As the Reserve Bank of India (RBI) hits the pause button on its policy rates, the markets have taken it as signal that interest rates may have peaked or are very close to their highs.

Meanwhile, gold prices have been touching fresh highs in recent weeks as equity markets have turned volatile.

While interest rates and coupons offered on deposits and bonds have turned attractive, prospects for gold finance companies have become brighter on the back of the rally in the prices of yellow metal.

Against this backdrop, Kosamattam Finance, a regional gold loan NBFC (non-banking finance company) has come out with non-convertible debentures (NCDs) of various tenors (15-88 months) and coupon rates (up to 9.5 per cent).

These NCDs are secured against assets of the company. As the coupon rates seem attractive, should you lock into these rates now?

Before taking the final call, read on to find out more about Kosamattam Finance’s gold loan business and the present NCD.

Healthy rates on offer

The issue is rated Ind A-/Stable by India Ratings, indicating an adequate level of safety in servicing interest and principal payments, and low credit risk.

Kosamattam Finance’s NCDs come in 14, 24, 30, 36, 39, 48, 54 and 88-month tenors. One can opt for monthly interest payout or cumulative payout option. Coupons for the monthly interest payout tenors – 24, 36 and 48 months – range from 8.75 per cent to 9.5 per cent.  The effective yields are in the range of 9.1 per cent to 9.9 per cent.

For the cumulative payment option, tenors have effective yields between 8.5 per cent and 9.9 per cent.

Compared to fixed deposits with banks and NBFCs, which offer 8-8.5 per cent, these coupons are attractive.

These NCDs are secured against the assets of the company.

Investors can consider parking small sums of their debt portfolio in Kosamattam Finance’s NCDs.

To have a regular interest flow, one can opt for the monthly payout option. In particular, the 24-month and 36-month tenors appear more attractive.

The longer tenors and the cumulative option can be avoided, as regular interest payouts add to the safety aspect.

Investors should note that the Finance Bill has made TDS (tax deduction at source) on interest payouts mandatory in the case of NCDs from April 1, which wasn’t the case earlier.

Data from Kotak Mutual Fund on corporate bond yields indicate that securities rated A- trade at yields of well over 10 per cent. Against this backdrop, Kosamattam Finance’s effective yields do not seem the highest in the market, but buying high-yield bonds in the secondary market is not easy for most of the investors.

Investors can consider parking small sums in the NCD and are advised to not to go overboard.

Steady business

Kosamattam Finance has been in the gold loan business for over 30 years. Its top market is Tamil Nadu, which accounts for over 55 per cent of its customers. Kerala, Karnataka and Andhra Pradesh are other key geographies for the company. Though not in the league of a Muthoot Finance or a Manappuram Finance, the company has managed to carve a moderate space for itself.

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In general, goal loans are relatively less risky compared to other types of loans. The loan-to-value (LTV) is restricted to 75 per cent, giving considerable margin of safety. In case of default, the pledged gold can be easily auctioned for recoveries. The company is focusing on increasing branch productivity rather than opening new offices.

The company’s performance in key metrics lends comfort.

  • From FY18 to the first nine months of FY23, Kosamattam Finance’s assets under management increased at a compounded annual growth rate of 16 per cent to ₹4,440 crore.
  • Tier-1 capital adequacy ratio in 9M FY23 remains healthy and stable compared to FY22 at 14.5 per cent
  • Return on assets improved to 1.96 per cent in 9M F23, an increase over 1.86 per cent in FY22
  • Net interest margin in 9M FY23 was robust at 7.5 per cent against 6.7 per cent in FY22. Cost of funds has remained stable at around 10-odd per cent
  • Cost-to-income ratio has reduced from 55.8 per cent as of FY22 to 52.1 per cent as of 9M FY23
  • The gross non-performing assets (GNPAs) remained low at 0.62 per cent as of 9M FY23, as against 0.66 per cent in FY22. For perspective, a CRISIL study pegs the GNPAs for gold loan NBFCs to be about 1.5-1.7 per cent in FY23.
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