) of around 10%, absorbing minor increases in borrowing costs when possible.

Interest rates in the US are expected to drop by 100-125 basis points, and this could have a ripple effect on borrowing costs in India.

Muthoot Finance plans to pass on any reductions in borrowing costs to customers, maintaining its NIM at around 10%.

The company's cost of borrowing is currently between 8.75% and 9%, having risen by about 100 basis points over the past year.

Muthoot Finance's home finance division, with an AUM of around ₹2,500 crore, is expected to experience significant growth.

Muthoot Finance's microfinance arm is expected to grow by 30-35%, with an IPO planned in the next year, pending favorable market conditions.

Transcripts

but uh speaking of green nothing as we

were just discussing earlier nothing has

been shining as bright as gold perhaps

uh remember spot prices in the US Comics

gold prices have cruised past the

$2600 an ounce Mark as well so what does

this mean for the gold financing

business here in India Well mutur

Finance is the company in Focus uh those

prices have been running at record

levels so what happens in an environment

like this is it business positive let's

ask Mr George Alexander mut MD at muta

Finance sir thank you so much for

joining in maybe your smile is saying it

all you know we had an analyst on the

show just before you joined and uh a lot

of the traders in the market are calling

for 3,000 on spot gold in in US terms

but to understand the business Dynamics

you know typically in a period when gold

prices start moving higher the value of

gold you're holding that's gone up

substantially what does that mean for

business are you able to lend more what

is a loan to value uh General level uh

that you you like to hold Visa the the

prescribed regulatory Norms just take us

through the

Dynamics thank you good morning and

happy AUM to all of you we are just

happy to you as well sir now yes to you

and to to all your customers and of

course to all our viewers as well thank

you thank you thank you the H is great

so uh as you see the gold price has been

going up if you look at the

international the dollar price it was

about

1,650 exactly 2 years back today it is

2,600 it's almost a 60% Green from what

we had two years back so I think all the

people who have gold with them are quite

happy happy to see the value of their

oraments going up 60% in the last two

years that apart as far as gold loan

companies are concerned of course as

usual we Finance only gold ornaments we

don't Finance bulling Etc but then all

the customers who have been taking gold

from us now as you said have been have

can get more for the same value so if

they were getting 100 rupees earlier

they can get 160 rupees today because

the loan to value is 75% is the max but

at any given point of time people don't

take all the 75 our average uh Lo to

Value dispersal at any point of time

would be in the range of 68 or less than

70%

only uh we see actually a good uptick in

the market demand for gold loans see the

sense we are getting from the market

from all our 6,000 branches all over the

country is that in the last five six

months demand for gold Lo is definitely

picking up and last quarter we were able

to do well and we continue to have good

growth momentum from the branches for

the gold loan group

I should I would say this is one reason

for that would be in the last 3 four

months unsecured loans have been little

been little difficult to combine for

people whether the whether be personal

loan or the unsecured loan Etc not that

easy today because Banks and nfcs are

going a little slow on that so that

keeps the demand for gold loans or loan

against SC on a upti that is why I see

wec good demand here and as usual the

focused players the players who are

focused on go loans have always had a

good time as a got a good run and as as

I've been saying this a quite secured

loan and customers are also quite happy

to get loans without much delay and that

is why the gold Lo sector is go is doing

well and I I'm sure it will continue to

do well in the days to come on sir sir

just to go back to the LTV Point uh so

so are you saying that not just the

industry but you as well uh at mut also

you're maintaining an LTV of roughly

around 70 just under 70 so there's

anywhere 5% you know uh an elbow room

that you have and then with the

appreciation in the price what is the

additional lending you can do I think in

our last interaction you mentioned that

you're looking at 15% AUM growth you you

were anyway going to revisit that by the

end of the second quarter and and now

you have this huge Tailwind in the form

of uh you know higher gold prices plus

like you're saying there's lesser

competition people are not getting

personal loans unsecured loans that

easily so now what is the a growth that

you can

forecast I think let us wait for the

next result wait for a month when we are

coming out with the results I think we

we will the board will take a decision

on the revision in the guidance today

the guidance stands at 50 I'm sure as

you know we have been doing well in the

first quarter probably we will uh think

of a guidance revision after the first

quarter results are there but as you

said people don't everybody does not

need the whole 75% some people take only

65% some people take 60 some people take

all the 75 but the fact is that since

gold prices are hitting astronomical

levels people are looking at gold as

something which of more value today and

more value on which they can B

that is what is the big thing what we

are seeing now they are seeing news

about gold price Etc every day in the

newspaper so people everybody has some

gold so they are quite happy to see that

their value of their ornaments is going

up and then with players like mut and

the banks here who can on from whom they

can borrow money easily I think it's a

win-win for the

customer M hi good morning prant here

and happy own to you sir and to family

you had I hope you had a wonderful own

and a wonderful own sadya uh and so just

to to uh to go on uh to shift the focus

slightly we're talking about AEM growth

what about on the liability side uh we

are as we were discussing earlier the

cusp of interest rate starting to come

off in the US uh expectations are that

this year in the US there'll be at least

125 basis points worth of rate Cuts here

in India also we may see a rate cutting

cycle slowly manifest itself maybe not

to the same Quantum could you tell us

what proportion of your liabilities book

uh is uh you know what's the maturity

profile of the liabilities book and if

rates were to come off sharply what does

it do to your net interest margin sir go

on uh sir uh we have always been

maintaining your net interest margin in

the range of about 10 plus or minus half

50 basis points we always maintaining

that uh when the when there was a slight

rise in the uh uh the what should I say

the borrowing cost for us we Tred to

absorb it ourselves but when it is

beyond our control we pass it on to

customers but still we try to maintain

the 10% n if as you we all know also you

all feel that the interest rates in US

is also coming down by 100 125 basis

points and there is going to be a ripple

effect of that in uh India also when B

cost comes down it's not that our

profits will go we will pass on a good

part of that to the customer that has

been what we have been doing we try to

maintain our n if the prices if the B

cost comes down we reduce our e yield

rates

also all right hi Mr M good morning and

good to see you in happy onam and

hopefully uh you know the time to come

Prashant has been telling us as well

about onam maybe we share a meal on what

that leaf you know I'm looking forward

but let's let's focus on the business

then sir you know a couple of points

here first quarter you have grown by 10%

on a quarter to quarter basis so I think

definitely that 15% will have to get

revised upwards the quantum is debatable

but as you told us at the end of quarter

two we'll wait by for that on the cost

of borrowings you know on irrespective

of when that rate cut comes about the GC

heals has already cooled off

considerably so could you tell us what

is the average cost of boring and as of

now how much has it come down see in the

last it has not started coming down

definitely it is almost I should say it

is plattered is on the top now maybe the

cost of borrowing should be in the range

of about little less than 9 8 75 to 9 is

the cost of borrowing today I think it

is it is it is gone to speak now if you

see about a year back it was 100 basis

points 125 basis points low so it is I

should say it is almost reached speed

and we should see the rates coming down

in the days to

come just to go back to the point sir

what is the liability the majority

profile is 50% of your liability book uh

you know you know under say 6 months

maturity give us a sense of that how

quickly will you be able to as rates

come off what what will happen yeah I

think our maturity profile is about 50%

is in the bank Banks actually it is

linked to these rates so if the rates

come down if the rates goes up we don't

have a big Advantage it's only three 3

months and six months where they reset

the rates so just because the rates have

come down or goes up there's no

liabilities which is fixed it it is

always fixed to the that's a pass but

for ncds May been taken 3 years four

years Etc yes for that what we have

already borrowed will be fixed so that

should be about 20 to 25% of our book

would be in the NCD which is usually in

the range of 3 years 20 half years 3

years four years Etc which is all the

rates are fixed unlike the banks where

they have a POS they have an option to

reset after every six months or so okay

all right final question sir before we

let you go give us a guidance on

bellstar mfi you told us that maybe in

the next one year or so we could see the

listing but what is the growth you're

guiding for out there and also on your

home finance division growth on both

these two okay the home finance division

has been actually doing well we are

actually focusing very great on that the

the a is around 2,500 crores now I think

we should see good growth in the home

finance where it is almost it's a very

secured loan book as far as the uh micro

Finance is concerned as you all know it

is an unsecured book but definitely it

is Def certainly a big service which the

micro Finance industry is doing to the

customers by putting purchasing power in

their hands I think the grow there uh

the

uh the micro Finance has about 30% or

35% growth guidance is what I'm not very

sure that the company is given and

regarding the uh IPO I think we have uh

got the green signal from the uh from

the sa so we'll wait for a good

opportunity time probably the next one

year to go to the market for the IPO for

the

wstar all right uh Mr mut uh pleasure

speaking with you sir as always thank

you very much happy on him again and uh

you know we'll speak again postly

earnings uh which come out uh and

probably there'll be a revision there as

well we'll take