Muthoot Finance Ltd Management Discussions.

Global economy

The world economy continued to improve in FY 2017-18, as growth picked up simultaneously across advanced countries and emerging markets and developing economies. The cyclical upswing underway since the middle of 2016 augmented to record a growth rate of 3.8% during the reporting period [Source: International Monetary Fund (IMF)]. The revival was a result of increased investments and rising consumption demands due to optimism in global financial markets.

The growth momentum is likely to continue in the current year and oust the remaining legacy of the crisis. The impetus is expected to sustain owing to focussed monetary policies, improving labour markets and enhanced investments leading to accelerated development in advanced markets. Global economic buoyancy is expected to remain balanced in the near to medium term, with an upward bias. The IMF predicts global growth to touch 3.9% in the upcoming years (2018 and 2019) owing to bullish financial markets.

Global GDP growth trend (%)







World Output










United States















United Kingdom





Other Advanced





Emerging Market and Developing










*Excludes the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, the United States) and Eurozone countries Source: International Monetary Fund (IMF)

Indian economy

Indias economy underwent a series of structural changes in the form of the Goods and Services Tax (GST) and demonetisation in the last couple of years. During FY 2017-18, as the adverse effects of these transformations began to wane, India recorded a GDP growth rate of 6.7%. Additionally, during the reporting period, India overtook France to register as the worlds sixth largest economy and continued to progress as one of the fastest growing world economies. Besides, Moodys upgraded its rating for India first time in 14 years.

Indias GDP is expected to grow at 7.4% in 2018 and 7.8% in 2019, according to the IMF, on the back of cyclical economic recovery, consistent reforms and concurrent uptick in global growth. Besides, the Government of Indias (GoIs) liberal foreign investment norms in various industries and expanding expenditure will help strengthen the economy. Private consumption and investments are also likely to accelerate due to economic development and GoIs efforts to bring more Indians in the folds of the formal economy.

Indias GDP growth










Source: Central Statistics Office (CSO)

NBFCs in India

Non-banking finance companies (NBFCs) are a vital part of Indias financial system. Their role in nation-building and financial inclusion complement the banking sector in taking credit to the unbanked segments of society. NBFCs play a critical role in providing financial support for the economically weaker sections.

The scope of NBFCs is expanding with the Government of India (GoI) focussing prominently on promoting entrepreneurship and innovation, especially in the micro, small and medium enterprises (MSMEs) segment. NBFCs enjoy the advantages of better product lines, lower cost, wider and effective reach, robust risk management capabilities to check and control bad debts and understanding of their customer segments vis--vis the traditional banks. Additionally, NBFCs credit growth is likely to remain healthy owing to improving macroeconomic conditions, higher credit penetration, increased consumption and disruptive digital trends.

(Source: Assocham India, PwC) E: Estimates

Growth opportunities

• Latent credit demand

• Digital disruption, especially for micro, small and medium enterprises (MSMEs) and small and medium enterprises (SMEs)

• Increased consumption

• Distribution reach and sectors where traditional banks do not lend

Gold demand in India

Indias fascination for gold dates back to ancient times, owing to the metals religious, cultural and investment significance. Gold continues to capture the imagination of Indians till date and there is an insatiable demand for the ‘yellow metal irrespective of movements in its prices. Consumption, instant liquidity and investment benefits are factors that drive people to buy and store gold. For Indians, investment in gold has always been viewed as a reliable source in times of need, especially by rural households. Gold is a means to get quick liquidity to meet any exigencies.

India continues to be one of the largest consumer markets for gold and is estimated to hold ~12.9% of the worlds total gold stock in FY 2017-18 up from 11.7% in FY 2011-12.

Factors affecting gold demand in India

Long-term factors

Short-term factors

Rising incomes

Gold price movement


Excess rainfall

It is anticipated that for a 1% increase in income, the demand for gold will rise by 1%

For a 1% increase in gold price, demand will decrease by 0.5%

For a 1% increase in inflation, demand increases by 2.6%

For a 1% increase in monsoon rainfall, gold demand rises by 0.5%

(Source: iMaCS, Gold Loan Market in India 2018)

These factors have created the right conditions for a flourishing gold loan market in India.

Indias gold loan market

Till the middle of the last decade, the unorganised sector catered to Indias gold loan market with limited penetration of organised lenders. However, the gold loan industry is increasingly formalising now with established and organised players gaining market share. The modern customers seek reliability and a trusted source, which encourage a greater number of organised retailers to come to the industrys forefront.

The total organised gold loan market in India reached an estimated size of 1,600 Billion after a muted growth of 1,450 Billion in 2016-17. The gold prices at the end of FY 2017-18 were higher by 7% compared to the corresponding period in the previous year. The demand for gold jewellery increased by about 6% during the reporting period vis--vis the year before.

Over the years, the specialised gold loan NBFCs have captured a significant market share in India. They have also increased the overall demand for gold loans with their niche focus and targeted market expansion activities. Traditionally, southern India is the hub for gold loans. However, growing economic stability in India, coupled with increasing gold prices is bolstering the specialised gold loan NBFCs across the nation. Additionally, these NBFCs are adopting an aggressive approach to expand and penetrate the non-South geographies, while at the same time focussing on improving the productivity of their existing branches, beyond their traditional strongholds.

Impact of Goods and Services Tax (GST) on gold

In the pre-GST era, the taxation on gold was 1% excise duty, along with a VAT of 1-1.5%, totalling to 2% tax. GST rates on gold have been pegged to 3%. This is in addition to an import duty of 10% and 5% GST on making charges.

Strategic moves for the sector Increasing footprint

Gold loan NBFCs are staying competitive by leveraging opportunities beyond their traditional Southern markets. They are launching aggressive advertising and promotion campaigns to increase their acceptability.

Diversifying incomes

The specialised gold loan NBFCs are also focussing on other financial products like providing insurance, foreign exchange, money transfer, travel services and others to increase their income sources with diversification of portfolio.

Leading digitally

NBFCs are implementing several technology-based initiatives including online payment services, fully networked and interconnected branches through Core Banking Solution (CBS), disaster recovery mechanisms and faster credit delivery mechanism for customers. Additionally, they have introduced digitally-powered systems such as Aadhaar-based KYC, POS^ terminals for payment of interest and loans, direct credit facility through NEFT/RTGS/IMPS* mode and Gold Cash Card, among others to enhance customer experience.

Reinforcing risk management

The specialised gold loan NBFCs are enthusiastically investing in enterprise risk management systems to better comply with stricter regulations on compliance. They are introducing processes for effective risk management, internal audit and branch surveillance and implementing Management Information Systems (MIS). Moreover, they are constituting Board-level committees for risk management, grievance redressal, audit and governance, which will surely strengthen their operational framework.

Supporting training and learning

Leading specialised gold loan NBFCs are investing in training and development of their new and existing staff. These organisations are focussing on upskilling their people, especially in growing their skills in customer relations and communication.

Growing through innovation

NBFCs use innovative gold loan products to cater to the diverse needs of their customers based on tenure, interest rate, segment, ticket size and repayment, among others. They offer diverse loan schemes, which attract customers from all sections, enlarging the customer base, and thereby profitability.

*National Electronic Funds Transfer (NEFT)/Real Time Gross Settlement (RTGS)/Immediate Payment Service (IMPS) ^Point of sale

Industry outlook

With the credit demand expected to rise, the gold loan market is projected to grow between 10-12% over the next few years and reach a market size of ~2,300-2,500 billion by FY 2021-22 (Source: iMaCS, Gold Loan Market in India 2018). Digital onboarding, delivery solutions and successful geographical expansion of gold loans market to non-South geographies are few key factors that facilitate the growth of specialised gold loan NBFCs. With the organised gold loan penetration levels below 4%, there is headroom for growth in this market. Financial institutions with the right focus, operational capabilities, availability of funds, refreshing products and modern technology are concentrating to capture a large market share and profitable returns.

However, the growth of the gold loan industry may be adversely affected by: a) abrupt downward revision in gold prices; b) any further tightening of the regulatory environment for NBFCs and c) any significant changes in customers preference from gold loan to other alternative lending products like personal loans, microfinance, among others. Despite the aforementioned risks, gold loan continues to be the loan product, which meets the expectations of the borrower in terms of availability at a short notice and at reasonable terms. Besides, it addresses the concerns of a lender in terms of credit risk while providing a higher return . These features will overweigh the risks attached to the growth projections of the industry.

Industry risks Competition

Banks which have significant cost of funds advantage can grow their gold loan business by offering lower interest rates than NBFCs, thereby imposing threat to the NBFC gold loan business. Besides, the unorganised sector caters to a large customer segment even today and retain their niche customer segment limiting the growth opportunities of NBFCs

Reduction in collateral value

Decrease in gold prices and steep decline in value, along with simultaneous loss of the sentimental attachment towards the collateral can pose a serious threat to the gold loan business. Companies across the industry are implementing robust risk management mechanisms to meet the contingencies of fall in collateral value, although it is a peripheral risk to the sector.

Adverse regulatory changes

Though adequate regulations have been framed for regulating the sector, any future changes in the regulatory environment have the potential to affect the gold loan NBFC industry. In the face of adverse regulations, the industry players may find the business less profitable, which may affect their sustainability.

Alternative loan products

Popularisation and availability of other loan products like personal loan, loan against property and home loan, among others can reduce the demand for gold loan. Additionally, diminishing availability of gold jewellery with borrowers and their unwillingness to pledge, serve as a potential threat to the growth of this sector.

Muthoot Finance Limited – A quick read

Muthoot Finance Limited (Muthoot) is the flagship company of the Muthoot Group. It is the pioneer of gold banking in India and currently the countrys largest gold financing company (by loan portfolio). The Company is ‘Systematically Important Non-deposit taking NBFC listed on Indias premier stock exchanges.

Over the years, Muthoot has developed a pan-India presence with 4,300+ branches. The Company bolsters financial inclusivity by catering to individual finance requirements of people who possess gold jewellery, but cannot access formal credit owing to various reasons. Its decades-long expertise in meeting customers unanticipated needs or other short-term liquidity requirements inspire trust and customer loyalty.

Financial performance review Gross loan assets under management

The Companys gross loan portfolio increased by

1,860 Crores during FY 2017-18, a net growth of 7%, to 29,138 Crores from 27,278 Crores in FY 2016-17.

Average gold loan outstanding per branch

Average gold loan outstanding per branch increased from 6.32 Crores in FY 2016-17 to 6.67 Crores in FY 2017-18 on account of increase in gold loan portfolio.


Revenues grew by 9% from 5,747 Crores in FY 2016-17 to 6,243 Crores in FY 2017-18.

Profit before tax

Profit before tax rose by 44%, from 1,921 Crores in FY 2016-17 to 2,757 Crores in FY 2017-18.

Profit after tax

Profit after tax increased by 46% at 1,720 Crores in FY 2017-18 from 1,180 Crores in FY 2016-17.

Capital adequacy ratio

Capital adequacy ratio increased from 24.88% in FY 2016-17 to 26.59% in FY 2017-18 with Tier I capital of 24.75%, on account of ploughing back of profit for the year, net of dividend payment.

Earnings per share (EPS)

Earnings per share increased to 43.04 in FY 2017-18 from 29.56 in FY 2016-17 on account of higher profits generated during the year.

24x7 risk control

A robust risk management system is critical as it helps to mitigate the various risks that a company faces during the course of its business. Muthoots risk management infrastructure implements policies and procedures that not only improve its ability to manage risks, but also enhances its operating processes.

Risk Understanding the risk Mitigating the risk
Operational risk The risk of direct or indirect loss due to the failure of systems, people or processes, or due to external events. • Installed centralised monitoring and surveillance cameras in almost all branches across India
• Instituted a series of checks and balances including an operating manual, along with both internal and external audit reviews
• Strengthened the existing appraisal method as well as KYC compliance procedure to mitigate the risks involved in the business
Risk Understanding the risk Mitigating the risk
• Reinforced the Company policies among existing and new employees through training
• Focussed on updating employees periodically with the latest developments to mitigate risks against frauds, cheating and unauthentic gold; strengthening their gold assessment skills
• Centralised monitoring systems and internal audit department assist in the overall operational risk management
Collateral risk The downward fluctuation in gold prices. • Control the effects of the risk by retention of at least 25% margin on the value of jewellery for the purpose of calculation of the loan amount
• Alleviate further by leaving out production costs, design cost and the gemstones associated with making the item for the calculation of the loan amount
• Sentimental value of gold jewellery induce repayment and redemption of the collateral, even if the value of the collateral falls below the repayment amount
Credit risk The failure of any counterparty to abide by the terms and conditions of any financial contract with us gives rise to credit risk. • Reduce credit risk through a rigorous loan approval and collateral appraisal process and a strong NPA monitoring and collection strategy
• Diminished risk because the collateral – the gold jewellery – can be easily liquidated and there is only a remote possibility of recovering less than the amount due because of adequate security margin being available on it
Market risk Market risk refers to potential losses arising from the movement in market values of interest rates. The objective of market risk management is to avoid excessive exposure to the volatility inherent in financial instruments. • Fixed rates of interest for majority borrowings, and all the loans and advances given minimise interest rate risk
Liquidity risk Liquidity risk involves the inability to raise funds from the market at optimal costs to meet operational and debt servicing requirements. • Organise regular meetings of the Asset and Liabilities Committee (ALCO) to review the liquidity position based on future cash flow
• Track the potential impact of prepayment of loans at a realistic estimate of its near to medium-term liquidity position
• Low liquidity risk in operations due to the nature of business, which uses funds from issue of debentures and bank loans with longer maturity periods than the loans issued
Business cycle risk Business cycle risk is associated with the seasonal or cyclical nature of an industry. • Pan-India presence allows mitigation of the cyclical pressures in the economic growth of different regions

Internal systems and their adequacy

The Company has an adequate internal control system in place to safeguard assets and protect against losses from any unauthorised use or disposition. The system authorises, records and reports transactions and ensures that recorded data are reliable to prepare financial information and to maintain accountability of assets. The Companys internal controls are supplemented by an extensive programme of internal audits, reviews by the management, and documented policies, guidelines and procedures.

Cautionary statements

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be ‘forward-looking statements within the meaning of applicable laws and regulations. Important developments that could affect the Companys operations include a downtrend in the financial services industry – global or domestic or both, significant changes in the political and economic environment in India or key markets abroad, tax laws, litigation, labour relations, exchange rate fluctuations, interest and other factors. Actual results might differ substantially or materially from those expressed or implied.

This report should be read in conjunction with the financial statements included herein and the notes thereto.