Bullish on gold; prices will rise in next 2-3 years:: George Alexander Muthoot , MD, Muthoot Finance

An expert speak out on how he is bullish for gold and that he predict that gold will continue its course and continue to be bullish for the next 2-3 years and will be dependent on the world economy and many consider gold as the safest option as the dollar is losing its value.

13 Jun, 2011, 10.33PM IST
PK Krishnakumar & S Sanandakumar

George Alexander Muthoot heads Muthoot Finance, a gold loan company with nearly Rs 50,000-crore turnover. After consolidating its growth in the south, the company is now on a major expansion in northern states. The lender, which went public recently, is one of the sponsors of Delhi Daredevils, an IPL team. George Alexander Muthoot, managing director of the company, spoke to PK Krishnakumar & S Sanandakumar on gold price rise, growth of gold loan business and the company's performance. Excerpts:

What would be the impact of gold price rise on gold loan companies?

The price rise in gold would impact us in two ways. First, it would enable us to give more loans to the same person. This is because he can avail more for the same gold that he has pledged with us. Secondly, our collateral will become stronger for the loans that have already been given. Gold prices have seen a 28% increase each year in the last two years.

Do you think the rally will continue?

I'm quite bullish about gold. Except for minor corrections, there is no reason to think gold prices will come down in the next 2 to 3 years. Unlike in the past, the price movement is now dependent on factors happening in the world economy. Several countries are investing in gold as it is perhaps the safest option when the dollar is weakening. China is amassing gold and even the governments in developed countries like the US are urging people to buy gold coins. So the demand will always be there. Another factor that can influence the price is the supply. No new mines have been discovered while the cost of production from the existing mines is going up rapidly.

Now that you have successfully concluded the public issue, what are your future plans?

The main purpose of our issue was to meet the working capital needs of the company. Our capital adequacy has moved up from 15% to a quite comfortable level of 22% after the issue. This will be used to run our expanding branch network. We opened 1,000 branches last year.

As a product, how is the growth of gold loan business across regions?

Though we started in Kerala, our growth centres are now outside the state. Of the 3,000 branches in the country, 700 are in Kerala. But now we have spread to almost all parts of the country except the north-east region. In the national capital region comprising Delhi and parts of Haryana and Uttar Pradesh, we have 250 branches. We are seeing good growth in the southern region.

How has the rising interest rate affected gold loan as a product?

Government is trying to tame the rate of inflation by controlling money supply. For this, they have been increasing the rate of interest. In the last four months, the overall rate of interest would have gone up by 2%. Our interest rates have also seen a similar rise. Another factor that has increased costs is a policy change. Earlier, commercial banks' loans to NBFCs were treated as priority sector loans. Now the Reserve Bank of India has decided not to give priority sector classification for such loans. When it was treated as priority sector loans, we used to get a 2% interest reduction which we used to pass it to customers. Now under the new dispensation, we will give less priority to our low interest schemes.

What are your projections for Muthoot Finance?

We did very well last year. Our profit after tax rose by 117 % to touch Rs 494 crore as on March 31, 2011. Our retail loan assets under management increased by 113% to Rs 15,868 crore during the same period. Last year's high growth was on a lower base. This year it may not be that high.

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