MC Exclusive | Merger an option for smaller NBFCs, says Muthoottu Mini MD

Muthoottu Mini MD Mathew Muthoottu

Muthoottu Mini Financiers, which announced a public issue of non-convertible debentures of as much as Rs 250 crore, wants to bet big on gold loans. The lender, a well-known name in the gold loan segment in south India, said funds from the issues, scheduled to close on May 17, will be used to expand its presence and enhance gold loan growth.

In an interview with Moneycontrol on April 21, managing director Mathew Muthoottu spoke about the Kochi-based company’s growth plans, challenges in the sector, and the Reserve Bank of India’s recent regulations for NBFCs. Edited excerpts:

We have had a very good response from the market so far. The issue size is around Rs 250 crore and till date the bid is about Rs 79 crore, which is around one-third of the issue size. We are expecting an early closure of the issue.

We plan to use the funds for expansion and for enhancing gold loan growth. The company has plans to expand branches. Today, we have about 814 branches and we plan to add 100 more in due course. Along with that, we also have plans to grow our gold loan book. We have an additional loan book target of about Rs 1,000 crore for this financial year. The funds collected through the debt market will be basically used for branch and loan book expansion.

The company has been tapping the debt market since 2014. During this financial year, we have plans for two to three debt issues, but that will depend on whether we are able to make inroads into new banks as well. Over the last one year, we have improved in terms of our relationships with banks. As of March 2021, we had 10 banks associated with Muthoottu Mini, which has increased to 16 banks as of date. We are looking at a (fundraising) target of around Rs 750 crore for this financial year.

Muthoottu Mini has a good customer base who rely on the legacy and goodwill of the company, so accessing funds from the debt market has not been so much of an issue. However, smaller NBFCs do find it difficult to tap the market and the cost of borrowing will be higher for them. Larger NBFCs may not face this problem. I think that only after a company attains a certain size it should tap the debt market.

At this point, the market is balanced and there is no difficulty as such approaching the market. The only thing is that you have the right issue size and a proper risk perspective before approaching the debt market.

As per the RBI regulations, Muthoottu Mini already falls under the ‘systemically important’ category. When we move to a scale-based approach, we will fall under the mid-scale category. This is not a hurdle for us since most of these regulations are already in place.

For the sector, it is a welcome change because we have had a lot of entrants in the NBFC space. So, moving to a layer-based approach is offering a fresh perspective in terms of regulations. Given the number of players, this is a risky market and it has to be tightly regulated. A layer-based approach will definitely help here.

The effectiveness of this regime will only be known only when it is implemented from October 2022. We are awaiting further regulatory instructions from the RBI, but from our perspective, moving on this layer-based approach will be a smooth transition.

The challenges will be for the lower-layer NBFCs. Lower-layer NBFCs, once they move into the upper layer, may face some difficulties wherein they will have to adjust to a tighter regulatory regime and it will have its own teething problems. Smaller NBFCs may also find it difficult to meet the capital requirement norms. But this is important, especially from a risk perspective and this measure could be a good way to shield NBFCs from collapsing.

Once the RBI issues the necessary directives and clarifications, the teething problems will be surpassed.

The gold loan sector has been faring quite well over the last few years and the market is expanding. If you look at banks, they are also looking to expand their gold loan book. For this sector, we are not seeing any challenges at this point.

However, other NBFCs, especially in the housing and two-wheeler space, are still struggling from the ups and downs that have emanated because of the Covid-19 pandemic. These NBFCs are finding it tough to sustain in a highly competitive environment and simultaneously protect their balance sheets. The next one to two quarters are going to be tough for these NBFCs.

For smaller NBFCs, this could be an option. However, the same may not be the case for NBFCs that are in the niche segment, for example, gold loan NBFCs like us. Specifically, in the gold loan segment, banks have started to expand their portfolio, but that has not affected gold loan NBFCs at all. In fact, we have found that there are more ways to expand our boundaries when it comes to targeting the untapped market. There is tremendous potential in the gold loan sector and that is where innovation comes in. Since this market is continuously expanding, we do not think consolidation may not be the way forward.