How Kerala-based Muthoot Finance, world’s largest gold financing company, funds MSME loans

Unlike large enterprises, Micro, Small and Medium Enterprises (MSMEs) largely depend on cash inflow from recurring sales to stay afloat. At present, the COVID-19 pandemic and lockdown have resulted in MSMEs seeing little to no sales and cash inflow.

Even before the pandemic broke out, several banks and financial institutions stepped up their lending to small businesses. However, many MSMEs don’t have sufficient collateral to provide against bank loans.

It can also take time - up to a few weeks or months - to complete the loan process from application to sanction and disbursal. Some MSMEs are also turned away and their loan applications rejected.

At present, MSMEs, traders, shopkeepers, etc are in need of instant working capital loans to breathe life back into their business and resume operations.

Gold loans, which for decades have been a quick and popular way for small businesses to provide liquid working capital, are now seeing an increase in demand, according to George Alexander Muthoot, Managing Director, Muthoot Finance - the largest gold financing company in the world.

“During the COVID-19 crisis, there is a lot of liquidity required in the MSME sector. The government has done a good job by asking banks to provide funds to MSMEs. However, it takes time for funds from bank loans to reach the hands of traders and shopkeepers. By September or October 2020, they might get their money. Till then, gold loans can help them survive,” he tells SMBStory in an exclusive interview.

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The Kochi-based financing company focusses on lending to MSMEs. 75 percent of its customers are small businesses, traders and shopkeepers. It claims it has Rs 40,000 crore worth Assets Under Management (AUM) for gold loans, as per Q3 FY2020, and that its current liquidity position is comfortable.

“We primarily cater to individuals who possess gold jewellery, but cannot access formal credit within a reasonable time, or for whom credit may not be available at all. We help them meet unanticipated or short-term liquidity requirements,” says George.

The Muthoot story

Gold loans have been a primary source of lending for small businesses. Due to the emotional value attached to gold jewellery, people pledge it as collateral to secure a short-term loan, rather than sell it to raise funds.

This business of gold loans, which was traditionally part of the unorganised sector, is being brought into the organised sector by players like Muthoot Finance, banks and other Non-Banking Financial Companies (NBFCs).

Muthoot Finance has its roots in a wholesale grains and timber trading business started by Muthoot Ninan Mathai in 1887. The modest trading business was initially located in Kozhencherry, a village in the erstwhile kingdom of Travancore in Kerala.

Kozhencherry was a geographically-handicapped village devoid of the prerequisites for starting a business. It lacked sufficient logistics, land, resources, industries, etc. Despite this, Muthoot Ninan Mathai and his family managed to grow the business.

It was then taken over by the founder’s son M George Muthoot, who incorporated the finance division of the group in 1939. The finance business, a partnership firm named Muthoot M. George & Brothers (MMG), was a chit fund.

In 1971, it was renamed Muthoot Bankers, and began to finance loans using gold jewellery as collateral. The company was incorporated as a private limited company in 1997 under the name The Muthoot Finance Private Limited.

Since then, the company has moved its headquarters to the city of Kochi and diversified into housing loans, vehicle loans, personal loans, money transfer, insurance, and microfinance.

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How the gold loans work

Under its brand, Muthoot brought into the organised sector the way gold loans worked. Customers took their gold jewellery to a Muthoot branch, where the staff checked the purity and weight of the gold.

Once the gold was accepted as collateral, Muthoot sanctioned and disbursed the loan based on the gold rates for that day.

“Today, as per the RBI stipulations, the maximum amount of loan is 75 percent of the value of gold given as collateral. We are able to give the loan within 15 minutes because we don’t need to look at the MSME’s credit scores. When a customer comes to us with gold, we check its quality and finish the KYC process. This is enough to sanction a loan,” George explains.

Muthoot’s customers are usually those that don’t transact much with banks. These MSMEs need a quick hard cash infusion of between Rs 20,000 to Rs 30,000, he says, adding that for loans of Rs 1 lakh and above, MSMEs are comfortable with a bank transfer.

“Big businesses don’t come looking for loans with gold ornaments to pledge as collateral. Small businesses who need short term loans disbursed in a few minutes are thus the customers that come to us,” he says.

A digital approach

Traditionally, before the era of digital payments, customers would physically walk into a branch to repay the loans and EMIs. But now, Muthoot has built a web portal and mobile app through which customers can facilitate repayments.

“With this model, a customer need to come to our branch only twice - once to give the gold, and once to take it back after repaying the loan. The interest and EMIs are paid online,” he says.

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Muthoot claims the number of customers paying interest online has doubled post COVID-19, and that the number of first-time users (FTUs) of the mobile app and web portal has increased six times in the last few months.

“Since the outbreak of the pandemic, we have also started a model where customers need not come to our branch at all. For a fee, we go to a customer’s house to check and collect the gold ornaments. Then we directly transfer the loan amount to his/her bank account. We also help in returning the gold to the customers after the tenure of the loan is over,” George says.

With the lockdown restrictions being eased across the country, Muthoot has reopened 90 to 95 percent of its 5,000 branches. With the prevailing liquidity crunch in the MSME sector exacerbated by the lockdown, Muthoot expects the demand for gold loans to surge in the next two to three quarters.