Have not seen much increase in loan loss: Muthoot Finance

Following the sharp correction in gold prices, Muthoot Finance, the gold financer is seeing more borrowers abandoning gold jewelleries; however this has not caused much increase in loan loss, Managing Director George Alexander Muthoot told CNBC-TV18 today.

"For us NPA (non performing assets) are loans which technically have become NPAs because of elapse of time, these are not loans where somebody has not paid 13-14 installments. So for us loan losses are important and not the NPA. Loan losses which we write off in the book have not increased and I think it must be 0.1% of total advances," Muthoot said. Also read: 15-20% price change unlikely to hurt biz: Gold Loan body
He further stressed that although instances of borrowers abandoning gold has increased, its not very significant. It may go up to 2 percent from earlier 1 percent of total outstanding loans in current quarter. The NBFC also has an option of auctioning the abandoned gold, however certainly auction value has reduced after fall in yellow metal prices. Muthoot Finance is seeing more demand for gold loans as not only individuals but even banks holding huge quantities are looking to encash their investments. Gold prices had corrected nearly 8-10 percent in April. Below is the edited transcript of Muthoot's interview to CNBC-TV18. Q: Do you give a lot of loan against gold coins at all? Will this 50 gram limit kind of come in the way of the volume of gold loans that you give?
A: Muthoot Finance or all other non-banking financial institutions (NBFC) do not give gold loans against gold coins. We do not give loan against gold coins or bullions at all. Q: Consumer keeps buying gold coins from all the banks. They are usually 5-10 gram kind of things. What is wrong with those coins? Why is there a policy of not giving loans against those coins?
A: It has been a policy. It is not only gold coins, even gold bullions. Q: I can understand bullion. That would be higher level of buying. But coins have become so much so fashionable, so common purchase items but you don’t give any loans at all.
A: We don’t give loans against gold coins. Q: Gold prices have kind of stabilised but are still off their highs. Will fourth quarter also be a quarter when you will see interest right back because people have defaulted?
A: The number of people defaulting would be certainly higher but it will definitely be a manageable amount. The number of people who may think of abandoning gold, only if they abandon gold, will we come into the problem. Muthoot and many other companies, who were there in the NBFCs earlier have had the system of regular collection of interest and servicing of loan. It is not like somebody takes a loan and we contact him only after six months and one year. We contact them regularly. They are local people. Since they keep servicing these loans, people don’t abandon just because the price has come down.
_PAGEBREAK_ Q: On a quarter-on-quarter basis or you can compare before when the gold prices were at USD 1,900 per ounce and now where they stand at USD 1,400-1,500 per ounce, what is the percentage increase in perhaps default or abandoning or trouble in even receiving the mid interval interest cost.
A: The interest cost wouldn’t have changed but definitely the number of people who may think about abandoning gold maybe higher. Earlier, it was only about less than 1-1.5 percent of the outstanding. It may go up to 2-2.5 percent. But if all that gold got abandoned, we can always have the option of auctioning it off. Q: But your auction value will also reduce because of the decline in gold prices.
A: The auction value will certainly reduce, but we can collect only which is due to us. Q: When did you do your last auction?
A: It is a regular feature. It happens every week, every month. Q: Have you noticed any change in the volume of gold loans because of this tendency of gold prices falling. Are there more people coming in and asking for gold loans?
A: Because of the gold prices coming down, many other players, maybe some of the banks and some small fringe players of NBFC gold loans are not very keen on doing this business now. The focused old players are getting the business. Certainly the value which we can give to a person has come down. Earlier, if a person was getting Rs 50,000, today he maybe eligible only for Rs 40,000. Q: Have you increased the loan-to-value (LTV)?
A: We don’t increase the LTV. LTV is fixed on the daily moving price of gold. Q: Initially, for a gold value of Rs 100 if you were giving Rs 70, now just because you want to be cautious have you reduced it to maybe Rs 50?
A: We haven’t reduced. The percentage is the same, but we give it only on today’s price. Q: Your gross non performing assets (NPA) have been around one percent mark for the last few quarters, just looking at your P&L. Is it going to stay at this one percent mark or do you see it moving up to 1.5-2 percent?
A: For us, the NPA is just a loan which has technically become NPA because of lapse of time. These are not loans where somebody has not paid 13 or 14 instalments. In such cases, a person who has not paid 14 instalments is not going to pay. But this is not like that. This is just a flux of time. For us what is to be seen is what are the loaned losses and not the NPA. Q: Could you tell us about loan loss then?
A: Loan losses are which we write off in the books. That is not increased. Q: What is that as a percentage of your total advances?
A: It must be about 0.01 percent.