Muthoot's vehicle finance, personal loan entry plan is taking shape

George Alexander Muthoot, MD, Muthoot Finance, is setting the record straight. He tells ET Now that the loan loss of Rs 30 crore in the March quarter is because of frauds and burglaries and has nothing to do with NPAs.

Edited excerpts:

Despite single digit growth in the gold loan portfolio, your profit growth was a fabulous 40% in Q4. Was this entirely on the back of financial leverage or did some one-offs partially aided this performance?

There is no one-off. It is the combination of all the efforts or processes we have taken in the last four-five quarters. We have seen to it that interest is collected fully from all the gold loan customers. That has been one of the main reasons for the increase in the interest collected as well as the increase in profit. Of course, the lower cost of funds have also helped this full year. That is why we were able to see a 47% growth in the net profit after tax compared to last year.


What is the projection because the market does not seem to have taken a fancy to these numbers. The stock is 6.5% down. How do you see the road ahead when it comes to recoveries especially in the MSME space?

Our gold loans are fully collateralised. The average ticket is only 40,000. As far as we are concerned, there is no concern on the recoveries or whether we will be able to recover our money. All these are fully secured and we are in the money and today even on the NPA, we are definitely in the money. That means even if we auction the gold at this point, we are not going to lose any money. Muthoot gives more time to borrowers to release their gold rather than forcing them to auction the gold. That is why you see NPAs in Muthoot. We never had any loan losses due to NPA in all our history. The loan loss which we have about 30 crore is mainly because of frauds or burglaries etc. nothing related to NPA. NPA never results in a loan loss for Muthoot.

Analysts are also saying that low single digit growth in gold loan can be pencilled in. Tell us what are the projections that you are working with? Your portfolio GNPA for the quarter gone by has increased from 5.6 to 8% in March. This is largely because of migration to 90-DPD and borrower wise classification and does not signify stress in the portfolio. How do you foresee your GNPAs and net NPAs by FY19 end?

Our GNPA was around 6% last quarter. Primary NPAs have come down to 4%. The secondary NPAs because of borrower-based classification is about 2%-2.8%. Going forward, we feel this will come down only. The NPAs which we saw last quarter, has been fully collected. The NPAs which you see in this quarter or the end of this quarter, is the new NPAs which have come up. As I said, we give more time to the customers to repay and take back their gold. We do not lose any money.

As regards the projections for growth next year, we would plan for a gold loan growth of 15% in the book but the subsidiaries are doing extremely well. Their base is very low and so they have grown 50-60% last year. Next year, also they will grow in excess of 60%. Our total AUM today is 90% gold loan and 10% other loans. End of this year, it should be 85% to 15% and end of 2020 March, we expect it to be 80% of gold loan and 20% of other financial products.

How are you going to look at your return ratios being sustained at these levels? Your return on assets, your return on equity which drives high cash generation that is being deployed in the housing finance in profitable microfinance subsidiaries. How can you sustain these return ratios?

Yes, the return on equity is not high because we are a little over capitalised. As we go forward and grow our subsidiaries, the equity will definitely be used much better and return on equity should go up in the coming quarters.

As far as return on assets is concerned, we would be happy with anything in the range of 4% to 5%. This quarter, it is about 6% but we should be happy if we get between 4% and 5% return on assets.

Your overall LTD of the current portfolio stands at 86%. How low is the probability of credit losses given gold prices being range-bound?

All the credit losses are because of frauds or spurious code coming in or may be burglaries which happened last year. There is absolutely zero credit loss because of NPA. There was a burglary last year and that has been one of the reasons for the credit loss. Probably we will get payment from the insurance companies later but till date, we have given back the money to compensate the customers and that is why the credit losses show.

There has been strong traction across home finance, micro finance, insurance broking and they account for 10% of your overall AUM and about 5% of your total profits. Based on your scale-up plan, what contribution to your revenue and profitability do you see from each of these verticals in the next two to three years?

Our subsidiaries contribute a little more than 10% of our AUM. Next year, we expect them to contribute little more than 15% and year after that 20% of AUM should be contributed by these companies. I am sure going forward their profitability also will be not as high as the gold loan sector but definitely it will get better and better in the days to come.

The housing finance is also doing well, they have projected a growth or an AUM of Rs 2500 crore next year. It is the same with the microfinance. From around Rs 1200 crore, they are expected to reach Rs 2000 crore by the end of next year. Having said that, we are also planning to enter the vehicle finance sector and personal loan sector in a very phased manner.