Swings in gold prices and fall in lending rates pose a major risk to gold loan companies. Speaking to Bloomberg TV India, Muthoot Finance MD George Alexander Muthoot explained how the company is cutting costs and persuading customers to pay interest periodically, to grow profits 21 per cent and maintain net interest margin at 9 per cent.
What has led to better margins in Q3?
The margin has been better mainly due to the better collection of interest and also reduction in the operating cost — it has come down about ₹10 crore. That is one of the reasons why we saw better profit growth of 21 per cent this quarter.
People have to understand that the average tenure of gold loan is five months. So, in four-five months the whole portfolio gets churned and we need to attract newer assets.
It is not that easy, but with 4,400 branches, we were able to do that. The change in strategy may be in asking or persuading customers to pay the interest periodically.
Instead of a bullet loan, we are encouraging the customers to pay the interest periodically and service the interest to ensure that our realisation and asset quality improves.
Will you cut rates further even though cost of the capital in the market has started rising since October?
No. For us, cost of capital has always been coming down. If you compare with last year, it has come down from 9.6 per cent to 9.01 per cent. We have been actually passing on this benefit to the borrowers.
A year back, our interest rates were 19 per cent while it is 18 per cent now. So, whatever benefits we are getting because of savings from operational expenses as well as interest costs, we are passing them to the customer and we are still maintaining our NIM (net interest margin) at 9 per cent over the last three years.
The drop in the currency as well a safe haven buying globally has increased gold prices quite sharply. What does this really mean for the business?
I think gold prices are almost steady but we only see weekly or occasional aberrations in the prices. Since we lend at the current rates only and that too maximum 75 per cent of the value, it actually does not affect us.