Muthoot Finance is eyeing a co-lending arrangement with other non-banking finance companies (NBFCs) in the wake of stiff competition from banks in the gold loan space.

If the plan fructifies, the Ernakulam (Kerala)-headquartered gold loan company will be the dominant partner in co-lending due to its robust capital position. It had a capital adequacy ratio of 33.29 per cent as of December-end 2022.

We will co-lend with smaller NBFCs. This is an opportunity,” said George Alexander Muthoot, Managing Director.

As per RBI’s November 2020 notification, banks are permitted to co-lend with all registered NBFCs (including housing finance companies) to the priority sector. The co-lending banks will take their share of the individual loans on a back-to-back basis in their books.

However, NBFCs are required to retain a minimum of 20 per cent share of the individual loans on their books.

“Currently, the notification does not apply to co-lending by two NBFCs, and only governs co-lending arrangements between banks and NBFCs…

“In the past year especially, we have witnessed NBFCs, influenced by commercial requirements, entering into co-lending arrangements not only with banks but also with other NBFCs, enabling wider access to the credit market,” said Hufriz Wadia, Partner, AZB & Partners, in an article on the law firm’s website.

Gold loan AUM

Muthoot Finance’s growth in gold loan assets under management (AUM) has slowed from about 32 per cent year-on-year (yoy) as at December-end 2020 to about 9 per cent as at December-end 2021 and to about 5 per cent as at December-end 2022.

The slowdown in gold loan AUM growth has come in the background of the Reserve Bank of India allowing banks to lend more against the pledge of gold ornaments and jewelery during the August 6, 2020 to March 31, 2021 period to mitigate the economic impact of the Covid -19 pandemic on households, entrepreneurs and small businesses.

The RBI then increased the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewelery for non-agricultural purposes from 75 per cent to 90 per cent. This coupled with competitive lending rates has helped banks attract many NBFC customers.

“Competition is there. Banks are looking to expand their gold loan portfolio. There are also new NBFCs which are coming into this space,” Muthoot said.

He emphasized that the trend of others (banks and NBFCs) coming in and trying to take away business will be short-lived.

Challenging biz

“This is an operationally intensive business–collecting gold, storing it, insurance, customer fraud, staff fraud, etc…It is challenging.

“We do our business with our own staff. Banks and others rely on outsourcing. The collateral (gold) is valuable. They are using third parties to collect gold from customer’s house. But our own staff go to the customer’s place,” Muthoot said.

As of December-end 2022, out of Muthoot Finance’s consolidated loan AUM of ₹65,085 crore, 89 per cent comprises gold loans. The balance 11 per cent comprises a non-gold loan portfolio such as home loans, vehicle loans, personal loans and MSME loans.

Muthoot expects non-gold loan business to go up to 15 per cent in the consolidated loan AUM in a year’s time and to 20-25 per cent in three-five years.

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