The Covid-19 pandemic has exacerbated the country’s economic distress. As income levels plummeted and businesses were hit due to the economic downturn and then the outbreak of the pandemic, gold lending companies came to the rescue of people who were facing acute distress and had need cash on hand. Alexander George Muthoot, Co-CEO of The Muthoot Group, which is the market leader in gold lending, talks about recent trends in the industry and says gold monetization has helped many individuals, families and entrepreneurs who wanted to restart their business after the confinements on a large scale. Edited excerpts:
Has Covid-19 had an impact on borrowing against gold? What have been the latest trends in gold lending lately?
Covid-19 has had its fair share of impact on credit demand, particularly on banks and financial institutions, with many banks reporting low credit uptake. As a category leader, we have always educated the masses through various campaigns and initiatives to unlock the potential of their idle asset i.e. gold. During the pandemic, much of society realized that their idle gold could be an efficient instrument for obtaining short-term credit, with minimal documentation and less hassle. This awareness led to the monetization of gold to a large extent, which helped many individuals, families and entrepreneurs who wanted to restart their business after the shutdowns.
Gold prices hit an all-time high in July and August 2020, during the early months of the pandemic, which further contributed to good growth in the gold loan category as a whole. This highly secured and sought after lending product encouraged financial institutions to foray into this sector while others tried to strengthen their position in this category. Some new fintech players have also entered the gold lending category.
Gold lenders also aggressively marketed their products and took advantage of available opportunities. All of these factors have helped create strong momentum in the gold lending industry, and we have seen good traction in 2020-21. Our consolidated assets under management (AUM) increased by 24% and our consolidated net income increased by 21% during the same period.
Considering that there are still nearly 25,000 tons of gold left in the form of household jewelry in India, there is huge potential ahead of us.
Is there a concern about reimbursement, as the pandemic has led to job losses and wage cuts?
As we all know, the impact of Covid-19 on our economy and society has been considerable. The government and the RBI had announced some measures to help the industry and individuals, such as loan restructuring and pro bono assistance to borrowers.
There have certainly been concerns about refunds across the board, and this is due to a combination of reasons. The general sluggishness of the economy due to Covid-19 has certainly led to a reduction in economic activity. This has impacted refunds in some ways. In addition, lower gold prices have also had some impact on redemption patterns.
In our case, since the duration of our gold loans is 12 months with no monthly payment obligation, our borrowers have had enough time to recover from the impact of the pandemic and maintain their repayments on the stipulated dates. We also offered interest relief to borrowers in need. We were able to isolate nearly 90% of our assets from Covid-19 and related impacts.
Going forward, we see no major issues in maintaining satisfactory asset quality. Our easy-to-use digital platforms for loan and interest repayment have been very well received by our customers. About 25% of our collection is through digital channels, and we are increasing this with our new digital offerings, such as refunds through our official WhatsApp channel and partnerships with companies like Paytm, PhonePe, Google Pay, etc.
What is the period during which gold loans are used?
We offer gold loans for a period of 12 months. However, a customer is free to liquidate their loan earlier without prepayment charges. We have observed that clients normally liquidate their loans within eight to nine months. In accordance with RBI guidelines, we can lend up to 75% of the gold value pledged to us. Clients also have the option of paying the interest or the principal amount at monthly intervals or a certain number of times during the life of the loan. In fact, we encourage customers who pay their interest at monthly intervals.
Given the omicron threat, what is the outlook for gold lending this year?
Recent reports indicate that the impact of omicron is not very severe and those affected recover in six to seven days without requiring hospitalization. Unlike the shutdowns during the first and second waves, the measures taken by central and state governments to contain the spread did not interfere with the normal lives of a majority of people. Therefore, for us, the momentum gained in the previous year should also be maintained in the current year. We expect the gold loan portfolio to grow by 15% for the current year.