Muthoot Finance was established in 1887 and entered the gold loan business in 1939. According to the management, the main goal was to address the credit needs of the underserved segments of the country. Over the years, Muthoot Finance has emerged as India’s largest gold loan NBFC. The company provides access to credit for individuals who possess gold jewellery but may not have access to formal credit channels or face delays in obtaining it. Core offering of Muthoot Finance is gold loans. In addition to gold loans, the NBFC also offers various financial products and services, including multiple types of loans, insurance offerings, money transfer services, and the sale of gold coins through its various subsidiaries.
Gold Loans are bullet repayment loans, rural India has 65% of India’s gold stock
Rural India is a major opportunity space for gold loan companies like Muthoot Finance. Rural India holds an impressive 65% share of the entire gold stock in the country. This highlights the significant role of gold as a valuable asset and investment choice in rural India. A large section of the rural population faces limited access to credit facilities, posing challenges to their financial growth and development. With lack of credit facilities, rural India is unable to invest in their businesses, education, or healthcare. Gold loans are bullet repayment loans. Speaking on customer repayment behaviour, George A. Muthoot, Managing Director at Muthoot Finance said, “People take a loan thinking that they can get money in 1 month, 2 or 3 months. 95% or 96% of the customers take back their gold before 12 months. Only 2% to 3% of them go beyond 1 year.”
South India accounts for 47% of Muthoot Finance gold portfolio followed by North India at 24%. Western and Eastern India account for about 19% and 10% of the company’s gold portfolio respectively. Gold loan assets under management (AUM) stands at Rs 6,75,171 crore as on September 30, 2023. Tne management has given guidance of 15-20% for AUM growth in FY24. The company reported revenues of Rs 3,606 crore up 28% YoY in Q2FY24. Net profit came in at Rs 1,060 crore in September Quarter 2023, a rise of 19% YoY.
Higher gold prices good for Muthoot Finance
Muthoot Finance stock is near its 52-week high. The stock price has gained nearly 60% since mid-March 2023. From Rs 58,000 per 10 grams, gold price rallied to Rs 66,000 by the end of 2023. Rising gold prices are beneficial for gold loan NBFCs. As gold prices rise, customers realize that gold’s value has increased and are ready to pledge more with gold financers. In other words, customers get higher value for their gold. The ticket size of gold loans also increases which is beneficial for gold loan companies. Thus, higher gold prices lead to high loan growth for gold loan companies and also strong growth in the balance sheet. Profitability also increases as gold loans charge high interest compared to other loan categories. Thus, with rising gold prices, stock prices of gold loan companies zoom. Since March 2020, the stock price of Muthoot Finance has increased by 145%, as gold prices strengthened post Covid. As the Middle East crisis continues, gold prices are expected to remain elevated.
