Muthoot Pappachan Group goes back to roots with planned microfinance unit
Loans worth Rs1,500 crore extended by group’s small loans unit to be gradually transferred to new entity, which will begin operations in a few months
More than 120 years since it started giving small loans to daily wage earners in Kerala, the Muthoot Pappachan Group is going back to its roots with a dedicated microfinance division called Muthoot Microfin Ltd that will lend to individuals and companies.
Loans worth Rs.1,500 crore extended by the group’s small loans business will be gradually transferred to the new entity, which will begin operations in a few months, group chairman and managing director Thomas John Muthoot said in an interview.
“We have received microfinance status for our new NBFC (non-banking finance company), Muthoot Microfin Ltd, in March. We are now planning to build the portfolio in the microfinance company,” said Muthoot.
Muthoot’s formal entry into microfinance comes in the backdrop of improved performance of the sector and the Reserve Bank of India (RBI) recently easing rules for microfinance firms.
Founded in 1887, the group is now present in financial services, hospitality, automotive dealerships, real estate and healthcare, among others. The group is also planning to do business in new locations within the country, he said.
Microfinance companies, now widely seen as promoting financial inclusion, had a tough time in 2010 when a crisis unfolded in Andhra Pradesh. Unregulated lending, often at high interest rates to the same customer by different lenders led to large-scale defaults and a clampdown on such companies.
Due to a fall in recovery rates and impending huge write-offs, microfinance institutions also defaulted on their debt service and five of the top six such firms were asked by their banks to apply to the corporate debt restructuring cell, said India Ratings and Research Pvt. Ltd in a note dated 30 January 2015.
Muthoot Fincorp, the Muthoot Pappachan Group’s flagship financial service arm, which largely deals with gold loans, now offers two-wheeler loans and insurance broking, apart from microfinance and small and medium enterprises business.
As on 31 March 2014, the company had a loan book of Rs.7,500 crore, revenue of Rs.1,975.34 crore and a net profit of Rs.63.27 crore.
“There is an adequate demand for microfinance products. But the risk profile of microfinance is different from gold loan products. Muthoot Pappachan Group will have to put systems and risk mitigation measures in place to succeed in this business,” said an analyst with a leading rating company, requesting anonymity.
The analyst added that gold loans are based on security and bullet payment while microfinance products need a different approach.
Muthoot Housing Finance Co. Ltd, a subsidiary of Muthoot Fincorp, primarily lends to affordable housing needs.
“Over the last five years, we have entered into these lines of business to have a more diversified range of products for our segment customers. We are also assessing the opportunity to lend more to the micro, small and medium enterprises,” Muthoot said.
In March 2012, RBI had introduced new norms for gold loan companies. It also formed a committee to study the gold loan business and the perils involved in the rapid growth of lending practices which depend on the price of the yellow metal.
Under its norms, the central bank said that gold loan companies could not lend more than 60% of the value of the gold pledged with them. RBI also raised the capital requirements for these companies. In January 2014, however, the central bank raised the ceiling on the loan-to-value ratio to 75%, in a relief for gold loan companies.