The borrowing costs of Muthoot Finance are expected to go up by 50 to 150 basis points due to the banking regulator's recent notification. In February, the Reserve Bank of India had told banks that buying loans against gold jewellery from non-banking finance companies could no longer form part of (the mandatory) ‘priority sector lending'.
On the sidelines of the meeting to announce Muthoot's IPO issue, Mr Oommem K Mammen, Chief Financial Officer, told Business Line the company's cost of borrowing would go up and this will be passed on to its customers. Currently, the NBFC's borrowings are at 10.5-11.5 per cent.
Muthoot Finance had sold gold loan portfolio to banks worth Rs 3,246 crore till November 2010, which represented a four-fold growth in two years. The portfolio reported a 147 per cent jump to Rs 2,008 crore in 2009-10. It sold loans worth Rs 813 crore in 2008-09, which was almost double that of the previous year.
This shows that private banks which do not meet the 40 per cent priority sector lending target find it easier to buy these loans from NBFCs to ramp their book.
Muthoot's IPO opened on April 18 and closes on April 21. The company expects to issue 4.3 crore equity shares of face value Rs 10 at a price band of Rs 160-175.
Stolen gold
Asked about how the company ensures that the gold jewellery pledged is not stolen, Mr George Jacob Muthoot, Joint Managing Director, said customers are asked to comply with ‘know your customer' norms.
The number of stolen jewellery cases increased to 69 for the eight months ending November 30, 2010, from 48 cases in 2008-09. The increase in cases may be due to more number of branches being opened, he said. “Insurance covers this risk,” said Mr Muthoot.
The company has undertaken insurance coverage of Rs 22,700 crore as on February 28, 2011, for various risks. The offer document states that the amount of insurance coverage may be less than the replacement cost of all covered property and may not be sufficient to cover all financial losses that the company may suffer should a risk materialise.