Consulate, IIM Trichy presents Muthoot Ground Zero

CASE 1 Gold Loans for the purchase of consumer durables

The Muthoot Group
The Muthoot Groups business origins can be traced back to 1887 when it started as a small trading
business enterprise in Kozhencherry, a remote village in the state of Kerala. In 1939, when Shri M George
Muthoot took the reins of the business, he diversified the business by venturing into Banking and Financial
services. Since its formation, the company, under the leadership of its key management - Shri M.G. George
Muthoot (Chairman), Shri George Alexander Muthoot (Managing Director), Shri George Thomas Muthoot
(Jt. Managing Director) and George Jacob Muthoot (Jt. Managing Director) has broadened its scale and
widened its geographic scope of retail operations. They have built a formidable business empire comprising
of 17 divisions including Financial Services, Plantations & Estates, Education, Leisure & Hospitality,
Healthcare, Housing & Infrastructure, Infotech, Wealth Management, Money Transfer, Forex, Media, Power
Generation, Precious Metals, Securities, Vehicle & Asset Finance, Travel Services, Muthoot Global ,
Muthoot Housing Finance and Muthoot Money.

Headquartered in Kochi and having its Corporate Office in New Delhi, the company has its presence
in USA, UK and UAE too.

Muthoot Finance Ltd
Muthoot Finance Ltd, the largest gold financing NBFC in the Country with an Asset Under Management
of Rs.21,000Crores and more than 4,200 Branches spread across the Country. The company is a
Systemically Important Non-deposit taking NBFC headquartered in the southern Indian state of Kerala.
Operating history of Muthoot Finance has evolved over a period of 75 years since M George Muthoot
founded a gold loan business in 1939 under the heritage of a trading business established by his father,
Ninan Mathai Muthoot, in 1887. The company is publicly listed and has a very strong presence in the semi
urban and rural heartland of India.

The company provides personal and business loans secured by gold jewellery. Gold Loans are primarily
given to individuals who possess gold jewellery but could not access formal credit within a reasonable time,
or to whom credit may not be available at all to meet unanticipated or other short-term liquidity
requirements.
Consulate, IIM Trichy presents Muthoot Ground Zero
More than 94% of the companys customers consist of those who avail loans below Rs.1 lakh. The
average ticket size of the loans offered by the companyis usually in the range of Rs.30,000-35,000.

The Context
The gold loan sector went through turmoil during the year 2012-13, mainly due to a series of regulatory
restrictions which were imposed by the Reserve Bank of India imposed in that period. As financial
institutions were allowed to lend only at a Loan to Value(LTV) of 60%, many customers migrated to Banks,
which did not have any restriction at the material time. Additionally, there was also a steady decline in the
gold prices, which prompted some of Muthoots customers to abandon their gold, as they found that buying
gold from the market will work out cheaper than settling the dues in the loan account to redeem the pledged
ornaments. These factors lead to an accumulation of Non-Performing Assets.

The dust has almost settled down now. The Reserve Bank of India has increased the LTV to 75% and
made it also applicable to Banks, thereby setting a level playing ground. Gold prices, despite the occasional
ups and downs, have stabilized to some extent. In this scenario Muthoot Finance Ltd.,is now facing one or
two specific problems and are keen to find the answers.

The Case Challenge - Gold Loans for Purchase of Consumer Durables

Today many Credit Card companies offer finance for purchase of Consumer Durables with EMI option.
Some of them do not charge Interest to customers, as they are able to collect a subvention amount from the
Manufacturer / Dealer which will compensate for the interest component.

There is another set of Finance Companies who offer EMI Loans for purchase of consumer durables, based
on the customers Credit Score (CIBIL Score) quite often having a tie up with the Manufacturer or Dealer of
these goods. They too get some part of the interest as subvention and are able to offer loans at very low
interest to the customer, which makes it attractive for him to purchase on EMIs.

However, a large number of customers are not able to access the Credit Card loans or do not have good
CIBIL creditscores. You are required to study the feasibility of Gold Loans for the purchase of consumer
durables, and focus on the following specific questions

What would be the size of the Credit Card /CIBIL score based loans?
Would the Gold backed finance with EMI option find favour with customers who are not able to
access the above?
If they would be willing to purchase under EMI Scheme; what would be the rate of interest
chargeable?
Whether the Urban, Semi Urban, Rural Customers would be interested in the Gold backed finance?

A study of these aspects should throw better light on the customers response to such schemes. You are also
encouraged to study and come up with ideas on how Muthoot can launch and effectively market these
schemes in the country.