C.LOSE TIME For Muthoot Finance’s Kondapur Hyderabad office, Monday is normally 5:30 p.m. But on August 10th, the manager Haripuri Padmavati and her five colleagues couldn’t close the doors until two hours later. More than 150 customers had visited the gold-backed lender, six times as many as on the Monday before covid-19. Among the borrowers were those who took care of infected family members; those who had lost their jobs but had large bills like school fees to pay; and entrepreneurs who have to pay creditors and employees. The average loan size was 50,000 rupees ($ 700).
The pandemic has created tremendous uncertainty about banks’ credit losses. However, Muthoot’s business is booming. Loans are extended for a year to obtain collateral in the form of gold – usually a bangle or necklace like the one used to light up Indian weddings. The entire borrowing process usually takes 15 minutes. Jewelry is weighed and then scratched on a small square stone. Acid and salt are applied to the scratch to test the purity. 5-10% of the articles fail. With experience, says George Alexander Muthoot, general manager of the company, you can recognize by touch. In a video call with your correspondent, he demonstrates by putting a chain in his palm, flipping his hand left and right, and then opening his fingers with a nod and a smile: evaluation is done.
Muthoot has grown steadily since the early 1950s. The company has more than 5,000 branches serving 250,000 customers every day, from construction workers to construction workers IT Professionals. The total number of loans through March was over $ 6 billion. Muthoot is the largest of the formal gold-backed lenders, with total assets of $ 40 billion. Smaller lenders who lend twice the value charge annual interest rates of up to 50%. Muthoot charges 12-24%, as do its direct rivals. Banks that tiptoe into business charge a little less.
As the price of gold rises, as it has for most of the past few months, a customer’s ability to borrow also increases. However, the greatest risk faced by lenders is that the price of gold will fall and undermine collateral values. In order to create a buffer, regulators had required that loans make up less than 75% of the value of the collateral. On August 6, the limit for banks was raised to 90%. But gold fell 5% on August 11th – a reminder of why the buffer exists. Muthoot follows the old rule.
However, the greatest virtue of gold-backed funding is how well it fits with India’s longstanding love of the yellow metal. Despite high tariffs, India has imported 8,400 tons of it in the last ten years, more than the stocks of the American Federal Reserve, the world’s largest repository. Windfalls are often headed in gold. In times of abundance, jewelry bought becomes a security when things go wrong – “the poor person’s insurance,” says Muthoot. What makes its business particularly lucrative is that the borrowers work so hard to redeem their collateral, not just to protect themselves from future troubles but to adorn the good times to come. ■
This article appeared in the Finance & Economics section of the print edition under the heading “Financial Alchemy”