Eyeing 9000 White Label ATMs in 3 years: Muthoot Finance

Muthoot Finance has been very positive on getting a banking license from the Reserve Bank of India. George Alexander; its managing director said that they had not applied for the banking license yet. The deadline for submitting the applications to the RBI is on July 1.

The company also had received sanctions from the central bank to install White Label ATMs. He told CNBC-TV18 that 9,000 ATMs would be installed over the next three years. He expected the non-performing loans (NPLs) to be similar or lesser than the two percent reported in the last quarter. On the company's business model, he said that the company's average loan size was Rs 40, 000 which was lent with collateral and only to individuals. Also read: Magma Fincorp to apply for a banking licence Below is the edited transcript of his interview to CNBC-TV18. Q: Your gross non-performing loans (NPL) have been on the rise. In the last quarter they rose to about 2 percent or so. Due to the gold prices falling off, what kind of pressure is expected on the asset quality? Where do you see your gross NPLs heading from here? A: At this stage, we should talk about the industry dynamics and our business model. We are not doing a commodity financing. We are only giving loans to consumers for their productive and their consumer needs. This is given only to individuals against collateral of personal household jewellery. We never give finance on a gold coin; we do not finance bullion or gold bars. There are people who take personal loans without any collateral. In our case, we are giving a loan with a collateral. The average loan size is only Rs 40,000. There is always a fall in price of any commodity. Price of a car or land can come down and out of collaterals it is not fungible like a commodity. So all these are working in our favour. We had a very robust risk management system. Whenever we give a loan we keep sufficient margin. The NPL level was little less than 2 percent. In the next quarters, it should come down only or we should be able to maintain that. It will never go back. However, because the gold price is falling people think that every customer will default. We will have to auction all this gold. Whether at the time of auctioning we will have a loss? No, such things do not happen. But definitely the charm for the industry has dwindled. One fallout which we have seen on all this is that the competition is now much lesser. Few non-banking financial companies (NBFC) who wanted to jump into this are not coming. Even the banks have become overcautious. But we have been in this business for the last 70 years with 4,300 branches all over the country. 60 percent of our branches are in the rural area, tier-2, and tier-3 cities. Q: You are going to set up 9,000 white label Automated Teller Machines (ATM). When do they come up? What should we expect in the current financial year and typically what are the margins in this? You will be charging banks for the usage of the ATM. How much will you make? A: There are three types of ATMs. We have applied for Type A. It means that the first year we have to do 1,000 ATMs, second year we have to do 2,000 ATMs, third year we have to do 6,000 ATMs. So, overall 9,000 ATMs have to be installed. This fits well with our financial inclusion strategy. There is a charge which Reserve Bank of India (RBI) has recommended i.e. not more than Rs 16 or something from each transaction. That is for us and the bank to negotiate. Q: It will start making money for you only next year. When will you recover the capital cost? A: In the capital cost also lot of dynamics have changed in the ATM business. An ATM setting up with Rs 25-30 lakh earlier has now come down to single digit. So ATMs have become better, the costs have come down. It fits well and we have our branches also. Q: Will you recover in 1-2 years? A: Certainly, in two years. It should break-even. After that, it should give us business. Secondly, through wide publicity Muthoot brand will be known. Q: You have two days. Have you applied for the banking license? A: If we do not apply, people will fault us. Q: So you are. When is it coming in? Has it already gone in the application? A: No, we have not given any application as yet. Q: You have tomorrow and Monday to apply. Will it be in the name of Muthoot Finance? The listed company will be the applicant, right? A: Yeah, sure. Q: We did see your net interest margins (NIM) moderate in the quarter gone by. With yields under pressure, with gold prices falling etc. will you be able to hold your NIMs at that 10 percent level or do you see it dip in the quarters to come? A: Presently, a lot of things are experienced in economic scenario all over the world and things are changing too fast now. In spite of that, we have been able to maintain the NIM. The 10 percent NIM may come down by a percentage or so. That is what we also expect. Maybe it should be in the region of about 8-9 percent in the coming year, because the business model is still robust. Q: Has there been any increase in the number of people who have walked away from their loans? What they have to payback will be very close to the cost of the jewellery. Is that somewhat more than what it was the year before? A: Definitely it is. If it was about one percent people walking away, now it maybe 1.5 or two percent now. If they walk away, there is nothing much for us other than losing a part of the interest. We may not get the full interest, but we can always recover our principal and a good part of our interest. Q: Will you have to make higher provisions as well in the next quarter? Last quarter we saw your provisioning go up quite a bit? Can you give us a run rate of the provisions that you will have to make? A: Provisioning went up, because we did an additional extra provisioning. We have to do a provisioning for standard assets. We have gone beyond the mandatory. It is good risk management measure, we did that. This quarter I do not think the provisioning should go up. It should only come down.