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  • Pawn Shop Business in India

    Ladies and Gentlemen in Pawnland, here is yet another interesting piece on our beloved industry from other parts of our world. This piece was featured by the Hindu News and is about a recent IPO (initial public offering) of a large chain operator in India, enjoy the read, more to follow!

    Muthoot Finance – IPO: InvestM. V. S. Santosh Kumar

    April 16, 2011:

    The Initial Public Offer (IPO) from gold loan provider, Muthoot Finance (Muthoot), may be a suitable option for investors with a high-risk appetite.

    The exceptional growth in gold loan disbursements (loans against gold jewellery) in recent years, the under-penetrated nature of this market and the high yields from these loans, despite being secured, make the gold lending business attractive within the banking/NBFC space.

    Muthoot, market leader in gold lending with a 70 year record, may thus have bright growth prospects. However, the high margins and the rapidly-growing gold loan market may be vulnerable to risks from a reversal in gold prices, causing a dip in collateral value and a significant tightening of regulatory and capital adequacy norms.

    At the upper end of the price band (Rs 160-175), the stock would trade at 2.46 times its estimated FY-12 book. At this valuation, it is at a premium to rival, Manappuram Gold, which trades at a price-to-book value multiple of 2.2 times. Valuations for most NBFC stocks have declined significantly from their highs of November 2010.

    Muthoot has better reach than its competitors in terms of branch network. It also manages a bigger loan book, has better credit rating (LAA-) and higher return on net worth compared to Manappuram.

    After this offer, Muthoot’s capital adequacy ratio would improve to excess of 23 per cent from 15.06 per cent in November 2010, positioning it well to meet the 15 per cent requirement by April 2011. This may not only help Muthoot to maintain loan growth, but also aid net interest margins (NIM). Additionally, the company has been tapping Tier-II capital sources to augment its capital adequacy.

    Industry and competition

    The gold loan market is pre-dominantly un-organised with pawn-brokers lending against this collateral at high rates. Muthoot, the market leader in the organised gold financing business, according to the data compiled by IMacs (ICRA management consultants), had close to a one-fifth market share, as of March 2010. In the period to November 2010, Muthoot’s loan book has grown by 75 per cent .

    Indian households are estimated to have a gold holding of anywhere between 18,000 and 20,000 tonnes. Given that gold is not an income-generating asset, the only means to monetise gold holdings is through loans. Theoretically, this translates into a Rs 30 lakh crore lending business opportunity (assuming a 75 per cent loan-to-value). According to ICRA IMacs industry report, the organised market size was only Rs 37,640 crore in March 2010.

    Muthoot Finance, as of November 2010, holds 97.6 tonnes of gold as security. Given the size of the potential market, competition is a limited threat as many players can co-exist.


    The company generally gives small ticket loans with a tenor not exceeding one year, thereby limiting interest risk and asset-quality concerns. The loan-to-value (value of loan to value of gold pledged) varies from 60 per cent to 90 per cent.

    However, there is an additional margin of safety, considering that it calculates value solely based on the weight of the gold content and excluding value of the stones, and so on. Therefore, the value of the collateral in its books is understated. Muthoot’s average loan-to-value of gold, as of November 30, was close to 60 per cent.

    The loan book of Muthoot (inclusive of securitised portfolio) grew at 82 per cent during the period 2007-08 to 2009-10. The average ticket size of loan is Rs 31,500 per account. The net interest margin of Muthoot was 10.4 per cent for the eight month period ended November 2010.

    The high net interest margins may fall to some extent due to rising interest rates and cost of funds. The priority sector status for gold loans, classified as agriculture loans, has recently been removed by the RBI, which too may dent Muthoot’s ability to raise funds at low cost. ICRA estimates that priority sector status made for a cost saving of 1-1.5 percentage points, which may now be lost.

    However, the management is confident that given the shorter tenor of the loans, the rising rates can be easily passed on to the customers. The rising competition may also put pressure on the yields.

    The company has a huge branch network, which is why the current cost-to-income ratio is high compared to other NBFCs. Over the years, as the branches start contributing fully to the business, the ratio may fall.

    Fee income opportunities are aplenty, given the strong branch network. Muthoot has added 1,144 branches over the last one year, taking its branch network to 2,749 branches; it plans to expand into under-penetrated markets of North India. This would enable it to geographically diversify and maintain loan book growth.


    The buoyancy in the gold lending business in recent years is partly attributable to the steady uptrend in gold prices. With gold at a record high, a correction cannot be ruled out. For gold lenders, given that loan repayments are not in the form of EMIs, the principal will remain at risk if gold prices drop sharply.

    The shorter tenor loans also require a high pace of customer additions to sustain high loan growth. Currently high growth in loan book is partly contributed by the rising value of gold pledged with the company. It is to be seen how this business works in a declining gold price environment.

    Regulatory intervention in the interest rates, a la microfinance companies, too is a risk. There is a Supreme Court hearing awaited on inclusion of gold-financing companies in Kerala Money Lenders Act, which may cap the rate of interest.

    According to the management, they have been excluded in other states from the Money Lenders Act. Increased focus of banks on gold loans may reduce the yields as they have access to lower cost funds. The existence of Muthoot Fincorp, a breakaway group, also in the gold financing business, may impede branding efforts.

    Stay tuned for more new about Pawns around the world!

    Jerry Whitehead



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