Kochi-headquartered Muthoot Finance is expecting its consolidated bottom line to improve from Rs 825 crore during Q1FY23 on account of higher yields, post the closure of the teaser loans offered during Q4FY22, Managing Director (MD) George Alexander Muthoot told Moneycontrol in an interaction on August 24.
“We discontinued the teaser rates in March 2022 and that was one of the reasons the yield has come down in Q1 of FY23. We have come down from a profit of Rs 978 crore (in Q1FY22) to Rs 825 crore (in Q1FY23)…because of yield depression,” the MD said.
Teaser loans are products that offer a lower rate of interest on loans for a fixed period of time, after which the rate of interest adjusts to the market levels.
As Moneycontrol had reported earlier, the Reserve Bank of India (RBI) had raised the loan-to-value (LTV) ratio in gold loans to 90 percent in August 2020 from 75 percent, an allowance that was to hold till March 31, 2021.
LTV compares the size of your loan to the value of the asset. For example, if your gold is worth Rs 200,000, and you have a loan of Rs 1,80,000, your LTV ratio is 90 percent.
This move by the RBI led to a pricing war between banks and NBFCs, and large gold loan non-banking finance companies (NBFCs), including Muthoot Finance and Manappuram Finance, launched teaser loans with interest rates as low as 0.57 percent per month.
“Now that 85 percent of the customers have migrated to the new scheme, we see yields going up in this quarter (Q2) and finally stabilising by Q3 and Q4, so profits should start improving next quarter onwards,” Muthoot said.
Gross loans under management
Muthoot Finance’s gross loans under management, as on June end, stood at Rs 56,689.2 crore, up 8 percent on a year-on-year (YoY) basis and down 2 percent, sequentially. Gold loans account for 99.1 percent of Muthoot Finance’s overall AUM.
The MD said the sequential fall was mainly on account of higher gold loan auctions during Q4FY22 and Q1FY23.
“We had started teaser rate loans in Q4. Because of that, there was a growth which compensated for the auctions. In Q1 of this fiscal, there were again auctions of Rs 1,500 crore. That time, the teaser was not there but we were still able to hold on to just 2 percent de-growth,” Muthoot said.
“In Q2 (July-September) of this fiscal, we should see it stabilising, and in Q3 and Q4, we should see the gold loan AUM going up… We should expect about 10 percent growth in AUM by the end of the year. If things are very good, it can be better also,” he added.
While lumpy gold auctions are unlikely to occur, the NBFC will complete 150 new branches across India by October, after having received approval from the RBI in July. Muthoot Finance has already opened 5-10 new branches, the MD said.
Competition with banks
When asked about rising competition from banks for gold loan customers, he said banks are actively engaging customers to increase their gold loan business “probably” because of lower bad loans.
However, even if banks pass small-ticket loans from their combined network of over 60,000 branches, the overall outstanding loan amount will itself be a “good amount,” Muthoot said. This does not mean that the gold loan business is being taken away from NBFCs by banks, he said
“New business is happening. I feel, overall, for the gold loan business, as such, the overall cake is increasing,” he said.
Borrowing costs
The RBI in a recent article, in its monthly bulletin, said that, going forward, as the economy recovers, NBFCs need to be wary of rising borrowing costs on account of normalisation of monetary policy.
Since May, the RBI has raised the policy repo rate by 140 basis points to 5.40 percent and banks have, in turn, raised their lending rates. While NBFCs borrow funds from a diversified list of sources, they are majorly dependent on banks for the same.
For Muthoot Finance, the borrowing cost can gradually increase by 50 bps to 100 bps, going ahead, he said.
As on June-end, the total borrowing of Muthoot Finance stood at Rs 45,426.7 crore. Of these, borrowings from banks stood at 55 percent, secured and listed non-convertible debentures (NCDs) accounted for 27 percent share and external commercial borrowings (ECBs) formed 17 percent of the total borrowings.
“Some of the earlier contracted legacy NCDs have higher rates. ECBs, especially, have very high landed cost. For that also, we are repaying 50 percent in October. So that should also help us. Overall, there can be a 50 bps increase in cost, but we can easily adjust yields (on advances),” Muthoot said.
“Every quarter, we will be doing at least about Rs 400 crore-Rs 500 crore of retail NCDs also. Retail NCDs also mature every quarter. There are a lot of NCD customers loyal to us for decades. The rate of our gold bonds should be 100 bps higher than the bank FD rates,” he added.
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