Muthoot-owned Belstar Microfinance enters gold loan biz to diversify portfolio

"We are looking to diversify the portfolio of microfinance business up to RBI permitted limit of 25% of the total AUM (assets under management)," said George Muthoot, managing director, Muthoot Finance.

The Chennai-based microfinance institution (MFI), with assets under management of ₹8,703 crore, posted a net profit of ₹24 crore in the December quarter, compared with ₹1,003 crore a year ago.

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As of 31 December, Belstar operated 1,224 branches and 272 controlling regional offices across 19 states. Muthoot Finance holds a 66.13% stake in Belstar Microfinance.

IPO plan on hold amid industry stress

The non-banking financial company has deferred its public listing plans by 3-4 quarters due to continued stress in the microfinance sector. Belstar had received an approval from the Securities and Exchange Board of India (Sebi) for a ₹1,000 crore IPO, and a ₹300 crore offer for sale.

Experts say diversifying into gold loan business ensures a steady stream of income. "All MFIs are diversifying into other businesses as the industry has been challenging. Credit cost for MFIs has been a cause for concern and that's why MFIs are looking to diversify into MSMEs, individual personal loans, etc.," said an official of an MFI.

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Interestingly, Muthoot Finance is also looking to transform Muthoot Money—its vehicle finance subsidiary—into a gold loan company. In its third-quarter analyst call, the management said the subsidiary now has nearly 950 branches.

Lenders tap gold business

"This year, we focused on expansion of branch network in our wholly-owned subsidiary, Muthoot Money. So, we have added almost close to about 800 branches during the year. And now we have transformed Muthoot Money from a pure vehicle finance company to a gold loan company. we fear that vehicle finance business is too competitive, and the margins are lower. So, we transformed that company into a gold loan company," according to the analyst call transcript.

On Wednesday, Poonawalla Fincorp also announced its entry into the gold loans business to strengthen its presence across tier-2 and tier-3 cities. Asirvad Microfinance and Muthoot Microfin also offer gold loans to customers.

Earlier this month, the Reserve Bank of India (RBI) issued a draft circular proposing measures to strengthen norms for loans against gold ornaments and jewellery. The proposals seek to improve underwriting processes, better collateral management and ensure funds are utilised appropriately.

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RBI has also proposed specific limits for single borrowers as well as sectoral caps on banks' gold loan portfolios. Additionally, it has suggested mechanisms to verify end use of funds, a mandated loan-to-value ratio of 75%, and standards for assessing the purity of gold.