Becnhmarking of gold loan providers in india by Sutherland Global Services

Benchmarking of Gold Loan Providers in India January 10, 2011

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Gold loan is a huge untapped market opportunity with a growth potential of 35-40% annually Gold Loan • Gold loan is a loan against gold, now even against gold ETFs • Average gold loan term is of nine months, and almost all gold loans are below one-year tenure • Typical customers of gold loan are lower and lower-middle income individuals • The principal loan amount generally ranges from INR 2,000 to INR 1 lakh – The average ticket size of gold loan is INR 20,000 • Interest rates on gold loans range from 12% to 30% per year • Lenders usually finance up to 80-90% of the value of gold, depending upon the quality of gold

Size of Gold Market in India (Rs Bn) 375

400 350 300

250

250 200 150

120

100 50

0 FY 02

Gold Loan Market Potential • India has an estimated 18,000 tonnes of gold, amounting to about 10 % of the world stock worth over USD 800 Bn – The market potential for gold loans in India is vast as less than 10% of private gold has been monetized • Traditionally, gold owners in southern India are more open to gold-based financial products • The organized gold loan market was estimated between INR 350 Bn and INR 400 Bn in 2010 • The gold loan market accounted for only 1.2% of the total gold stock • The gold loan market is significantly under-penetrated and expected to grow at 35-40% per year in the future

FY 07

FY 09

FY 10

Value of Gold Stock in India (Rs Bn)

35000 30000 25000 20000 15000 10000 5000 0

32000 25000 11669 6462

FY 02 0.38

FY 07

FY 09

FY 10

1.03 0.97 % of gold loan stock

1.2

Source: Muthoot Finance, August 2011

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Muthoot Finance is the largest and oldest gold financing company in India • • •

Business Description

•

Muthoot Finance is the flagship company of the Muthoot Group The company was incorporated as a gold loan company in 1997, and in 2001 was accorded the status of “Systematically Important Non Banking Financial Company (NBFCs)” under RBI guidelines Muthoot is backed by the world’s largest sovereign fund Abu Dhabi Investment Authority, besides private equity firms like Matrix Partners, Kotak Private Equity and Baring India In addition to the gold loans, Muthoot also offers money transfer services, travel-related services (e.g., travel insurance) and foreign exchange facilities – It also sells gold and silver coins – It has recently started collection agency services – The company operates three wind mills in Tamil Nadu

•

It has identified two business segments: Financing and Power Generation – Till FY2010, it also had FM Radio as a separate segment

Gross Retail Loan Assets under Management

•

INR 209.4 Bn (Sept 2011)

Revenue

• INR 23.16 Bn (March 2011)

Gold Loan Accounts

• 5.5 Mn (Sept 2011)

Employee Base

• 21,543 (Sept 2011)

Branch Network

• 3,274 branches across 20 states, Delhi NCR, and 4 union territories in India (Sept 2011)

Head Quarter

• Kerala, India

Geographic Coverage

• India

Founded in

• 1939

Stock Market Listing

• Listed on the NSE and BSE in May 2011

Segments

Source: Annual Report 2011, Company Website

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NBFCs, being product-focused, have outpaced commercial banks in growing their gold loan business at a 72% annual rate Market Share of Gold Lenders by Category 100%

13.7%

9.7% 11.6%

25%

23.6%

32.2%

32%

14.5%

12.1%

80%

14.8%

60%

18.4%

40% 20%

72% 52.3%

50.6%

46.5%

37%

0% FY07 Public Sector Banks

FY09 NBFCs

FY10 Private Sector Banks

Cooperatives

• Rapidly-growing gold loan market and borrowers’ default rate attracted several new players in the gold loan business • Default rate in personal loan is around 8-10%, whereas in gold loan it is 0.5%

• The gold loan market has been dominated by south-focused commercial banks that account for around 58% of the total market • NBFCs whose primary business was gold loans grew faster than banks at 72% over FY 2007-10 because: • NBFCs offered flexibility, quick disbursal and superior customer services • Banks have to comply with RBI’s regulations to open branches, whereas NBFCs currently have no such obligation • NBFCs provide 70-80% loan-to-value (LTV) ratio for 22 carat gold, whereas banks give only 55-65% Source: Muthoot Finance, August 2011

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NBFCs’ specialization and niche focus enable them to charge higher interest rate compared to banks Key Ratios (as a % of average assets)

Specialized NBFCs*

Banks – Gold Loans**

Interest Income

22-23%

11-12%

Interest Expense

11-12%

7-8%

Net Interest Margin

11%

4% (approx)

Operating Expenses

5.5% (approx)

1.5%

0.2%

0.1%

Return on Assets (post tax)

3.3-3.5%

2.2% (approx)

Return on Net Worth

27-30%

16-18% (approx)

Provisions for Bad Debts

*Risk Weightage of 100%, Capital Adequacy Ratio of 12% ** Risk Weightage of 100%, Capital Adequacy Ratio of 10%

• Banks charge approximately 12-13% interest on gold loans for general purpose, while NBFCs demand interest rate between 22% and 26% • This results in higher interest income, which in turn provides higher ROA for NBFCs and leaves enough money with them to pursue expansion • However, unlike banks, NBFCs do not have access to cheap retail deposits, and hence they have to shell out more money to get funds • Recent change in the RBI policy of priority lending has made the funding costlier, which is being partly offset by growth in loan books

Source: Muthoot Finance, August 2011

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Muthoot Finance has developed requisite expertise for gold loans, however, interest rate remains a big threat Parameters

Sub Parameters

Traditional NBFCs

Traditional Banks

Co-operative Banks

New Private Sector Banks

New NBFC Entrants

Focus on gold loans

High

Medium

Low

Medium

Branch network in high potential geographies

High

Low

Medium

Understanding of target customer segments

High

Low

Medium

Low

Medium

Product features

High

Medium

Service

High

Low

Medium

Infrastructure

High

Medium

Low

Interest charged

Low

High

Medium

Low

Capabilities and service offerings

Ability to offer competitive rates

Expected threats in specialized NBFCs

Key areas of strength of specialized NBFCs

• Muthoot Finance is facing challenges on multiple fronts by different sets of players

• Banks, especially private ones, are aggressive on retail gold loans. They have power of low-cost deposits • New private sector banks like Kotak and Yes Bank can match the customer services; however presently, they have chosen not to focus on this segment • The biggest competition is coming from the existing or new NBFCs (but new to gold loan), e.g. Magma, backed by investors’ money, can rapidly expand and pose challenges to existing NBFCs where they are weak

Source: Muthoot Finance, August 2011

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Muthoot Finance is the undisputed gold loan leader with a market share of almost 20% Market share Movement by Company INR 120 Bn

INR 240 Bn

11.0%

13.4%

80%

13.1%

12.6%

70%

13.2%

60%

3.7% 4.7% 3.6% 8.9% 3.1% 4.7%

100%

90%

50% 40%

19.5% 13.9% 10.4%

4.9% 6.1% 4.8% 6.4% 3.6% 4.3%

30%

20%

INR 375 Bn

6.8% 6.3% 5.9% 5.1% 3.7% 2.3%

34.0%

30.7%

26.1%

FY07

FY09

FY10

10% 0% Others

Federal Bank

Andhra Bank

State Bank of Travancore

Muthoot Fincorp

South Indian Bank

Manappuram

Indian Bank

Indian Overseas Bank

Muthoot Finance

â&#x20AC;˘ Muthoot Finance, Muthoot Fincorp and Manappuram have captured a relatively higher gold loan market share by providing high LTV, easy access, low level of documentation and formalities, quick approval and disbursal of loans, and safe lockers Source: Muthoot Finance, August 2011

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Manappuram is the closest competitor of Muthoot Finance Areas

Muthoot Finance

Primary business Pan India presence in March 2011

Gold loans account for more than 99% of its business

2,733 branches

2,064 branches

INR 23.2 Bn

INR 11.8 Bn

INR 158.7 Bn

INR 74.8 Bn

4.7 Mn

1.2 Mn

75%

15.82%

29.13%

6.03 times

2.94 times

0.33%

0.11%

Revenue Assets under management in March 2011

Manappuram Finance

Customer base Average LTV (Loan to Value) Capital adequacy ratio

Debt to equity ratio (as on March 31, 2011) Net NPA (Gold Loans)

• Muthoot competes closely with Manappuram for the gold loan business

• Muthoot scores when it comes to revenues and customer base. Its revenue is twice and customer base is four times that of Manappuram • But it struggles on capital adequacy ratio, debt to equity ratio and net NPA, when compared to Manappuram • Debt-to-equity is the area of serious concern for Muthoot • Average-per-customer of Manappuram is almost double of Muthoot

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