Gold stocks have been doing well today after the KUB Rao Committee said that there is no risk to the financial system because of gold loan NBFCs.
George Alexander Muthoot, MD, Muthoot Finance told CNBC-TV18 that the move by the committee is positive. "The committee report removes negative perception of the sector since KUB Rao is an RBI person and therefore people are likely to believe," adds Alexander.
Below is an edited transcript of George Alexander’s interview on CNBC-TV18
Q: What is your view with regards to the KUB Rao Committee recommendations?
A: KUB Rao has finally submitted his report and has come out in the public. As per the report, we are happy that there is no systemic risk to the financial system because of gold loan NBFCs. It is a very positive point for us. Also the report confirms that the gold loan is a socially useful function and it serves the public. This is exactly what we wanted the public to know, especially from an RBI designated or RBI nominated committee. KUB Rao is an RBI person. This will change the negative perceptions which were in the minds of many people.
Thirdly, we also had the Association of Gold Loan Companies (AGLOC) interacting with the committee and have acknowledged the good work we have done in giving them all the information which they wanted for their report. So finally the negative perceptions have been removed off this sector from the public.
Q:The report does give a clean cheat to gold loans, but there are some recommendations like raising of Non-Convertible Debentures (NCDs) to keep a watch. If your ability to raise these debentures is curbed like the bank finance for which the exposure of banks as a percentage of their capital funds to a single NBFC has been brought down from 10 percent to 7.5 percent, do you see that as a big roadblock in further expansions?
A: No, I do not think so. The funding for the NBFCs comes through various channels such as the bank funding. With respect to the bank funding there has never been any curbs, but a single bank should not have an exposure of more than 7.5 percent of its total assets to a single NBFC. We have relationship with more than 30 banks and no bank have ever crossed this limit and there are many more banks. This sector has been good and we are always trying to diversify our funding.
We have come out with four listed NCDs also. With four listed NCDs we have raised around Rs 2,000 crore. We are diversifying our funding portfolio. If the NCDs is not there we will go to banks, if the other is not there we will go to the listed NCDs. We can always tap various sources from the market and if the negative perceptions are changed, we can always do more funding from the mutual funds also. So we have many sources or avenues of funding. I do not think these things would matter much to us.
Q: You don’t see curbing becoming a constraint to growth if the rules tighten?
A: Not at all. Rules need to be tightened because there are so many Non-bank financial companies (NBFCs) coming and Rao Committee has to see not the big NBFCs, they should go to the whole spectrum of small NBFCs and see which practices are needed to be attempt.
Q: But specifically on the big NBFCs, NBFC one and two by which they mean you and Manappuram, they have indicated that branch expansions may require RBI approval. Expansion of the smaller guys who are less regulated should be controlled more than the big guys like you who are listed and therefore under the public glare. But if your branch expansion is curbed or requires RBI approval won't that hinder growth?
A: As far as Muthoot Finance is concerned we have our own 4000 branches as of date and are well present everywhere. It is not simply the branches which give the business.
Q: If the branch expansion is curbed will you have a problem?
A: No, we only need permission from the RBI. The existing NBFCs which are depositing NBFCs need permissions from the RBI. So according to the present regime, you apply to the bank, if in 30 days they do not object then automatically they have given us permission. But I am not sure what the committee thought when they said about branch expansion and whether they should put a cap on the number.
I am also seeing some logic in what you also said that it is not relating the new NBFCs and only for curbing the big NBFCs I do not see any logic there. But we will have to go through the recommendation in details to see what it is.
Q: They have not put any curbs, they are only suggesting whether curbs will be or prior RBI approval there should be expansions by companies which already have 1000 branches and more. Will that curb your growth?
A: I don’t think because all our branches take four-five years to mature and the branches which we have opened in the last two years will take another three-four years to mature and so the business can be garnered from all the branches much better.
Q: What would your current cost of funds be and would there be any significant alteration in terms of the cost of funds post these recommendations coming through?
A: If the recommendations come through and if the negative perceptions are removed, the bank rates to NBFCs can also come down by maybe 100 bps or so, because if the negative perceptions go away the banks will be more comfortable with regards to the funding to gold loan NBFCs.
Q: The report recommends that perhaps there could be a curb on interest rates charged ceiling. At the moment what is the highest that you charge? What are your margins and what can be the impact if that ceiling is put in by the RBI?
A: I don’t know what they have thought about the ceiling. Today the interest rate margin for us is about 9 percent. But the cost of operation is also high because these are all small ticket operations. Cost of operation is high because our average ticket size is only Rs 30,000 and that is why the net interest margins are higher. If our funding cost comes down we usually bring down our rates of interest too.
Q: Do you all have an unofficial 24 percent ceiling?
A: No, we have 24 percent ceiling that’s maximum and because we have different schemes, the average is only 21.8 percent today.