Gold deposits not viable option, says Muthoot Finance

Mumbai: Muthoot Finance, which holds 132 tonnes of pledged gold, has said that mobilizing the yellow metal for on-lending is not a viable business proposition.

The gold deposit scheme has been proposed by economists and government officials to curb imports. However , given that the holder of the world’s largest gold loan portfolio is skeptical, there are questions over the success of such a scheme.

“The common man who purchases gold, purchases it in the form of jewellery. If he has to deposit it, he will need to melt it and convert it into 24K gold. It is this gold that will be returned. But the holder instantly loses 20% of the value of the jewellery by converting it into bullion. If on maturity of the deposit, he wants to convert it into jewelry again he will lose another 20% value of the investment,” George Alexander Muthoot, MD, Muthoot Finance , told TOI. Pointing out that gold deposit was never a big hit, he said that the scheme might have worked for temples which do not need gold in jewellery form. But even here the sentiment was against melting and placing them in deposits.

In the light private gold holdings of almost 18,000 tonnes and continuing demand for gold, economists and policymakers have spoken about unlocking value by coming out with gold deposits . In the past, industry body Assocham had recommended the creation of gold banks. Earlier this year, RBI relaxed some of the gold deposit norms to encourage individuals to hold gold in demat form. However, banks like SBI have said that there is not much demand for the little gold that they have mobilized in the form of deposits.

According to Muthoot, lending against gold is the more efficient way of putting to use an idle asset. "In the last eight months, gold has been painted as a villain because of the high current account deficit. There is a wrong notion that gold loans are driving imports. This is not correct because of the 18,000 tonnes of gold in the form of jewellery, only 1,000 tonnes is mortgaged with lenders," said Muthoot. He said of the gold loans disbursed by Muthoot, 20% were used in agriculture, 30% for self-employment , 30% by promoters of small and medium enterprises and 20% for other purposes.

Muthoot Finance is one of the applicants for a banking licence . According to Muthoot, the company is best placed to achieve the goal of financial inclusion set out for banks. The company already has close to 2,700 former bankers on its rolls. It has in place a core banking solution and as a provider of white-label ATMs, plans to set up 9,000 machines in three years. The company, which has to increase public shareholding to 25% from 20% by June 2014, is likely to come out with a QIP in eight months.