Muthoot Finance Ltd Management Discussions.

Global economic review

The year 2020 began with the onset of a once-in-a-century global health crisis that soon snowballed into an economic one, as most countries were forced to close their borders and impose national lockdowns to contain the COVID-19 pandemic. Restrictions on mobility and physical proximity at home and abroad disrupted trade and dislocated supply chains.

Global trade volumes contracted by ~8.5% for 2020, with GDP dropping by 3.3%, the sharpest since the Great Depression. Advanced economies contracted by ~4.7% as most major economies in Europe as well as several states in the US adopted stringent lockdown measures early on. The UK economy contracted by almost 10% while GDP in Euro area and Japan fell by 6.6% and 4.8%, respectively. China was the only major economy to report positive growth.

The phased unlocking with the flattening of the infection curve, accompanied by large-scale fiscal and monetary measures by governments and central banks, respectively, kickstarted the economic revival in the second half. Sentiments were further boosted by the rapid discovery and rollout of vaccines. This resulted in a much lower than expected fall in global output for the full year.

Region-wise growth estimates (%)

Region 2019 (P) 2020 (P) 2021 (P)
World 2.8 -3.3 6
Advanced Market Economies (AMEs) 1.6 -4.7 5.1
Emerging Markets and Developing Economies (EMDEs) 3.6 -2.2 6.7
Association of South-East Asian Nations (ASEAN) 4.8 -3.4 4.9
US 2.2 -3.5 6.4
Euro Area 1.3 -6.6 4.4
UK 1.4 -9.9 5.3
China 5.8 2.3 8.4
Japan 0.3 -4.8 3.3
Russia 2.0 -3.1 3.8

(Source: IMF)


The global economy is projected to grow at 6% in 2021, with trade volumes expected to rise by ~8.4%, as activities return to pre-pandemic levels aided by accelerating vaccination drives globally. However, the emergence of the second wave in several countries is likely to keep the global economy on tenterhooks, threatening a fragile recovery.

The synchronised measures (amounting to almost 10% of global GDP) are likely to drive consumption demand, boost investment appetite and lower unemployment, providing critical support to the revival trajectory.

Indian economic overview

The year under review was perhaps the most challenging one in recent history as the Indian economy recorded a degrowth of 7.3% during 2020-21. The economy contracted by 23.9% and 7.5% in the first and second quarters, respectively, before retracing the positive territory in the third quarter and managing to grow by 1.6% in the fourth.

Following the onset of the pandemic and the consequent nationwide lockdown, the Indian government stepped in to provide relief to the economically vulnerable sections and stabilise the economy. The RBI complemented efforts on the fiscal policy side with several measures to boost system liquidity and drive credit growth while providing relief to borrowers in the form of moratorium on loan repayments.

Announced in phases through the financial year, the package amounted to 29.87 lakh crore, equivalent to 10% of Indias GDP and played a crucial role in the sharper-than-expected economic recovery. Further, rural India showed robust resilience, being less impacted by the pandemic during the first wave, with the agriculture sector recording positive growth. With the festive demand playing out well in the third quarter, aided by a low interest rate environment, and the vaccination drive gathering momentum, the India economy showed signs of a steeper growth trajectory ahead.

(Source: Economic Time, Business Standard, Live Mint).

Quarterly growth rate of the Indian economy (%)

Q1FY21 Q2FY21 Q3FY21 Q4FY21
(23.9) (7.5) 0.4 1.6

(Source: CSO)


The emergence of the more intense second wave with still mutating virus strains has posed significant challenges to the fragile economic recovery. The IMF has lowered Indias economic growth forecast to 9.5% for FY22, as renewed lockdowns albeit localised dampened sentiments.

(Source: IMF).

Industry Insights

Non-banking financial companies (NBFCs) are used to enhance the mainstream banking system in the financial intermediation process and financial inclusion. NBFCs play a significant role in promoting inclusive growth by providing financial services to the less-banked customers as well as unorganised sector such as the micro, small and medium enterprises (MSMEs) through efficiency and diversity. Since a large chunk of Indias population did not even have bank accounts a decade ago, the government has been encouraging financial inclusion. And one of the vital components of financial inclusion is adequate access to credit, which has created enormous prospects for the NBFC sector. This is a key factor that many NBFCs have been constantly focusing on improving their services through diversified offerings, technology adoption, strategic partnership, robust operational model, and regulatory compliance.

Diversified offerings

NBFCs offer a wide range of financial products and services including personal loans, commercial vehicle finance, housing loans, infrastructure finance, gold loans, microfinance, money transfer, insurance, education funding, and many more customized finance solutions. Their strong focus on the unorganised and under-served population of the economy, helped them to create a niche market for themselves by identifying the needs of targeted customer segment.

Technology adoption

In recent years, emerging technologies have helped NBFCs in bringing productivity and efficiency in various aspects of their operations as well as lowering costs. Everything has become simpler, efficient and cost-effective, from lead generation to credit score calculation, customer onboarding, loan disbursement and collection. As a result, they have been able to bring down the cost of servicing their existing customers and acquiring new customers.

Further, COVID-19 has imposed numerous constraints on traditional business operations, urging organisations to recognise the importance of new technologies. Thus, a rising number of NBFCs have made significant progress in technological adoption, enabling paperless lending process. This has not only helped them to elevate customer experience, but also a great step towards sustainability.

Robust operational model and regulatory compliance

Since NBFCs are focusing on lending to the unorganised segment, a robust risk management strategy is critical for short-term as well as long-term business sustainability.

Even though technology has offered significant benefits in terms of operational efficiency, customer experience and cost savings, its crucial to implement strategies to manage various risks such as credit risk, liquidity risk, operational risk and interest rate risk. Additionally, NBFCs need to comply with the regulatory policies based on their targeted segment and geographical location of operation.

Performance of NBFCs

During FY21, NBFCs profitability fell in the first quarter, as businesses incurred economic losses owing to nationwide lockdowns in wake of the COVID-19 pandemic. In Q1FY21, both return on assets (RoA) and return on equity (RoE) decreased as compared to the corresponding period in FY20. However, the situation improved slightly in the second quarter as NBFCs spendings fell faster than income. RoA and RoE increased from 1.8% and 10.3% in Q2FY20 to 2.3% and 12.7% in Q2FY21, respectively. The sectors profitability remained stable in the third quarter.

In asset quality front, NBFCs witnessed improvement in FY21, compared to the previous year. Whereas the gross nonperforming assets (GNPA) ratio of NBFCs was increased in Q1 and Q2 of FY21, compared to the corresponding period of FY20. However, both GNPA and net NPA ratios fell in Q3FY21, compared to Q3 FY20. The consolidated balance sheet of NBFCs grew at a slower pace in Q2 and Q3 of FY21. On the other hand, they were able to continue credit intermediation, even at a lower rate, reflecting the resilience of the sector.

In terms of NBFCs sectoral disbursement of credit, the industrial sector, notably micro, small, and large industries, were the hardest hit by the pandemic due to their reduced credit growth, whereas retail financing remained ahead of the curve, backed by low delinquency.

[Source: RBI]

Government initiatives

• The RBI and the government announced a slew of measures to help with liquidity and offset the effects of the pandemic. These steps were taken to improve asset quality and ease liquidity. Special liquidity facility:

As part of the Atmanirbhar Bharat package, the Union Ministry of Finance announced a 30, 000 Crore Special Liquidity Scheme for nonbanking, home finance firms, other monetary financial institutions in Budget 20-21.

• Targeted Long-Term Repo Operations (TLTRO 2.0):

The RBI decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 for a total amount of up to 50,000 Crore in order to channel liquidity to small and mid-sized corporates, including NBFCs and micro finance institutions (MFIs), that have been impacted by COVID-19 disruptions.


While the NBFC sector remained flat last year amidst the pandemic, the outlook for FY22 still surrounds the evolving uncertainties of the second wave of COVID. The severity of infections and effect of lockdown on business on NBFC asset quality will only become apparent over time.

According to a report by Credit Rating Agency, ICRA Ltd, the NBFC sector may see a growth of 7-9% (excluding infra NBFCs and HFCs) in FY22. The growth is expected to be led by gold loans, home loans, personal loans, and rural finance. The improvement in demand from the segments such as vehicle finance and commercial lending segments are expected to take longer to register a strong revival. On the flipside, the non-bank performance for the commercial real estate and other large corporates are estimated to see a decline. To achieve the expected growth in FY22, additional funding lines would be crucial apart from the existing lines.

Gold demand amid COVID-19

In India, gold is considered a sign of wealth, social status, financial security, and have a high emotional value in the culture. A great affinity for gold among the countrys rural population coincides with practical considerations of the portability and security of jewellery as an investment. In recent years, the income levels of Indians have improved which drives gold demand. But Indias relationship with gold goes beyond income growth: gold is intertwined with

Indias way of life. Gold is also important in more personal life events. In Indian tradition, giving gold as a gift is a deeply embedded aspect of marriage rituals—weddings account for over half of annual gold demand.

People rarely sell gold jewellery but use it to obtain short term loans by keeping jewellery as collateral, particularly in rural settings. Since people have limited access to banks in rural communities, the demand for gold loans is majorly driven by NBFCs like Muthoot Finance.

Jewellery Demand

The COVID-19 pandemic led to consumer demand weakness which, in turn, affected the jewellery demand in India. Total jewellery demand declined by 42% to 315.9 tonnes in 2020 from 544.6 tonnes in 2019, largely due to the nationwide lockdown along with a surge in gold prices. Demand slightly increased in the second quarter (June-September quarter) to 52.8 tonnes, but the demand was 48% low in a year- on-year basis. Gold prices were up 34% hovering around 50,000/10grams for most of time in 2020.

Together with the sharp pullback in the domestic gold price, these factors supported the quarterly recovery in gold jewellery demand. The reopening of the economy and the announcement of successful vaccines also boosted consumer sentiment.

In the January-March quarter of 2021, demand for gold jewellery increased by 39% from the same period a year ago to 102.5 tonnes. The growth in the last quarter of FY21 was due to the drop in COVID-19 cases and the wedding season demand for which consumers step out for shopping. However, the momentum of gold demand is likely to fall in the wake of the second wave of COVID that imposed restrictions in movement and strict lockdowns. The gold demand may suffer until large-scale vaccination and economic revival in FY22.

According to the World Gold Council, with the implementation of mandatory hallmarking in June 2021, establishment of the international bullion exchange in GIFT city and Retail Code of conduct under the aegis of the industry steering committee, industry growth will be qualitatively superior underpinned by global ambitions and strong awareness of trust and transparency.

Jewellery Demand

CY2019 (tonnes) CY2020 (tonnes) y-o-y change (%)
India 544.6 315.9 -42
World ALIGN=RIGHT>2,122.7 1,411.6 -34

Source: World Gold Council Report)


Gold is the most preferable precious metal for investing

because of the following reasons:

• Gold does not corrode, making it a long-term store of value, and humans are drawn to it physically as well as emotionally.

• Gold acts as a hedge against inflation because the value of gold usually rises when cost of living rises.

• Gold is a safe haven asset that holds its value in the face of financial and geopolitical uncertainty.

• Since gold has a negative correlation with equities and other financial instruments, it can be used to diversify an investment portfolio.

There are several ways to invest in gold. Some of them are

investing through gold-backed Exchange Traded Funds

(ETFs)/MFs and official gold bars and coins.

According to the WGCs Gold Demand Trends report, Indias total gold investment demand for CY2020 declined by 11% to 130.4 tonnes compared to 145.8 tonnes in CY2019. In value terms, gold investment demand stood at 55,020 crore, up by 20% from 45,980 crore in CY2019.

In January-March quarter of 2021, the gold investment demand increased to 37.5 tonnes from 28.1 tonnes in the same period of 2020, resulting in a growth of 34%. In terms of value, it grew by 53% at 15,780 crores from 10,350 crores during January-March quarter last year. The growth in gold retail investment was attributed to the increasing economic activity, festival season demand, and the slide in gold prices below 50,000. However, the gold investment outlook surrounds uncertainties of the second wave of COVID-19 that has dipped consumer confidence.

Organised gold loan market

The Indian gold loan market is divided into two segments— organised and unorganised. The organised gold loan market includes banks (public, private, co-operative, and small finance banks), NBFCs, and Nidhi companies, while the unorganised gold loan segment comprises individuals who provide secured loans to borrowers by keeping gold as collateral.

The organised gold loan markets though still constitute only minority of the overall Indian gold loan market which is expected to grow exponentially during 2021-25 because of the growing number of financial institutions providing gold loans to the underbanked population. In the organised gold loan segment, NBFCs dominate the market because of their quick loan processing, systematic gold valuation, and safe keeping.

Key advantages of specialised NBFCs in the gold loan market

• Singular focus on gold loan products that helps hone capabilities across faster loan processing, accurate gold valuation, safekeeping and auctioning

• Relatively small ticket size, secure nature of business and wide variety of products, leading to minimal credit cost and stable growth

• Deeper penetration into semi-urban and rural areas, bringing more of the underserved into the formal banking fold

• Flexible repayment options that suit different borrower requirements

• Proactive marketing, branding and geographic expansion that help capture new-to-market customers

COVID-19 impact on gold loan

The COVID-19 pandemic has brought a paradigm shift in the gold loan market as people started realising that gold is an instrument of credit rather than an instrument of savings, particularly in India. Demand for gold loans remained strong, both for NBFCs, and banks during FY21. As the pandemic imposed economic distress and many people required extended liquidity support, many people used their gold holdings as collaterals to meet their financial needs during the pandemic, lenders saw a surge in demand for gold loans. In addition, the credit eligibility in case of gold loan is restricted only to quantity and quality of gold jewellery, it is easier for borrowers to avail loan.

The RBI raised the permissible Loan-To-Value (LTV) ratio for scheduled commercial banks providing gold loan products from 75% to 90% up to March 31, 2021, in consideration of the utility of such loans. Non-bank lenders have also approached the RBI to raise the LTV to the same level as banks. Increased gold prices and a greater LTV will enable them to meet the financial needs of a bigger number of small business owners, merchants, and households. On the other hand, NBFCs do not expect it to be a considerable competitive advantage.


The pandemic has had a favourable impact on the Indian gold loan market since consumer demand for gold loans has surged as many individuals are experiencing financial hardship and gold loans are the easier to obtain. However, demand for gold loan may slow as gold price drops and the pandemic-induced distress subsides. The revival in economic activity as the adverse impact of pandemic subsides should, however, increase the demand for gold loans by that time. In any event, banks and NBFCs would aggressively focus to sell this product to customers.

Muthoot Finance

Muthoot Finance, the flagship company of the Muthoot Group, is Indias largest gold financing company (in terms of loan portfolio). As part of our core business, we provide personal and business loans secured by gold jewellery. We primarily cater to individuals who possess gold jewellery but cannot access formal credit to meet unanticipated or other short-term liquidity requirement.

As a trusted pan-India brand in the gold loan space, Muthoot Finance is revolutionising Indias gold banking sector and empowering people across the social pyramid. Inspired by a rich legacy that goes back several generations, our team of 25,000+ employees serve 250,000+ customers every day, through 4,600+ branches, the majority of which are in semiurban and rural India.

SCOT Analysis Strengths

Strong core loan portfolio: We have gold loan portfolio spread across the country with borrowers having varied profile and hence diversified. Since loans are collateralised by household used gold ornaments , possibility of a loss in the event of default by customers is remote as collateral can be liquidated with relatively higher ease. Hence , we are able to generate strong cash flows from the core business.

Long-standing leadership: We are able to maintain a solid leadership position in the retail financial services business due to our large geographic footprint, committed workforce and customer-centricity.

Smart financial management: We have a competitive advantage due to our prudent financial management that results in high profit margin.

Smart solution: For a seamless and better customer experience, we leverage the power of digital. By embracing digital, we have been able to increase our consumer engagements and tap into the digitally literate client categories.

Excellent product mix: Our unmatched combination of products based on customer needs helped us to maintain our leadership position. We offer attractive rates and terms that allows us to gain and retain more consumers.

Brand legacy: With our distinctive financial services and strategic marketing, we have built a strong brand that has created a strong brand recall among customers.


• Storage: Gold must be always handled with caution during the loans life cycle due to its low quantity vs high value. Employees must be trained on how to recognise possibility of theft and other fraudulent behaviours, as well as the procedures to be complied to prevent them.

• Operating expenses: Providing secure storage hubs at each branch costs money and reduces operating revenues at the branch level. There are also costs associated with strong electronic monitoring and cybersecurity protocols to protect client data.


• Digital services: It is a pressing need to expand digital service uptake more than ever. We will be able to better serve our customers if we place a renewed emphasis on this for their convenience and welfare.

• Technology adoption: Customers demand smart solutions, immediate credits, and a flawless verification

procedure, all of which are feasible with technology advancements.


• Increased competition and alternative financial products: We are not just competing against other gold loan lenders but also other financial services providers that deal in unsecured loans - providing the customers the option of availing funds without providing any collateral. At the same time, lenders are partnering with fintech companies or investing in their digital capabilities to onboard unsecured loan customers, particularly salaried professionals with high levels of financial and technological literacy, with relative ease.

Risk management

We have a robust risk management mechanism in place that addresses flaws in the system while maintaining ethical corporate governance practices.

Risk Description Mitigation measures
Operational The possibility of direct or indirect loss as a result of system, personnel, or process failures, or as a result of external occurrences. To mitigate various operational risks, we have robust systems and stringent processes in place. We protect our branches with centralised monitoring and surveillance cameras. Employees are trained on how to spot a fraud, such as unauthentic gold, on a regular basis. We have a centralised system with dedicated audit personnel for overall risk management.
Collateral Downward fluctuation in gold prices could lead to loss of profits To address this risk, we have a policy of retaining at least 25% of the gold price of jewellery when calculating the loan amount, excluding design and production charges. Even if the collaterals value falls below the repayment amount, the sentimental value of gold jewellery drives repayment and redemption.
Credit Failure of counterparty to abide by the terms and conditions of any financial contract with us We have a strict loan approval and collateral evaluation process in place, as well as an effective non-performing asset monitoring and collection approach. The risk is mitigated to some extent by the collaterals liquidity, as there is a remote chance of recovering less than the amount due on account of adequate security margin.
Market Fluctuation in interest rate Interest rate hikes can be passed on to borrowers; fixed rates of interest for the bulk of borrowings, as well as all loans and advances, reduce interest rate risk.
Liquidity The inability to raise cash from the market at the best possible price to meet operational and debt servicing needs. We interact with the Asset and Liabilities Management Committee (Committee of Board Of Directors) and ALCO Committee(Committee of Executives) on a regular basis to examine the liquidity position based on future cash flows. Due to the nature of business of the company, which employs funds from a variety of sources, including debentures, external commercial borrowings, and bank loans with longer maturities than the loans given, there is less liquidity risk in operations.
Business Cycle Associated with the seasonal or cyclical nature of an industry Our extensive presence across India enables us to alleviate cyclical pressures on various regions economic growth.

Operational performance

Please refer to Page 24 of the Annual Report for details on our operational highlights.

Financial performance

• Gross loan assets under management

Our gross loan assets under management increased by 26% to 526,223 million in FY21 from 416,106 million in FY20.

• Gold loan outstanding

Our gross gold loan outstanding was 519,266 million in FY21, up 27%, from 407,724 million in the previous year. The average gold loan per branch was 112.10 million

during the year under review, an increase of 26%, from 89.28 millions in FY20.

• Revenue

Our total income grew by 21% from 87,228 million in FY20 to 105,744 million FY21.

• Profit before tax

Our Profit before tax for FY21 stood at 50,065 million, as compared to 40,574 million in FY20.

• Profit after tax

Our Profit after tax grew by 23% to 37,222 million in FY21 from 30,183 million in FY20.

• Capital adequacy ratio

The capital adequacy ratio for FY21 was 27.39% with a Tier I capital of 26.31% and a Tier II capital of 1.08%.

• Earnings per share

Earnings per share increased to 92.79 in FY21 from 75.31 in the previous year.

Human resources

Please refer to Page 38 of the Annual Report for details on our people practices.

Internal control and 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.